Fair Value 24 Hanscom Ave Reading Ma
Accounting Interview Questions & Answers (Basic)
Here are the the most important Bookkeeping concepts you demand to know.
1. Walk me through the 3 financial statements. "The 3 major financial statements are the Income Statement, Balance Sheet and Cash Flow Argument. The Income Statement gives the company's revenue and expenses, and goes down to Net Income, the terminal line on the statement. The Balance Canvass shows the company's Assets - its resource - such as Greenbacks, Inventory and PP&E, equally well as its Liabilities - such as Debt and Accounts Payable - and Shareholders' Equity. Avails must equal Liabilities plus Shareholders' Disinterestedness. The Cash Flow Statement begins with Internet Income, adjusts for non-greenbacks expenses and working capital changes, and so lists cash flow from investing and financing activities; at the terminate, y'all meet the visitor'south cyberspace alter in greenbacks." 2. Can you lot give examples of major line items on each of the fiscal statements? Income Statement: Revenue; Cost of Appurtenances Sold; SG&A (Selling, General & Authoritative Expenses); Operating Income; Pretax Income; Internet Income. Balance Sail: Cash; Accounts Receivable; Inventory; Plants, Holding & Equipment (PP&Eastward); Accounts Payable; Accrued Expenses; Debt; Shareholders' Equity. Greenbacks Flow Statement: Net Income; Depreciation & Amortization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations; Capital Expenditures; Cash Menstruation From Investing; Sale/Purchase of Securities; Dividends Issued; Cash Flow From Financing. 3. How do the 3 statements link together? "To tie the statements together, Net Income from the Income Statement flows into Shareholders' Disinterestedness on the Residuum Sheet, and into the acme line of the Greenbacks Flow Statement. Changes to Residuum Sail items announced as working upper-case letter changes on the Cash Flow Statement, and investing and financing activities affect Balance Sheet items such equally PP&Due east, Debt and Shareholders' Disinterestedness. The Cash and Shareholders' Equity items on the Balance Sheet act as "plugs," with Cash flowing in from the final line on the Cash Flow Statement." 4. If I were stranded on a desert island, but had i argument and I wanted to review the overall health of a company - which statement would I use and why? Y'all would use the Greenbacks Flow Statement because it gives a true picture of how much cash the company is actually generating, contained of all the non-cash expenses you might have. And that's the #ane thing you care almost when analyzing the overall financial health of any business organization - its greenbacks flow. 5. Let'due south say I could only look at 2 statements to appraise a visitor's prospects - which ii would I use and why? You would choice the Income Statement and Balance Sail, because yous tin create the Cash Menses Statement from both of those (bold, of course that you take "before" and "after" versions of the Balance Canvas that correspond to the same period the Income Statement is tracking). vi. Walk me through how Depreciation going up by $10 would affect the statements. Income Statement: Operating Income would decline by $x and assuming a 40% tax rate, Net Income would go down by $6. Cash Flow Argument: The Net Income at the top goes down by $six, merely the $10 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $4. There are no changes elsewhere, and so the overall Internet Modify in Greenbacks goes upward by $iv. Balance Sheet: Plants, Property & Equipment goes downwards past $10 on the Avails side because of the Depreciation, and Cash is upwardly by $iv from the changes on the Cash Flow Statement. Overall, Avails is down by $half-dozen. Since Net Income fell by $vi as well, Shareholders' Disinterestedness on the Liabilities & Shareholders' Equity side is down by $6 and both sides of the Balance Sheet balance. Note: With this type of question I always recommend going in the order: This is then y'all can check yourself at the end and make sure the Remainder Sheet balances. Recollect that an Asset going up decreases your Cash Flow, whereas a Liability going upwards increases your Cash Menses. 7. If Depreciation is a non-greenbacks expense, why does information technology impact the cash balance? Although Depreciation is a non-greenbacks expense, it is taxation-deductible. Since taxes are a cash expense, Depreciation affects greenbacks by reducing the corporeality of taxes you pay. 8. Where does Depreciation usually evidence up on the Income Statement? Information technology could be in a carve up line particular, or information technology could be embedded in Cost of Goods Sold or Operating Expenses - every visitor does it differently. Note that the end result for accounting questions is the same: Depreciation always reduces Pre-Taxation Income. 