1 What do you understand by the term working capital? Working capital may be defined as the overall, generalized portrait of an organization’s assets Technically speaking, the working capital is the current assets minus the current liabilities Basically, the working capital is chiefly concerned with the estimates of cash present in the organization 2 Do you think it is possible that a company with an assertive cash flow can still find itself in dire straits? Indeed, it is possible In fact, there.
1 What you understand by the term working capital? Working capital may be defined as the overall, generalized portrait of an organization’s assets Technically speaking, the working capital is the current assets minus the current liabilities Basically, the working capital is chiefly concerned with the estimates of cash present in the organization Do you think it is possible that a company with an assertive cash flow can still find itself in dire straits? Indeed, it is possible In fact, there is no such corresponding relationship Specifically speaking, a company which sells inventories and delays the concerned payables will reflect substantial cash flow but is essentially in financial trouble Apart from that, a company’s prospective revenues may hint at a strenuous situation, even though the company’s present revenues are very much kicking Can you define the meaning of goodwill? Goodwill may be defined as the redundant value of the cost price against the essential market value of the same Fundamentally, goodwill qualifies in the category of intangible assets Can you highlight the meaning and purpose of a deferred tax liability? Essentially, a deferred tax liability comes into the view when the concerned amount of tax is shelled at a future date to the IRS In fact, it can be summed up as the opposite of the deferred tax asset Generally speaking, the case for deferred tax liability arises when there is a discrepancy between the IRS reporting and the GAAP reporting Such subtle differences might eventually translate to the payment of lower taxes to the IRS What you understand by the term debentures? A debenture is nothing but a certificate of loan agreement furnished under the company’s stamp Essentially, the debenture holder is mandated to receive a fixed return along with the principal amount at the time of the maturity of the debenture Highlight the difference between real money and nominal money Also, explain the meaning of treasury bills Real money is the one which is loaded with its basic purchasing potency Nominal money, on the other hand, is related to the aspect of technical enumeration or counting So it turns out the nominal money is what reflected in the bill Treasury bills may be defined as the money market instruments in order to sponsor the short term financial requisites of the Government of India Essentially, all treasury bills are discounted securities which are provided at discount to face value Can you define hedging and preference capital? Understood simply, hedging may be defined as an instrument to alleviate risks In other words, hedging may correspond to the essential purpose of insurance However, what precisely marks the difference between the two is that hedging is not concerned with augmenting profits but alleviating risks Preference capital, on the other hand, may be defined as the capital which carries preference over equity capital at the time of the payment of dividend and the winding up of the company What you understand by the term composite cost of capital? Simply put, the weighted average cost of capital is indicative of the composite cost of capital Such parameters as the debt, preferred stock and common stock are reflected in the eventualities of the composite cost of capital Essentially, its purpose is to highlight the cost of each additional capital against the backdrop of the average capital cost What you mean by the term adjustment entries? Entries which are passed at the end of each accounting period are known as the adjustment entries As the name itself suggests, the chief purpose of the adjustment entries is to adjust the nominal and other accounts in order to engender a stable account on the balance sheet In fact, a balance sheet is an essential component in order to decipher the fairness of a business In other words, it can also be said that adjustment entries act as drafts before the final entries are passed 10 What you understand by the term cost accountancy? Cost accountancy may be defined as the overall presentation of cost control and other account figures in order to uphold the fairness of a particular venture and to aid the prospects of a grounded managerial decision making Apart from accounting of the costs, cost accountancy is also concerned with reflecting profitability 11 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 12 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) 13 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 14 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 15 How 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 16 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 17 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: Part I) What is the impact on the company’s EBITDA? Part II) What is the impact on the company’s Net Income? Part III) What is the impact on the company’s cash flow? Part IV) What is the impact on the company’s valuation? Answer: Part I) EBITDA increases by the exact amount of R&D expense that is capitalized Part II) Net Income increases, and the amount depends on the depreciation method and tax treatment Part III) 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 Part IV) Valuation is essentially constant – except for the cash taxes impact/timing impact on the net present value (NPV) of cash flows 18 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 19 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 20 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 21 When 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 22 How 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 23 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) 24 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.] 