Finance Interview Questions (and Answers)

Walk me through the three financial statements.

The balance sheet shows a company’s assets, liabilities, and shareholders’ equity (put another way: what
it owns, what it owes, and its net worth). The income statement outlines the company’s revenues,
expenses, and net income. The cash flow statement shows cash inflows and outflows from three areas:
operating activities, investing activities, and financing activities.

If I could use only one statement to review the overall health of a company, which statement
would I use, and why?

Cash is king. The statement of cash flows gives a true picture of how much cash the company is
generating. Ironically, it often gets the least attention. You can probably pick a different answer for this
question, but you need to provide a good justification (e.g., the balance sheet because assets are the
true driver of cash flow; or the income statement because it shows the earning power and profitability of
a company on a smoothed out accrual basis).

If it were up to you, what would our company’s budgeting process look like?

This is somewhat subjective. A good budget is one that has buy-in from all departments in the company,
is realistic yet strives for achievement, has been risk-adjusted to allow for a margin of error, and is tied
to the company’s overall strategic plan. In order to achieve this, the budget needs to be an iterative
process that includes all departments. It can be zero-based (starting from scratch each time) or building
off the previous year, but it depends on what type of business you’re running as to which approach is
better. It’s important to have a good budgeting/planning calendar that everyone can follow.

When should a company consider issuing debt instead of equity?

A company should always optimize its capital structure. If it has taxable income, then it can benefit from
the tax shield of issuing debt. If the firm has immediately steady cash flows and is able to make the
required interest payments, then it may make sense to issue debt if it lowers the company’s weighted
average cost of capital.

How do you calculate the WACC?

WACC (stands for weighted average cost of capital) is calculated by taking the percentage of debt to total
capital, multiplied by the debt interest rate, multiplied by one minus the effective tax rate, plus the
percentage of equity to capital, multiplied by the required return on equity. Learn more in CFI’s
free Guide to Understanding WACC.

Which is cheaper, debt or equity?

Debt is cheaper because it is paid before equity and has collateral backing it. Debt ranks ahead of equity
on liquidation of the business. There are pros and cons to financing with debt vs. equity that a business
needs to consider. It is not automatically better to use debt financing simply because it’s cheaper. A good
answer to the question may highlight the tradeoffs if there is any follow-up required. Learn more about
the cost of debt and cost of equity.
A company has learned that due to a new accounting rule, it can start capitalizing R&D costs
instead of expensing them.

This question has four parts to it:

1. What is the impact on the company’s EBITDA?

What is the impact on the company’s net income?
What is the impact on the company’s cash flow?
What is the impact on the company’s valuation?

Answer:

1. EBITDA increases by the exact amount of R&D expense that is capitalized.

Net income increases, and the amount depends on the depreciation method and tax treatment.
Cash flow is almost unimpacted — however, cash taxes may be different due to changes in
depreciation expense, and therefore cash flow could be slightly different.
Valuation is essentially constant — except for the cash taxes impact/timing impact on the net
present value (NPV) of cash flows.

What, in your opinion, makes a good financial model?

It’s important to have strong financial modeling principles. Wherever possible, model assumptions
(inputs) should be in one place and distinctly colored (bank models typically use blue font for model
inputs). Good Excel models also make it easy for users to understand how inputs are translated into
outputs. Good models also include error checks to ensure the model is working correctly (e.g., the
balance sheet balances, the cash flow calculations are correct, etc.). They contain enough detail, but not
too much, and they have a dashboard that clearly displays the key outputs with charts and graphs. For
more, check out CFI’s complete guide to financial modeling.

What happens on the income statement if inventory goes up by $10?

Nothing. This is a trick question — only the balance sheet and cash flow statements are impacted by the
purchasing of inventory.
What is working capital?

Working capital is typically defined as current assets minus current liabilities. In banking, working capital
is normally defined more narrowly as current assets (excluding cash) less current liabilities (excluding
interest-bearing debt). Sometimes it’s even more narrowly defined as accounts receivable plus inventory
minus accounts payable. By knowing all three of these definitions, you can provide a very thorough
answer.

What does negative working capital mean?

Negative working capital is common in some industries, such as grocery retail and the restaurant
business. For a grocery store, customers pay upfront, inventory moves relatively quickly, but suppliers
often give 30 days (or more) credit. This means that the company receives cash from customers before it
needs the cash to pay suppliers. Negative working capital is a sign of efficiency in businesses with low
inventory and accounts receivable. In other situations, negative working capital may signal a company is
facing financial trouble if it doesn’t have enough cash to pay its current liabilities.