9. What happens when Accrued Compensation goes upward by $ten? For this question, confirm that the accrued bounty is now being recognized as an expense (as opposed to but irresolute non-accrued to accrued compensation). Assuming that's the case, Operating Expenses on the Income Statement go upward by $10, Pre-Taxation Income falls past $10, and Cyberspace Income falls by $half dozen (bold a forty% tax rate). On the Greenbacks Menses Statement, Net Income is down by $6, and Accrued Compensation volition increase Cash Flow by $10, and then overall Cash Flow from Operations is up by $4 and the Net Change in Cash at the bottom is up by $4. On the Balance Sheet, Cash is upwardly by $4 as a result, then Assets are up by $4. On the Liabilities & Equity side, Accrued Compensation is a liability so Liabilities are up by $10 and Retained Earnings are down by $6 due to the Net Income, then both sides residuum. x. What happens when Inventory goes up past $x, assuming you pay for it with cash? No changes to the Income Statement. On the Cash Flow Argument, Inventory is an asset so that decreases your Cash Menses from Operations - information technology goes down by $ten, as does the Internet Change in Greenbacks at the bottom. On the Balance Sheet under Assets, Inventory is upward past $10 just Cash is downwardly by $10, and so the changes cancel out and Assets still equals Liabilities & Shareholders' Equity. xi. Why is the Income Statement not afflicted by changes in Inventory? This is a common interview mistake - incorrectly stating that Working Uppercase changes show up on the Income Statement. In the case of Inventory, the expense is only recorded when the goods associated with information technology are sold - so if information technology's simply sitting in a warehouse, information technology does non count as a Cost of Good Sold or Operating Expense until the company manufactures it into a product and sells it. 12. Let's say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements affected at the commencement of "Year 1," before anything else happens? At the start of "Twelvemonth 1," before anything else has happened, there would exist no changes on Apple's Income Argument (yet). On the Greenbacks Flow Argument, the boosted investment in factories would show upward under Cash Flow from Investing equally a net reduction in Cash Flow (so Cash Flow is downwards by $100 so far). And the boosted $100 worth of debt raised would evidence upwards as an addition to Cash Menses, canceling out the investment activity. So the cash number stays the aforementioned. On the Residuum Sheet, there is now an additional $100 worth of factories in the Plants, Property & Equipment line, so PP&Due east is upward by $100 and Assets is therefore up by $100. On the other side, debt is up by $100 as well and so both sides rest. 13. Now let's leave i year, to the get-go of Twelvemonth 2. Assume the debt is loftier-yield so no principal is paid off, and assume an interest charge per unit of 10%. Also assume the factories depreciate at a rate of 10% per twelvemonth. What happens? Subsequently a yr has passed, Apple tree must pay involvement expense and must record the depreciation. Operating Income would decrease by $10 due to the x% depreciation charge each year, and the $ten in boosted Interest Expense would subtract the Pre-Tax Income by $20 altogether ($10 from the depreciation and $10 from Interest Expense). Assuming a tax rate of 40%, Net Income would fall by $12. On the Greenbacks Flow Statement, Net Income at the top is down by $12. Depreciation is a non-cash expense, and then you add it dorsum and the cease result is that Cash Catamenia from Operations is downwardly by $2. That's the only alter on the Cash Menses Statement, so overall Greenbacks is down by $two. On the Balance Sail, nether Assets, Greenbacks is down past $two and PP&Due east is down past $10 due to the depreciation, so overall Assets are down past $12. On the other side, since Net Income was down by $12, Shareholders' Disinterestedness is also down by $12 and both sides balance. Remember, the debt number under Liabilities does not change since we've assumed none of the debt is actually paid back. 14. At the commencement of Year 3, the factories all break down and the value of the equipment is written down to $0. The loan must also be paid dorsum at present. Walk me through the 3 statements. After 2 years, the value of the factories is now $lxxx if we get with the 10% depreciation per twelvemonth supposition. It is this $80 that nosotros will write down in the 3 statements. First, on the Income Statement, the $80 write-down shows up in the Pre-Taxation Income line. With a 40% tax rate, Net Income declines by $48. On the Greenbacks Menstruum Statement, Net Income is downward past $48 but the write-down is a noncash expense, so nosotros add together information technology back - and therefore Cash Catamenia from Operations increases by $32. There are no changes under Greenbacks Menstruation from Investing, but nether Cash Catamenia from Financing there is a $100 charge for the loan payback - and so Greenbacks Menses from Investing falls by $100. Overall, the Net Change in Cash falls past $68. On the Balance Sheet, Cash is at present down by $68 and PP&E is downward by $eighty, then Assets have decreased past $148 birthday. On the other side, Debt is downwards $100 since it was paid off, and since Net Income was downwardly past $48, Shareholders' Equity is down by $48 as well. Birthday, Liabilities & Shareholders' Disinterestedness are downwards by $148 and both sides residue. 