25 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 26 Why capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings? 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 27 Walk me through a cash flow statement Start with net income, 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 total change of cash Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash balance 28 Is it possible for a company to show positive cash flows but be in grave trouble? Absolutely Two examples involve unsustainable improvements in working capital (a company is selling off inventory and delaying payables), and another example involves lack of revenues going forward in the pipeline 29 How is it possible for a company to show positive net income but go bankrupt? Two examples include deterioration of working capital (i.e increasing accounts receivable, lowering accounts payable), and financial shenanigans 29 I buy a piece of equipment, walk me through the impact on the financial statements 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) 30 Why are increases in accounts receivable a cash reduction on the cash flow statement? 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 31 How is the income statement linked to the balance sheet? Net income flows into retained earnings 32 What is goodwill? 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 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m Acquirer records cash decline of $500 to finance acquisition Acquirer’s PP&E increases by $100m Acquirer’s debt increases by $50m Acquirer records goodwill of $450m 33 What is a deferred tax liability and why might one be created? 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 34 What is a deferred tax asset and why might one be created? 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 hepful Please feel free to add any comments or recommendations in the comments section below 35 Explain three sources of short-term Finance used by a company Ans Short-term financing is done by the company to fulfill its current cash needs Short-term sources of finance are required to be repaid within 12 months from the financing date Some of the short-term sources of financing are: Trade Credit, Unsecured Bank Loans, Bank Over-drafts, Commercial Papers, Secured Short-term loans Trade Credit is an agreement between a buyer and a seller of goods In this case, the buyer of the goods purchases the goods on a credit i.e the buyer pays no cash to the seller at the time of buying the goods, only to pay at a later specified date Trade credit is based on mutual trust that the buyer of the goods will pay the amount of cash after a specified date Bank Overdraft is a type of short-term credit that is offered to an individual or a business entity having a current account which is subject to the bank’s regulation In this case, an individual or a business entity can withdraw cash more than what is present in the account Interest is charged on the amount of over-draft which is withdrawn as a credit from the bank Unsecured Bank Loan is a type of credit that banks are ready to give and is payable within 12 months The reason why it is called an unsecured bank loan is that no collateral is required by the individual or a business entity taking this loan 36 A company buys an asset; walk me through the impact on the financial statements Ans The purchase of Assets is a transaction done by the company which will impact all the three statements of the company Let’s say that the asset is the equipment of $5million In Balance Sheet, cash will go down by $5million; decreasing the asset side of the balance sheet and at the same time the asset will be recorded as equipment of $5million which will increase the asset side of the balance sheet by the same amount Hence, the balance sheet of the company will be tallied In Income Statement, there will be no impact on the first year of income statement but after the first year, the company will have to charge depreciation expense on the purchased equipment which the company will have to show it in the Income Statement of the company Cash Flow Statement, assuming that only cash has been paid by the company to purchase the equipment The Cash Flow from Investing will result in the cash outflow of $5million 37 What is EPS and how is it calculated? Ans EPS is the Earnings per Share of the company This is calculated for the common stockholders of the company As the name suggests, it is the per-share earnings of the company It acts as an indicator of profitability Calculation: Popular Course in this category Sale Investment Banking Training (117 Courses, 25+ Projects) 4.9 (831 ratings) 117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion View Course EPS = (Net Income – Preferred Dividends) / weighted average number of shares outstanding during the year 38 Different types of EPS Colgate Case Study - Earnings Per Share Ans There are basically three types of EPS which an analyst can use to calculate the company’s earnings: Basic EPS, Dilutive EPS, and Anti-Dilutive EPS Basic EPS: It is useful for companies that have a simple capital structure In other words, it can be used to calculate earnings of the company which has no convertible securities outstanding like convertible bonds or convertible preference shares Dilutive EPS: It has a dilutive characteristic attached to it When a company has a complex capital structure, it is better to calculate Dilutive EPS instead of Basic EPS In other words, when a company has convertible securities such as convertible bonds, convertible preference shares and/or stock options which after conversion, dilutes the earnings i.e lower the earnings calculated for common shareholders of the company Anti-Dilutive EPS: This is the kind of EPS in which the convertible securities after conversion, increases the earnings for the common shareholders of the company 39 What is a difference between Futures Contract and Forwards Contract? Ans A futures contract is a standardized contract which means that the buyer or seller of the contract can buy or sell in lot sizes that are already specified by the exchange and is traded through exchanges Future markets have clearinghouses that manage the market and therefore, there is no counterparty risk Forwards Contract is a customizable contract which means that the buyer or seller can buy or sell any amount of contract they wish to These contracts are OTC (over the counter) contracts i.e no exchange is required for trading These contracts not have a clearinghouse and therefore, the buyer or the seller of the contract is exposed to the counterparty risk 40 What are the different types of Bonds? Ans A bond is a fixed-income security that has a coupon payment attached to it which is paid by the bond issuer annually or as per the conditions set at the time of issuance These are the types of bonds: Corporate Bond, which is issued by the corporations Supra-National Bond is issued by super-national entities like the IMF and World Bank Sovereign National Bond is a bond issued by the government of the country 41 What is a securitized Bond? Ans A bond that is repaid by the issuing entity by the cash flows which come from the asset set as collateral for the bond issued is known as securitized Bond We can understand by the example: A bank sells its house loans to a Special Purpose Entity and then that entity issues the bonds which are repaid by the cash flows generated by those house loans, in this case, it is the EMI payments made by the house owners 42 What is Deferred Tax Liability and why it might be created? Ans Deferred Tax Liability is a form of tax expense that was not paid to the income tax authorities in the previous years but is expected to be paid in future years This is because of the reason that the company pays less in taxes to the income tax authorities than what is reported as payable For example, if a company uses a straight-line method for charging depreciation in its income statement for shareholders but it uses a double-declining method in the statements which are reported to income tax authorities and therefore, the company reports a Deferred Tax Liability as the paid less than what was payable 43 What is Financial Modeling in Corporate Finance? What is Financial Modeling First of all, financial modeling is a quantitative analysis that is used to make a decision or a forecast about a project generally in the asset pricing model or corporate finance Different hypothetical variables are used in a formula to ascertain what future holds for a particular industry or for a particular project In Corporate Finance, Financial modeling means forecasting companies financial statements like Balance Sheet, Cash Flows, and Income Statement These forecasts are in turn used for company valuations and financial analysis With respect to Investment Banking, you can talk about the Financial Models that you have prepared You may refer to these Financial Modeling Templates Let us move to the next Corporate Finance interview question 44 What are the most common multiples used in valuation? There are few common multiples which are frequently used in valuation – EV/Sales EV/EBITDA EV/EBIT PE Ratio PEG Ratio Price to Cash Flow P/BV Ratio EV/Assets 45 Describe WACC and its components Ans WACC is the Weighted Average Cost of Capital which the company is expected to pay on the capital it has borrowed from different sources WACC is sometimes referred to as the Firm’s Cost of Capital The cost to the company for borrowing the capital is dictated by the external sources in the market and not by the management of the company Its components are Debt, Common Equity, and Preferred Equity 46 What are Stock Options? Ans Stock Options are the options to convert into common shares at a predetermined price These options are given to the employees of the company in order to attract them and make them stay longer The options are generally provided by the company to its upper management to align management’s interests with that of its shareholders Stock Options generally have a venting period i.e a waiting period before the employee can actually exercise his or her option to convert into common shares A Qualified