In answer to this interview question, it’s important to consider the company’s normal working capital
cycle.

When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized
and depreciated according to the company’s accounting policies.

How do you record PP&E and why is this important?

There are essentially four areas to consider when accounting for Property, Plant & Equipment (PP&E) on
the balance sheet: (I) initial purchase, (II) depreciation, (III) additions (capital expenditures), and (IV)
dispositions. In addition to these four, you may also have to consider revaluation. For many businesses,
PP&E is the main capital asset that generates revenue, profitability, and cash flow.

How does an inventory write-down affect the three financial statements?

This is a classic finance interview question. On the balance sheet, the asset account of inventory is
reduced by the amount of the write-down, and so is shareholders’ equity. The income statement is hit
with an expense in either cost of goods sold (COGS) or a separate line item for the amount of the write-
down, reducing net income. On the cash flow statement, the write-down is added back to cash from
operating activities, as it’s a non-cash expense (but must not be double-counted in the changes of non-
cash working capital). Read more about an inventory write-down.

Why would two companies merge? What major factors drive mergers and acquisitions?

There are many reasons companies go through the M&A process: to achieve synergies (cost savings),
enter new markets, gain new technology, eliminate a competitor, and because it’s “accretive” to financial
metrics. Learn more about accretion/dilution in M&A.

[Note: Social reasons are important too, but you have to be careful about mentioning them, depending
on who you’re interviewing with. These include ego, empire-building, and to justify higher executive
compensation.]
If you were CFO of our company, what would keep you up at night?

This is one of the great finance interview questions. Step back and give a high-level overview of the
company’s current financial position or the position of companies in that industry in general. Highlight
something on each of the three financial statements.

 Income statement: growth rates, margins, and profitability

 Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios, leverage, return on assets
(ROA), and return on equity (ROE)
 Cash flow statement: short-term and long-term cash flow profile, any need to raise money or
return capital to shareholders
 Non-financial statement: company culture, government regulation, conditions in the capital
markets
Beginner-Level Finance Interview Questions

1. How can a Company Show Positive Net Income but go Bankrupt?

Ans: A company can show positive net income while facing bankruptcy by deteriorating working capital (by
enhancing accounts receivable and reducing accounts payable) and financial tactics.

2. What does Working Capital Mean?

Ans: Working capital is the amount you get after deducting current liabilities from current assets. It tells you how
much cash is tied up in the business through inventories and receivable and how much cash you need to pay off the
business’s short term obligations (in the coming 12 months).

3. Why do Capital Expenditures Increase Assets When other Cash Outflows don’t and Instead Create
Expenses?

Ans: Capital expenditures are capitalized because they give benefits to the firm for a substantial amount of time. For
example, a new branch would make a lot of money for the firm for a long while but an employee’s work will only
benefit until the time of paying the wages and that’s why they create an expense. This is the primary difference
between an asset and an expense.

4. Explain a Cash Flow Statement.

Ans: First we start with net income, proceed line by line while making adjustments to arrive at cash flows from
operations. Now, you will have to mention capital expenditures, purchase of intangible assets, purchase or sale of
investment securities, and asset sales to arrive at cash flow from investments. After getting the cash flow from
investments, you’ll need to mention issuance or repurchase of equity and debt and paying out dividends to arrive at
finances.

Then, you need to add cash flows from investments, operations, and financing to get the total change in cash. Finally,
the cash balance at the beginning of the period and the change in cash lets you arrive at the cash balance of the
period’s end. This is essentially what a cash flow statement looks like.

5. Can a Company Show Positive Cash Flows While Facing Financial Problems?

Ans: Yes, a company can show positive cash flows even while facing financial trouble through impractical
enhancements in working capital (delaying payables and selling inventory) or by not letting revenue go forward in
the pipeline.
6. What do you Mean by Preference Capital?

Ans: In simple words, preference capital refers to the amount raised by issuing preference shares. This is a hybrid
method of financing the firm as it offers some features of debentures and some features of equity. It is the capital that
has preference over equity capital at the time of dividend payment.