15. Now permit's look at a unlike scenario and assume Apple is ordering $10 of boosted iPod inventory, using cash on hand. They order the inventory, just they have not manufactured or sold annihilation yet - what happens to the three statements? No changes to the Income Statement. Cash Catamenia Statement - Inventory is up by $10, so Cash Flow from Operations decreases by $ten. In that location are no farther changes, and so overall Cash is downwards by $10. On the Balance Sheet, Inventory is up past $ten and Greenbacks is down past $10 so the Assets number stays the same and the Residue Canvas remains in rest. sixteen. At present let's say they sell the iPods for revenue of $20, at a cost of $10. Walk me through the 3 statements under this scenario. Income Statement: Revenue is up past $xx and COGS is upwards by $10, then Gross Profit is upward past $10 and Operating Income is up by $10 every bit well. Assuming a xl% revenue enhancement rate, Net Income is up by $6. Cash Flow Statement: Net Income at the tiptop is upwardly past $vi and Inventory has decreased by $10 (since we just manufactured the inventory into real iPods), which is a cyberspace addition to cash flow - and so Cash Menstruum from Operations is upwards by $16 overall. These are the but changes on the Cash Flow Argument, and so Net Change in Cash is upwardly by $16. On the Balance Sheet, Cash is upwardly by $xvi and Inventory is down by $10, and then Assets is up past $six overall. On the other side, Net Income was upward by $half dozen and then Shareholders' Disinterestedness is up past $6 and both sides remainder. 17. Could you lot e'er end up with negative shareholders' equity? What does it mean? Yes. It is common to encounter this in 2 scenarios: It doesn't "mean" anything in particular, but it can be a cause for concern and perhaps demonstrate that the company is struggling (in the second scenario). Notation: Shareholders' equity never turns negative immediately after an LBO - information technology would simply happen following a dividend recap or continued net losses. eighteen. What is working upper-case letter? How is it used? Working Capital = Current Assets - Current Liabilities. If information technology'southward positive, it means a visitor tin pay off its brusque-term liabilities with its brusk-term avails. It is oft presented every bit a fiscal metric and its magnitude and sign (negative or positive) tells y'all whether or not the company is "sound." Bankers look at Operating Working Capital letter more than unremarkably in models, and that is defined as (Electric current Avails - Cash & Cash Equivalents) - (Current Liabilities - Debt). xix. What does negative Working Capital mean? Is that a bad sign? Non necessarily. It depends on the type of company and the specific state of affairs - here are a few different things information technology could mean: twenty. Recently, banks have been writing down their avails and taking huge quarterly losses. Walk me through what happens on the 3 statements when there'south a writedownward of $100. First, on the Income Statement, the $100 write-downward shows up in the Pre-Taxation Income line. With a 40% taxation rate, Net Income declines by $60. On the Greenbacks Flow Statement, Net Income is downwardly past $60 but the write-down is a noncash expense, and so we add together information technology dorsum - and therefore Cash Flow from Operations increases by $40. Overall, the Cyberspace Change in Cash rises by $40. On the Balance Sheet, Greenbacks is now upward by $40 and an asset is down by $100 (it'south non clear which nugget since the question never stated the specific nugget to write-down). Overall, the Assets side is downwards past $sixty. On the other side, since Net Income was downwards by $60, Shareholders' Disinterestedness is also downward past $lx - and both sides rest. 21. Walk me through a $100 "bailout" of a company and how it affects the 3 statements. Get-go, confirm what type of "bailout" this is - Debt? Disinterestedness? A combination? The most common scenario hither is an disinterestedness investment from the regime, and then hither's what happens: No changes to the Income Statement. On the Cash Flow Statement, Cash Flow from Financing goes up by $100 to reverberate the authorities's investment, so the Net Change in Greenbacks is upwards by $100. On the Balance Canvas, Cash is upwards by $100 so Avails are upwards by $100; on the other side, Shareholders' Disinterestedness would go upward by $100 to make it balance. 22. Walk me through a $100 write-downwards of debt - as in OWED debt, a liability - on a company's balance sheet and how information technology affects the three statements. This is counter-intuitive. When a liability is written downwardly you tape it as a gain on the Income Statement (with an asset write-downwardly, information technology's a loss) - then Pre-Tax Income goes upwards by $100 due to this write-downwards. Assuming a twoscore% taxation rate, Net Income is upwards past $60. On the Cash Flow Statement, Net Income is upwardly by $threescore, but we demand to subtract that debt write-downwardly - so Cash Flow from Operations is downwards by $40, and Net Alter in Cash is down past $40. On the Balance Sheet, Cash is down by $40 and then Avails are down by $40. On the other side, Debt is down by $100 only Shareholders' Equity is upwardly past $sixty because the Net Income was upwardly past $60 - so Liabilities & Shareholders' Equity is down by $forty and it balances. If this seems strange to you, you're not alone - run into this Forbes article for more on why writing downwardly debt actually benefits companies accounting-wise: http://www.forbes.com/2009/07/31/off-white-value-accounting-markets-equities-fasb.html 23. When would a company collect greenbacks from a customer and not record it every bit acquirement? 