option is a tax-free option which means that they are not subject to taxability after the conversion An Unqualified option is a taxable option which is taxed immediately after conversion and then again when the employee sells the stock 47 What is the DCF method? Ans DCF is the DCF method This method is used by analysts to value a company by discounting its future cash flow and bringing it down to its current value Discounted Cash Flow uses different techniques to value a company These techniques or methods are: DDM, FCFF, and Free Cash Flow to Equity 48 What is a Stock Split and Stock Dividend? Ans A stock split is when a company splits its stock into or more pieces For example a for split A company splits its stock for various reasons One of the reasons is to make the stock available for the investors who invest in the stock of the companies which are inexpensive The probability of growth for those stocks also increases Stock Dividend is when the company distributes additional shares in lieu of cash as dividends 49 What is the Rights Issue? Ans A rights offering is an issue that is offered to the existing shareholders of the company only and at a predetermined price A company issues this offer when it needs to raise money Rights Issues might be seen as a bad sign as the company might not be able to fulfill its future obligations through the cash generated by the operating activities of the company One needs to dig deeper as to why the company needs to raise the capital 50 What is a clean and dirty price of a bond? Ans Clean price is a price of a coupon bond not including the interest accrued In other words, the clean price is the present value of the discounted future cash flows of a bond excluding the interest payments Dirty price of a bond includes accrued interest in the calculation of bond Dirty price of the bond is the present value of the discounted future cash flows of a bond which include the interest payments made by the issuing entity 51 Why Do Capital Expenditures Increase An Organization's Assets (pp&e), While Other Expenditures, Like Paying Taxes, Employee Salaries, Utility Bills, Etc Do Not Increase An Organization's Asset Base, But Instead Show Up As Expenses On The Income Statement That Reduce Equity Via Retained Earnings? Unlike general expenses that provide benefit over a short period time (i.e., employee's work, taxes, etc.), capital expenditures provide benefit over a longer period of time Due to the duration of their estimated benefit usually several years capital expenditures are capitalized on the balance sheet, where shorter term expenditures are expensed on the income statement This is the difference between an asset and an expense 52 Is It Possible For A Company To Have Positive Cash Flow But Be In Serious Financial Trouble? Yes, it is A company that is selling off inventory but delaying payables will show positive cash flow for a while even though they're in trouble Another example would be where a company has strong revenues for the period but future forecasts show that revenues will decline This would happen when a company hasn't focused on making sure there were new prospects/sales in the pipeline 53 Is It Possible For A Company To Show Positive Net Income And Still Go Bankrupt? Absolutely A company that's experiencing a deterioration of working capital (i.e decrease in accounts payable, increase in accounts receivable) can show positive net income but be in financial trouble in the future It's also possible to show positive net income while in financial trouble by manipulating financial statements (e.g revenue recognition, expense recognition, etc.) 54 A Company Purchases A Piece Of New Equipment Explain The Impact Of The Purchase On The Income Statement, Balance Sheet, And Statement Of Cash Flows At the time of the purchase, there is a cash outflow (cash flow statement) and PP&E goes up (balance sheet) Over the life of the asset it is depreciated This shows up a reduction in net income (income statement) and PP&E (balance sheet) decreases by the amount depreciated At the same time retained earnings (balance sheet) also goes down However, the depreciation is added back in the cash from operations section (cash flow statement) as it is a non-camsh expense the reduced net income 55 Why Are Increases In Accounts Receivable A Cash Reduction On The Cash Flow Statement? Net income has to be adjusted to reflect an increase in accounts receivable since the company never actually received the funds As the cash flow statement begins with net income, it shows a cash reduction what accounts received increases 56 What Is A Deferred Tax Asset And What Is Its Purpose? A deferred tax asset (as its name suggests) is when a company pays more in taxes to the IRS than they actually owe (as shown as an expense on their income statement) This is an asset because it can be used to offet future tax expense in the future Deferred tax assets can result from differences in revenue recognition, expense recognition, and net operating losses 57 What Is A Deferred Tax Liability And What Is Its Purpose? A deferred tax liability is just the opposite of a deferred tax asset The deferred tax liability occurs when a tax expense reported on the income statement is not paid to the IRS during the same period it is recognized it's paid at a future date Deferred tax liabilities can result when there are differences in depreciation expense between book reporting (GAAP) and IRS reporting