7. What do you Mean by Hedging?

Ans: Hedging is a risk management strategy we implement to offset losses in investments. We do so by taking an
opposite position in a related asset. However, the amount of risk hedging reduces results in a similar reduction in the
potential profit. You can say that hedging is similar to having insurance where you pay a certain premium and get
assured compensation.

With hedging, if the asset in question causes you a loss, the opposite position in the related asset will make up for
this loss. This is why a hedger is quite different from speculators as a hedger doesn’t focus on maximizing profits but
on minimizing risks.

Intermediate-Level Finance Interview Questions

1. What is RAROC?

Ans: RAROC stands for Risk-Adjusted Return On Capital and is a risk-based profitability measurement framework
we use to analyze risk-adjusted financial performance. It gives a proper view of profitability across organizations. It
is one of the best tools to measure a bank’s profitability. By combining it with the risk exposure and the ascertained
economic capital, you can calculate the expected returns more accurately with RAROC.

2. What do you Mean by Fair Value?

Ans: Fair value refers to the unbiased and rational estimate of the potential market price of an asset, good, or service.
The fair value of an asset is the amount at which you can buy or sell the asset in a current transaction between
willing parties other than a liquidation. Similarly, the fair value of liability refers to the amount at which you can
incur or settle in a current transaction between two willing parties other than a liquidation.

3.What do you Mean by the Secondary Market?

Ans: Secondary market is where people trade securities that have been offered to the public in the primary market
beforehand and are listed on the stock exchange. The secondary market is also known as the aftermarket and some of
the prominent examples of them include NASDAQ, Bombay Stock Exchange (BSE), and New York Stock Exchange
(NYSE).

4. What is the Difference Between Cost Accounting and Costing?

Ans: Costing is the process of identifying a product’s or service’s cost while cost accounting is the mechanism of
analyzing a business’s expenditure. Cost accounting is a branch of accounting that determines the expenses incurred
from a venture through examining, analyzing, and predicting the cost data.

On the other hand, costing is the process of asserting the costs and prices of products. Costing is a technique while
cost accounting is a branch of accountancy. The former has very little impact on a business’s decision-making while
the latter is crucial for informed decision-making.

5. What do you Mean by Cost Accountancy? Do you Know the Objectives of Cost Accountancy?
Ans: Cost accountancy is the combination of costing and cost accounting where you classify, record, and allocate
expenditure to determine a product’s or service’s cost. It records and analyses the related data and presents them
appropriately to help in guiding the decision-making process.

Following are the objectives of cost accountancy:

 To get correct analysis of cost (by process and different elements of cost).
 To ascertain the cost per unit of various products.
 To ascertain the profitability of every product.
 To advise the management on how they can maximize their profits.
 To disclose the sources of wastage (time, resources, or money).

Advanced-Level Finance Interview Questions

1. What do you Mean by Adjustment Entries? Why do We Pass Them?

Ans: The entries we pass at the end of every accounting period to the nominal and related accounts so we can
indicate the correct profit and loss in the profits and loss accounts and keep the balance sheet accurate, are called
adjustment entries.

It is crucial to passing adjustment before we prepare the final financial statements as in their absence the final
statements would reflect incorrect information resulting in error and confusion. Moreover, the balance sheet wouldn’t
show the accurate position of the business if we don’t pass the adjustment entries.

2. What do you Mean by the Put Option?

Ans: Put option is a financial market derivative instrument that allows the holder to sell an asset at a specific price
by a specific date to the writer of the put. The purchase of a put option sends a negative message about the future of
the stock in question.

3. What do you Mean by Deferred Tax Liability?

Ans: Deferred tax liability is the amount the company hasn’t paid yet to the tax department but is expecting to pay it
in the future. It happens when a company’s tax expenses are lesser than the amount they reflect in their tax reports or
financial statement.

4. What is Goodwill?

Ans: Goodwill is an asset that contains the excess of the purchase price over the fair market value of an acquired
business.

5. What is the Difference Between a Journal Entry and a Ledger?

Ans: The journal is the book of prime entry and all the transactions are recorded in it to show which account got
debited and which one got credited. However, the ledger is the book for keeping separate accounts. You’d have to
classify the recorded transactions in a journal and add them to the dedicated accounts present in the ledger. The
ledger is also known as the book of final entry.

A finance interview won’t be complete without technical questions. Here are some common yet important finance
technical questions to look into.