3 examples come to mind: Companies that agree to services in the futurity ofttimes collect cash upfront to ensure stable revenue - this makes investors happy as well since they can meliorate predict a company'south operation. Per the rules of GAAP (Generally Accepted Bookkeeping Principles), you merely record revenue when you actually perform the services - and then the visitor would not record everything as acquirement right abroad. 24. If cash collected is not recorded every bit revenue, what happens to information technology? Normally it goes into the Deferred Revenue remainder on the Balance Canvass nether Liabilities. Over time, as the services are performed, the Deferred Revenue balance "turns into" real revenue on the Income Statement. 25. What's the deviation betwixt accounts receivable and deferred revenue? Accounts receivable has not yet been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how much revenue the visitor is waiting on, whereas deferred revenue represents how much it is waiting to record as acquirement. 26. How long does information technology usually have for a company to collect its accounts receivable balance? Mostly the accounts receivable days are in the twoscore-50 24-hour interval range, though it's higher for companies selling high-end items and it might be lower for smaller, lower transaction-value companies. 27. What'southward the deviation between greenbacks-based and accrual accounting? Cash-based accounting recognizes revenue and expenses when cash is actually received or paid out; accrual accounting recognizes revenue when collection is reasonably certain (i.eastward. after a customer has ordered the production) and recognizes expenses when they are incurred rather than when they are paid out in greenbacks. Most large companies use accrual accounting considering paying with credit cards and lines of credit is so prevalent these days; very minor businesses may employ cash-based accounting to simplify their financial statements. 28. Allow's say a customer pays for a Television receiver with a credit card. What would this wait like nether cash-based vs. accrual accounting? In greenbacks-based bookkeeping, the revenue would not prove up until the company charges the customer's credit carte, receives authority, and deposits the funds in its bank business relationship - at which point information technology would show up as both Revenue on the Income Argument and Cash on the Balance Canvass. In accrual accounting, it would testify upward as Revenue right away just instead of appearing in Cash on the Balance Canvass, it would get into Accounts Receivable at beginning. And so, once the cash is actually deposited in the company's bank account, information technology would "turn into" Cash. 29. How do y'all determine when to capitalize rather than expense a purchase? If the asset has a useful life of over 1 year, it is capitalized (put on the Balance Sail rather than shown as an expense on the Income Statement). So it is depreciated (tangible assets) or amortized (intangible avails) over a certain number of years. Purchases like factories, equipment and land all last longer than a year and therefore show up on the Balance Sheet. Employee salaries and the cost of manufacturing products (COGS) just cover a short menses of operations and therefore testify up on the Income Argument as normal expenses instead. 30. Why practise companies report both GAAP and non-GAAP (or "Pro Forma") earnings? These days, many companies have "non-greenbacks" charges such as Amortization of Intangibles, Stock-Based Bounty, and Deferred Acquirement Write-down in their Income Statements. Every bit a result, some fence that Income Statements under GAAP no longer reflect how profitable most companies truly are. Non-GAAP earnings are almost always higher considering these expenses are excluded. 31. A visitor has had positive EBITDA for the by ten years, merely it recently went bankrupt. How could this happen? Several possibilities: Remember, EBITDA excludes investment in (and depreciation of) long-term assets, interest and one-time charges - and all of these could end up bankrupting the company. 32. Ordinarily Goodwill remains abiding on the Residuum Sheet - why would it be impaired and what does Goodwill Impairment mean? Usually this happens when a visitor has been acquired and the acquirer re-assesses its intangible assets (such as customers, brand, and intellectual property) and finds that they are worth significantly less than they originally idea. It often happens in acquisitions where the heir-apparent "overpaid" for the seller and tin can result in a large internet loss on the Income Argument (see: eBay/Skype). It tin can likewise happen when a visitor discontinues role of its operations and must impair the associated goodwill. 33. Under what circumstances would Goodwill increase? Technically Goodwill can increment if the company re-assesses its value and finds that information technology is worth more, just that is rare. What usually happens is 1 of two scenarios:
- Big-3 Vacancies
- Big-4 Vacancies
- Goldman Sachs Vacancies
Source: https://finexecutive.com/en/news/accounting_interview_questions__answers_basic_2_4_2015
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