which lead to differences income as reflected on a companies income statement versus what's reported to the IRS and which results in lower taxes payable to the IRS (in the short run) 58 What Is Treasury Bills? Answer :Treasury Bills are money market instruments to finance the short term requirements of the Government of India These are discounted securities and thus are issued at a discount to face value 59 What Is Networth? Answer :Networth is the total assets minus total liabilities of a company 60 What Is Carecredits Healthcare Financing? How Does It Work? Answer : CareCredit's healthcare financing is unique Unlike a traditional credit card, CareCredit offers financing specifically for healthcare treatments and procedures These treatments can include much needed family dental work, cosmetic surgery or even veterinary services for your family's pet It's easy to apply for CareCredit financing online at carecredit.com and you find out instantly if you are approved CareCredit also gives you a 'No Interest' option, as well as an Extended Payment Plan (EPP) which helps you select a payment plan that works for you This convenience allows you to start using your CareCredit account immediately CareCredit healthcare financing is accepted at 100,000 practices, which makes finding a participating provider simple 61 What Is The Difference Between Journal Entry & Ledger? Answer : A journal is also called as a book of prime entry transactions occured are first entered in this book to show which accounts should be debited and which should be credited on the basis of entries made in the journal, accounts are prepared, the book which contains the accounts is called a ledger transactions entered in the journal are classified according to their nature and posted in their respective accounts in ledger it is also called as book of final entry 62 What Are Debentures? Answer : A Debenture is " A certificate of agreement of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return and the principal amount whenever the debenture matures 63 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? Answer : 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 64 Why Are Increases In Accounts Receivable A Cash Reduction On The Cash Flow Statement? Answer : 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 65 I Buy A Piece Of Equipment, Walk Me Through The Impact On The Financial Statements Answer : 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) 66 How Is It Possible For A Company To Show Positive Net Income But Go Bankrupt? Answer : Two examples include deterioration of working capital (i.e increasing accounts receivable, lowering accounts payable), and financial shenanigans 67 Is It Possible For A Company To Show Positive Cash Flows But Be In Grave Trouble? Answer : Absolutely Two examples involve unsustainable improvements in working capital (a company is selling off inventory and delaying payables), and another example involves lack of revenues going forward.in the pipeline 68 How Is The Income Statement Linked To The Balance Sheet? Answer : Net income flows into retained earnings 69 What Is A Deferred Tax Liability And Why Might One Be Created? Answer : 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 70 What Is A Deferred Tax Asset And Why Might One Be Created? Answer : 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 71 What Is Put Option? Answer : A "Put option" gives the holder the right but not obligation to sell an asset by a certain date for a certain price 72 What Is Authorized Capital? Answer : Authorized capital is the maximum capital that a company is authorized to raise 73 What Is Discount Cash Flow Management? The DCF for an investment is calculated by estimating: the cash that you will have to pay out, and the cash which you expect to receive back The timeframes that you expect to receive the payments must also be estimated Each cash transaction must then be recalculated, by subtracting the opportunity cost of capital between now and the moment when you will pay or receive the cash 74 What Is Bull Market? Answer : A financial market of a group of securities in which prices are rising or are expected to rise 75 Different Types Of Insurance Answer : Types of insurance: Auto insurance home insurance health insurance Disability casualty 6 life property other types insurance insurance financing vehicles 10 closed community self insurance 76 Who Is A More Senior Creditor, A Bondholder Or Stockholder? Answer : The bondholder is always more senior Stockholders (including those who own preferred stock) must wait until bondholders are paid during a bankruptcy before claiming company assets 77 What Is Inflaition? Answer : In economic terms, inflation is the rise in the prices of goods and services in the given economy over a period of time As the prices rise, each unit of the country's currency will buy fewer goods and services 78 What Kind Of Stocks Would You Issue For A Startup? Answer : A startup typically has more risk than a well-established firm The kind of stocks that one would issue for a startup would be those that protect the downside of equity holders while giving them upside Hence the stock issued may be a combination of common stock, preferred stock and debt notes with warrants (options to buy stock) 79 What Is Trial Balance? Answer : It is statement of balances of all the accounts in the ledger prepared to prove the arithmetical accuracy of the books of accounts 80 What