These are major concept-based finance technical questions, so you can easily find answers to these in your books.
This will not only help improve your concepts but will also make your finance question and answer
pdf unpredictable. So, brainstorm these finance technical questions and higher your chances of cracking your dream
interview.

On that note, there will be some hints to guide and direct you toward the answers.

1. Explain, that capital expenditures help increase assets, yet other cash flows like taxes and paying salary do
not do so but create an instant expense on the income statement, which then negatively impacts equity through
retained earnings.

Hint: Go through the definition of capital expenditure and determine its main variables.

2. Given an example of a situation where a company is showing positive cash flow but is in grave trouble.

Hint: Look into the concepts of unsustainable improvements in working capital and pipeline getting slow.

3. Is it possible for a company to show positive net income but still go bankrupt? Give justification for your
answer.

Hint: look for financial shenanigans and what happens when accounts receivables increase and payables get
reduced.

4. Explain why the increases in accounts are receivable and a cash reduction on a cash flow statement.
Hint: Remember how a cash flow statement begins and what measures are taken to adjust the net income reflected.

5. Tell the relationship between the income statement and the balance sheet.

Hint: Think about net income and retained earnings and their relationship.

6. How can one create deferred tax liability?

Hint: Look into the definition of tax liability, GAAP, and IRS. After that, revise different relations between GAAP
and IRS and see what happens when the difference between the two increases.

7. How can one create deferred tax assets?

Hint: What happens if a company pays more tax than they need to do? Look into revenue recognition, expense
recognition, and NOLs (net operating losses) concepts and think about their relationship.

8. How will the three financial statements be impacted when I buy anything?

Hint: Determine whether or not the thing is a depreciating asset. The answer will majorly depend on that. Then
understand the three financial elements.

Top 10 Finance Question

1. What do you think is the one best valuation method to use when examining a company, and why?
This is another of those questions where there’s not a single, technically “right” answer. What you hope to
gain from this question is, primarily, seeing the applicant demonstrate that they are familiar with the three
valuation methods – discounted cash flow (DCF) analysis, comparable company analysis, and precedent
transactions analysis. The question also offers a good opportunity to assess an applicant’s reasoning process.

If you want to get a really firm assessment of the applicant’s skill level, you can even go as far as asking them
to perform an on-the-spot analysis, using one, two, or even all three methods. Bonus points for applicants
who aren’t rattled by such a request for an on-the-spot performance.

An applicant with a good answer to this question will likely note what they like about each valuation method,
its particular strength insofar as what it reveals about a company. They might also mention some secondary
metrics that they might utilize to support their primary valuation method.

2. What profitability model do you favor using when forecasting the profits for a specific project?

This question is much like the previous one, in that what you’re looking for is not a specific answer, but just a
chance to assess an applicant’s understanding of concepts such as revenue streams, implicit and explicit
costs, net present value, and billable hours.

You might again ask for a demonstration of an applicant’s skill by posing a hypothetical, such as, “A client
wants to upgrade one of their parts from plastic to natural wood. The upgrade will cost ‘x’ amount of dollars.
The client believes it can charge customers an additional ‘a’ amount of dollars for Corporate Finance
Institute® the upgraded version. Evaluate whether doing the upgrade is a worthwhile project.”

3. How would you handle a situation where you’ve found a potential error within the details of your
client’s cash flow statement?

This kind of question is looking for an applicant’s ability to identify a problem and efficiently remedy the
situation. A good answer typically includes the following elements:

- Run the numbers to be certain that there is, in fact, an error or discrepancy

- Make some quick notes about the potential ramifications of the problem if left uncorrected, and about the
easiest ways to fix the problem

- Set up a meeting with a supervisor as soon as possible; present findings and thoughts on the problem, and
get input and/or direction from him or her on how to proceed

4. After working as a financial analyst for some time, is there a different role or career path that you want
to pursue?

This is just the financial analyst interview version of the generic job interview question, “Where do you see
yourself in five or ten years from now?” It can, first of all, reveal whether you can reasonably depend on the
applicant, if hired, to stick around a while. It’s not worth the time and trouble to hire and train an employee if
they’re going to leave next month when their application elsewhere is successful.

A promising analyst might mention that they envision a career path where they work their way up to
becoming a senior analyst with your firm, after which they think they might be interested in becoming a
treasury manager or chief financial officer (CFO).
5. Explain “financial modeling” to me.

