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Finance Interview Questions and Answers

If you're pursing a career in insurance, retail banking, corporate finance, investment


banking or other financial services field, you should be prepared for finance interview
questions--even if you majored in liberal arts. The following are few best practices to keep
in mind as you prepare for the finance interview.

Be prepared for technical questions. While it's not uncommon for students in non-
finance/business majors to pursue careers in finance, or areas of business that require
an understanding of finance, some students erroneously believe they won't be asked
technical questions if their major wasn't in finance or business. This isn't always true.
When you arrive for a finance interview, you better make sure you have an
understanding of basic finance and accounting concepts.

Once an interviewer identifies a "gap" in your knowlegde, it's very difficult to change
the tone of the interview. Even in the best of job markets you're going to have
competition for good jobs, so make sure you arrive at the interview knowledgeable and
prepared for the position you're seeking.

Try to keep your responses and explanations under 2 minutes. Answer the question
completely but concisely--don't go overboard. More lengthy answers often lose the
interviewer and sometimes lead to the interviewer coming back with more complex
questions on the same subject.

If you absolutely don't know the answer to a question, say so. It's okay not to know
the answer to a few questions. If the interviewer thinks you're trying to pull one over on
him, you're going to loose face--and the job offer. When job candidates try to BS their
way through a finance interview, it rarely turns out good.

If you're interviewing for a finance position, you're also going to be expected to be familiar
with accounting. Accounting is the language of business, so don't think you can get by in
your finance job (or perform well in your interview) without an understanding of basic
accounting concepts and principles. Expect to answer several accounting questions in your
interview. Some of the questions will be easy and straight forward, while others will be a bit
more challenging. Testing your understanding of basic accounting concepts allows an
interview to gauge your knowledge without getting into more complicated valuation/finance
questions.

Below are some of the most common accounting questions you can expect to see during the
interview process for a finance position.

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?

Answer
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.

Explain to me what a cash flow statement is and how it works.

You'll want to start with net income and then proceed line by line through the major
adjustments (depreciation, deferred taxes, and working capital changes) required to arrive
at cash flow from operations. In your explanation you'll also want to mention the following:

Capital expenditures, purchase of intangible assets, sale of real assets, and


purchase/sale of investment securities to find cash flow generated from investing
activies.
Issuance/repurchase of dept, sale of equity, and payment of dividends to find cash
flow from financing activites.
Adding the cash flows from operating, investing and financing activities your able to
come up with the total change in cash.
By taking the cash balance at the beginning of the period and adjusting it for the
total change in cash you arrive at the cash balance at the end of the period.

Is it possible for a company to have positive cash flow but be in serious financial
trouble?

Answer:
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.

What is working capital?

Answer
By definition, working capital is current assets minus current liabilities. The working capital
figure shows a financial manager how much of an organization's cash is tied up in items
such as accounts receivables and inventory. It also indicates how much cash is going to be
required to pay off short term debt and obligations over the next year.

Is it possible for a company to show positive net income and still go bankrupt?

Answer
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.)

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.

Answer
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.

What is goodwill and how is it accounted for?

Answer
Goodwill is an intangible asset that is defined as the excess value of the purchase price over
the fair market value (book value) of an acquired business. For example, if Walmart is sold
for $100 billion with PP&E book value of $50 billion, equity of $30 billion, and debt of $10
billion, then the goodwill paid for Walmart would be $30 billion--the total sales price ($100
billion) minus the book value (Assets-Liabilities) of $70 billion.

The organization acquiring Walmart would show a decrease in cash of $100 billion to finance
the acquisition, an increase of $50 billion to PP&E, an increase of debt of $10 billion, and
goodwill of $30 billion.

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

Answer
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.

What is a deferred tax asset and what is its purpose?

Answer
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.

What is a deferred tax liability and what is its purpose?

Answer
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).

Corporate Finance Interview Questions


Corporate finance is one of the most popular career paths in finance. It's particularly
popular among recent business graduates and MBAs. In the corporate finance interview,
expect traditional management, organizational, and behavioral questions, but you also need
to be prepared to answer questions that test your techical ability. Questions designed to test
your understanding of corporate finance concepts and calculations are often presented in
the form of business cases or word problems.

Whatever answer you come up with when tackling technical questions, the interviewer is
just as interested in understanding you're rationale and thought process as they are the
answer you come up with. They do want to know that you can crunch numbers, but they're
just as interested in your ability to understand business strategy.

Not surprisingly, in some corporate finance interviews the majority of the questions are
focused more on testing your ability to think logically than they are your technical ability.
Don't be surprised if the first interview question you get has nothing to do with corporate
finance at all. A few "non-finance" type questions you might encounter include:

Tell me about yourself


Why do you want to work for our company?
What can you bring to this position that other candidates can't?
What weakness have you had to overcome?
Where do you see yourself in 5 years? In 10 years?
Are you willing to work long hours?
What achievements are you most proud of
What other companies are you interviewing with?
If you could pick only one stock, which would it be and why?
What do you know about our company, our competition, and our industry
Convince me you want to work in finance.
What questions do you have for me?

However, you may also be asked to demonstrate your finance skills during an interview.
Recent grads and candidates early in the careers might be asked to calculate yields-to-
maturity for bond products or something else pretty simple like an NPV calculation. Job
applicants with several years of corporate finance experience might be asked to calculate
cost of capital, or something a little more challenging. And if you're unlucky you may be
asked some obscure math question such as "Given a barometer, calculate the height of this
tree." While extreme, off the wall, questions like this do come up from time to time, they're
not the norm. Just remember, it's not the answer the interviewer is looking for, it's they way
you think and go about solving problems that they want to see.

The following are few entry-level corporate finance questions candidates can expect to see
during the interview process.

Where did the Dow Industrial Average and S&P 500 close yesterday?
Under what circumstances to corporations buy back stock?
Provide me an example of when you've demonstrated leadership
What are your strengths and weaknesses?
Value this business for me.
What are the advantages and disadvantages of a company issuing stock to finance
its operations rather than use debt?
When is debt financing more attractive than equity financing?
Who is a more senior creditor, a stockholder or a bondhold?
What is a "swap" and how does it work?
How would you go about valuing this department for a spin-off?

If you're interviewing for a senior-level corporate finance position, you should expect
technical corporate finance questions as well as several questions relating to strategy and
business philosophy. Some interview experts suggest that when interviewing for senior-level
positions that you should frame your answers as if you're a strategic partner the
organization may considering bringing on permanently.

A Few Additional Tips


Before the interview:

Due your due diligence on the company you're interviewing with. Understand their
business model and how the company differentiates itself from its competitors. Review
the company's website, annual reports, Bloomberg, WSJ, Lexis/Nexus, and other
industry publications.

Be familiar with current market trends affecting the industry and how these trends
may impact the company.

Make sure you're prepared to value a project. Know how to calculate and/or are
familiar with NPV, IRR, differences, EVA definitions, downfalls, and how each relates to
the viability of a project.

Prepare to answer simple case questions. It's quite likely the interviewer will present
to you a company facing a problem and ask you what they should do. Make sure your
provide the interviewer with your strategy as well as your answer.