Is Your Investing Strategy? Answer : Different investors have different strategies Some look for undervalued stocks, others for stocks with growth potential and yet others for stocks with steady performance A strategy could also be focused on the long-term or short-term, and be more risky or less risky Whatever your investing strategy is, you should be able to articulate these attributes 81 What Is Demat Account? What Is The Use Of It? Answer : Demat means Dematerialisation of share, in simple it is an account with which a person can trade in security market without which a person cannot buy or sell any share in security market 82 What Is Retained Earnings? Answer : When a company or corporation earns a profit or surplus, that money can be put to two uses it can either be re-invested in the business called retained earnings or it can be paid to the shareholders as a dividends 83 What Is The Difference Between Asset Management And Invest Management? Answer : Investment and asset are really close in meaning.Investment is when you put your money in stock, bond or other financial instruments Whereas Asset is what you own generally reffered to land, proprietorship , factory, etc 84 Why Would An Investor Buy Preferred Stock? Answer : An investor that wants the upside potential of equity but wants to minimize risk would buy preferred stock The investor would receive steady interest-like payments (dividends) from the preferred stock that are more assured than the dividends from common stock The preferred stock owner gets a superior right to the company's assets should the company go bankrupt A corporation would invest in preferred stock because the dividends on preferred stock are taxed at a lower rate than the interest rates on bonds 85 What Is Crossover Rate? Answer : Crossover rates have to with the amount of earnings that are generated by two different but similar projects The crossover rate is the point at which the two projects achieve the same net present value In terms of investments,calculating a crossover rate between two similar securities can help an investor determine what to buy and what to sell 86 Define Fair Value? Answer : Fair Value is an accounting expression, originally defined by the SEC.Under GAAP, the Fair Value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, other than in a liquidation On the other side of the balance sheet, the Fair Value of a liability is the amount at which that liability could be incurred or settled in a current transaction between willing parties, other than in a liquidation If available, a quoted market price in an active market is the best evidence of Fair Value and should be used as the basis for the measurement If a quoted market price is not available, preparers should make an estimate of Fair Value using the best information available in the circumstances In many circumstances, quoted market prices are unavailable As a result, making estimates of Fair Value is often difficult 87 What Is Meant By Take Over? Answer : In business, a takeover is the purchase of one company by another 88 What Is Secondary Market? Answer : Secondary market refers to market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange 89 What Is Call Option? Answer : Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date 90 What Is Raroc? Answer : RAROC is a risk-adjusted framework for profitability measurement and profitability management It is a tool for measuring risk-adjusted financial performance And it provides a uniform view of profitability across businesses (Strategic Business Units / divisions) RAROC and related concepts such as RORAC and RARORAC are mainly used within (business lines of) banks and insurance companies RAROC is defined as the ratio of risk-adjusted return to economic capital 91 What Is The Internal Rate Of Return(irr) Of Eurekaforbes? Answer : Internal Rate of Return is that rate of Return at which the net present value is equal to Zero or it is the Rate which equates the present value of the cash inflows to the cash outflows 92 What Is Eps? Answer : Earning per share thats portion of stehcompay profit 93 What Is Hedging? Answer : Hedging is a tool to minimize the risks It is thus like an 'insurance' where one pays a premium but gets an assured amount in case of some uncertain event to the extent of the loss actually suffered on an equally opposite position for which the hedge was done Thus, hedger is different from arbitrageur and speculators, as the intention here is not to maximize the profit but to minimize the loss E.g In Capital Markets, suppose an investor has an equity portfolio of Rs lacs and the portfolio consists of all the major stocks of NIFTY He thinks the market will improve in the long run but might go on a downside in the shortrun NIFTY today stands at 4300 To minimize the risk of downfall, he enters into an option contract by buying NIFTY-PUT of strike 4300 at a premium of, say, Rs 100 Thus, the actual amount paid is Rs 5,000(lot size of NIFTY is 50) Also, the number of NIFTY-PUTs to be bought will vary on the beta of the portfolio so as to completely hedge the positon 94 What Is The Punch Line Of Job? Answer : No matter how efficiently goods / services are produced, if they cannot be delivered to the customer in the quickest possible time it is vain 95 What Is The Entry For Deprecation? Answer : Depreciation Account Dr Accomulated Deprecitation Account Cr 96 What Is Preference Capital? Answer : Preference Capital