Because financial modeling is such a key responsibility of a financial analyst, you want to be sure that any
applicant is well-versed in it. The following are some points of knowledge to look for in a good answer:

- Financial modeling is a form of quantitative analysis that is used for predicting or forecasting probable
future outcomes. It’s commonly used to help management determine prices or to help design marketing
strategies. Financial modeling examines both costs and revenues – historical, current, and potential future
costs and revenues. It can then be used to run various “what if” scenarios, comparing Corporate Finance
Institute® various possible business or investment choices, to assist executive management in making
informed decisions that will, hopefully, optimize profitability for a business enterprise.

- Financial modeling is frequently applied to assessing the value of a company, making operational or strategic
business decisions, and in budget planning and forecasting.

- Commonly used financial models include the leveraged buyout (LBO) model, initial public offering (IPO)
model, and the discounted cash flow (DCF) model.

6. Is it possible for a company to be in significant financial trouble even though it still has a net positive
cash flow?

This question can help you determine whether an applicant has a strong grasp of the basic principles of
corporate finance, and the ability to analyze financial statements, and determine how cash is moving in,
through, and out of a business – to confirm whether or not the enterprise is actually making money.

An applicant should be able – with perhaps a moment or two of deeper thought – to envision at least one or
two scenarios where positive cash flow, but overall financial distress might co-exist, such as the following:

- The company is selling inventory, thus generating cash flow, but holding off on paying its accounts payables

- A business currently has strong revenues and cash flow, but future revenue forecasts project revenues
declining substantially over time.

7. Describe the difference between a ledger and a journal.

Financial analysts are frequently tasked with reviewing both journal and ledger entries for accuracy and
completeness. Therefore, they should have a solid understanding of both types of records and be able to give
an answer to this question that goes beyond just noting that a journal is a more informal, precedent record,
as compared to what is commonly referred to as the general ledger.

A solid answer should first of all reflect the applicant’s understanding of the key differences between journal
and ledger entries. In a journal, all financial transactions of a business are recorded as they occur. That is,
they appear in chronological order, showing the date of the transaction, a brief description, and whether the
entry is a credit or debit. In contrast, when records of transactions are entered into the general ledger,
transcribed from the journal, they are organized into categories for proper accounting purposes and do not
necessarily appear in chronological order.
The applicant should also be familiar with the categories and sections that a general ledger organizes journal
entries into: Corporate Finance Institute® - Assets - Liabilities - Revenues - Expenses - Owner’s Capital

8. Explain financial ratio analysis and how financial analysts use ratios.

Examining financial ratios is a key skill that financial analysts can use to obtain more information and deeper
insights into a company’s overall financial health and its position in the industry relative to its competitors.
The answer you get to this question should provide a firm indication of an applicant’s knowledge and skill
level in this important area of financial analysis.

A good applicant should be able to provide a workable definition of financial ratios – that they reflect the
relative magnitude of a pair of selected numbers that can be found in a company’s three basic financial
statements. For example, the debt-to-equity ratio reveals how much of a company’s financing comes from
debt, as compared to the amount that comes from equity. Popular ratios include price-toearnings, price-to-
book, working capital, and inventory turnover. An applicant should also be able to demonstrate their
knowledge of the usefulness of financial ratios, such as the fact that looking at different ratios helps company
stakeholders determine things such as profitability, liquidity, operational efficiency, market value, debt
coverage, solvency, and where a company stands in an industry as compared to its competitors. (For example,
the quick ratio reflects a company’s ability to meet its short-term obligations. If the industry average quick
ratio is 1.5 and Company A has a ratio of 2.5, then it is significantly more secure financially than its peers – as
the value of its liquid assets relative to the amount of its short-term debt is nearly twice as much as that of its
peers.)

9. As a financial analyst, what factors do you continually monitor and analyze?

It’s important for financial analysts to keep data up-to-date and easily accessible in order to track several key
factors, including the following:

Risk exposure and current working capital

- Opportunities to increase efficiency in business operations

- Optimal capital structure

- Model whether current business decisions may alter the key value drivers for the business Corporate
Finance Institute®

- Examine what products and what customers are key determinants of profit margins - Potential of current
decisions to significantly impact stock price

In answering this question, a sharp applicant will not only note most or all of the preceding points, but also
note the need to regularly review data or situations they should be monitoring closely, as the key factors for a
particular business will likely change over time.