is the capital which carries preference over Equity capital at the time of Payment of dividend and at the time of winding up of the comapany 97 What Are The Two Most Basics Financial Statements Prepared By The Companies? Answer : Financial statements are prepared in two forms: Balance Sheet is a position statement as it refers to a particular date It is also referred to as Statement of Sources and Application of Funds It informs about the various sources used by the organization which are technically known as liabilities to raise the funds which are referred as assets Profitability Statement also known as Profit and Loss Account It is a period statement as it refers to a particular period 98 What Are The Various Systems Of Accounting? Explain Them Answer : There are two systems of Accounting: Cash System of Accounting: This system records only cash receipts and payments This system assumes that there are no credit transactions In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received This system is used by the organizations which are established for non profit purpose But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during that period to which they pertain This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting 99 Explain Balanced Capitalization Answer : Capitalization is a collection of share capital, loans, reserves and debentures It represents permanent investment in companies and it also removes the need of long-term loan plans It is used to show the reality of the industry by promoting competition, development, profit and investment between individuals, companies and businesses Balance capitalization is part of this Capitalization only where it is compared to the relative importance, value and other things to make it proportionate in every sense In balance capitalization debits and credits should be equal on both sides and the share should be shared among all in equal proportions 100 What Is Capital Structure? What Are The Principles Of Capital Structure Management? Answer : Capital structure is a term which is referred to be the mix of sources from which the long term funds are required for business purposes which are raised to improve the capital of the company To fund an organization plan this capital structure is required which is the combination of debt and equity The management ensures the capital structure accesses which are needed to fund future growth and enhance financial performance 101 What Are The Principles Of Capital Structure Management? Answer : The principles of capital structure management which are essentially required are as follows: Cost Principle Risk Principle Control Principle Flexibility Principle Timing Principle 102 What Is Composite Cost Of Capital? Explain The Process To Compute It? Answer : Composite cost of capital is also known as weighted average cost of capital which is a measurable unit for it It also tells about the component costs of common stock, preferred stock, and debt Each of these components is given a weight on the basis of the associated interest rate and other gains and losses with it It shows the cost of each additional capital as against the average cost of total capital raised The process to compute this is first computing the weighted average cost of capital which is the collection of weights of other costs summed together The formula is given as: WACC= Wd (cost of debt) + Ws (cost of stock/RE) + Wp (cost of pf Stock) In this the cost of debt is calculated in the beginning and it is used to find out the cost of capital and other weights of cost is been calculated after the calculation each and every individual weight of the component is added and then it gives the final composite cost 103 What Are Adjustment Entries? Why Are They Passed? Answer : Adjustment entries are the entries which are passed at the end of each accounting period to adjust the nominal and other accounts so that correct net profit or net loss is indicated in profit and loss account and balance sheet may also represent the true and fair view of the financial condition of the business It is essential to pass these adjustment entries before preparing final statements Otherwise in the absence of these entries the profit and loss statement will be misleading and balance sheet will not show the true financial condition of the business 104 What Is Cost Accountancy? What Are The Objects Of Cost Accountancy? Answer : Cost accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making Following are the objects of Cost Accountancy : Ascertainment of Cost and Profitability Determining Selling Price Facilitating Cost Control Presentation of information for effective managerial decision Provide basis for operating policy Facilitating preparation of financial or other statements 105 What Is The Difference Between Costing And Cost Accounting? Answer : Costing is the process of ascertaining costs whereas cost accounting is the process of recording various costs in a systematic manner, in order to prepare statistical date to ascertain cost ... and found these finance interview questions hepful Please feel free to add any comments or recommendations in the comments section below 35 Explain three sources of short-term Finance used by... with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m Acquirer records cash decline of $500 to finance acquisition Acquirer’s PP&E increases by $100m Acquirer’s debt... 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