10. What software programs do you use to prepare reports and presentations (illustrated technical graphs,
charts, or spreadsheets)?
Excel is still a mainstay of financial analyst presentations; however, many additional software programs have
made it easier for financial analysts to prepare more vibrant, colorful presentations that help to present data
more clearly. Among the most popular software programs to help with creating highimpact reports and
presentations are Tableau, Power BI, and Limelight.

An applicant’s answer to this question will clue you in as to what programs they’re familiar with, trained in, or
fluent with – and may also indicate how aware they are of how rapidly software is improving and the need to
be continually learning new programs. Part of a good answer to this question may also include expressing the
applicant’s willingness to use any program that the company may prefer and noting their ability to quickly
learn and become fluent with new software.
Q. Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary,
taxes, etc., do not create any asset, and instead instantly create an expense on the income statement
that reduces equity via retained earnings?

A: Capital expenditures are capitalized because of the timing of their estimated benefits – the

lemonade stand will benefit the firm for many years. The employees’ work, on the other hand,

benefits the period in which the wages are generated only and should be expensed then. This is

what differentiates an asset from an expense.

Q. Walk me through a cash flow statement.

A. Start with net income, and go line by line through major adjustments (depreciation, changes

in working capital, and deferred taxes) to arrive at cash flows from operating activities.

Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of

investment securities to arrive at cash flow from investing activities.

Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow from

financing activities.

Adding cash flows from operations, cash flows from investments, and cash flows from financing gets

you to the total change of cash.

Beginning-of-period cash balance plus the change in cash allows you to arrive at the end-of-period

cash balance.

Q. What is working capital?

A: Working capital is defined as current assets minus current liabilities; it tells the financial statement

user how much cash is tied up in the business through items such as receivables and inventories and

also how much cash is going to be needed to pay off short term obligations in the next 12 months.
Q. Is it possible for a company to show positive cash flows but be in grave trouble?

A: Absolutely. Two examples involve unsustainable improvements in working capital (a company is

selling off inventory and delaying payables), and another example involves a lack of revenues going

forward in the pipeline.

Q. How is it possible for a company to show positive net income but go bankrupt?

A: Two examples include deterioration of working capital (i.e. increasing accounts receivable,

lowering accounts payable), and financial shenanigans.

Q. I buy a piece of equipment, walk me through the impact on the 3 financial statements.

A: Initially, there is no impact (income statement); cash goes down, while PP&E goes up (balance

sheet), and the purchase of PP&E is a cash outflow (cash flow statement)

Over the life of the asset: depreciation reduces net income (income statement); PP&E goes down by

depreciation, while retained earnings go down (balance sheet); and depreciation is added back

(because it is a non-cash expense that reduced net income) in the cash from operations section

(cash flow statement).

Q. Why are increases in accounts receivable a cash reduction on the cash flow statement?

A: Since our cash flow statement starts with net income, an increase in accounts receivable is an

adjustment to net income to reflect the fact that the company never actually received those funds.

Q. How is the income statement linked to the balance sheet?

A: Net income flows into retained earnings.

Q. What is goodwill?

A: Goodwill is an asset that captures excess of the purchase price over fair market value of an

acquired business. Let’s walk through the following example: Acquirer buys Target for $500m in

cash. Target has 1 asset: PPE with a book value of $100, a debt of $50m, and equity of $50m = book

value (A-L) of $50m.

 Acquirer records cash decline of $500 to finance the acquisition

Acquirer’s PP&E increases by $100m

Acquirer’s debt increases by $50m

 Acquirer records goodwill of $450m

Q. What is a deferred tax liability and why might one be created?

A: Deferred tax liability is a tax expense amount reported on a company’s income statement that is

not actually paid to the IRS in that time period, but is expected to be paid in the future. It arises

because when a company actually pays less in taxes to the IRS than they show as an expense on

their income statement in a reporting period.

Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to

differences in income between the two, which ultimately leads to differences in tax expense reported

in the financial statements and taxes payable to the IRS.

Q. What is a deferred tax asset and why might one be created?

A: Deferred tax asset arises when a company actually pays more in taxes to the IRS than they show

as an expense on their income statement in a reporting period.

Differences in revenue recognition, expense recognition (such as warranty expense), and net operating

losses (NOLs) can create deferred tax assets.

I hope you enjoyed this article and found these finance interview questions helpful. Please feel free

to add any comments or recommendations in the comments section below.