Here are some Top Accounting Interview Questions and Sample Answers. This has been curated from our experience of working with companies around our Recruitment services.
Financial Statements – fundamentals
What are the three main financial statements and what does each convey?
• Income Statement: Shows revenues, expenses, and profit over a period.
• Balance Sheet: Snapshot of assets, liabilities, and equity at a point in time.
• Cash Flow Statement: Tracks cash inflows and outflows by operating, investing, and financing activities.
Explain the difference between profit and cash flow.
• Profit is accounting-based (includes non-cash items like depreciation).
• Cash flow measures actual cash movement; a company can be profitable but short on cash.
How is the cash flow statement linked to the income statement and balance sheet?
• Net profit from the income statement is the starting point for operating cash flow.
• Changes in balance sheet items (e.g., working capital, debt, PPE) explain cash movement.
• The ending cash on the CFS matches cash on the balance sheet.
Que: What is the difference between operating profit, EBIT, and EBITDA?
• Operating profit = Revenue – Operating expenses (includes depreciation).
• EBIT = Earnings before interest and tax; often same as operating profit but may include non-operating income.
• EBITDA = EBIT + Depreciation + Amortisation (proxy for cash operating performance).
Que: How does the treatment of depreciation differ between the income statement and cash flow statement?
• On the income statement: Expense reducing profit.
• On the cash flow statement: Added back under operating cash flows because it’s non-cash.
Balance Sheet
Que: What is the difference between current and non-current assets/liabilities?
• Current: Expected to be realized/settled within 12 months (e.g., inventory, accounts payable).
• Non-current: Held/owed beyond 12 months (e.g., PPE, long-term loans).
Que: What does working capital mean, and why is it important?
• Working Capital = Current Assets – Current Liabilities.
• Positive WC supports liquidity; too high WC may indicate inefficient asset use.
Que: Explain the difference between equity and reserves & surplus.
• Equity (Share Capital): Funds invested by shareholders.
• Reserves & Surplus: Accumulated retained earnings and other reserves over time.
Que: How do you calculate and interpret the debt-to-equity ratio?
• Formula: Total Debt ÷ Shareholders’ Equity.
• High ratio = more leverage (risk + return potential); low ratio = conservative financing.
Que: Why might a company’s net worth be negative?
• Accumulated losses > equity invested.
• Could be due to sustained losses, high write-offs, or dividend payouts exceeding profits.
Que: You see a balance sheet with ₹50 crore cash, but the company is also carrying ₹40 crore short-term debt. What questions would you ask?
Ans: Why not repay debt? Is cash earmarked? Debt cheaper than cash returns? The company want to preserve cash for its working capital requirements. It’s better to have cash as long as the business is generating higher returns than cost of debt.
Que: A company has ₹100 crore PPE on its books, with accumulated depreciation of ₹70 crore. How would you interpret this?
Ans: It’s likely that Assets are older, may need replacement.
Que: If trade receivables have doubled in one year, but sales have grown only 20%, what are the risks?
Ans: Poor collection, possible revenue inflation.
Que: A company has negative cash from operations but positive investing cash flows. Is this sustainable?
Ans: Likely asset sales; not sustainable for long-term operations
Que: Explain what could cause goodwill to appear on a company’s balance sheet.
Ans: Goodwill is recognised only in case of an acquisition. If a company has paid more than net assets (fair value) in acquisition goodwill is recognised as intangible.
Income Statement / Profit & Loss Statement
Que: What is the difference between gross margin, operating margin, and net margin?
• Gross Margin: (Revenue – COGS) ÷ Revenue — shows production efficiency.
• Operating Margin: Operating profit ÷ Revenue — includes overheads.
• Net Margin: Net profit ÷ Revenue — final profitability after all expenses.
Que: How do you identify if revenue recognition is aggressive or conservative?
• Aggressive: Recognizing revenue before risks transfer, unusual spike in sales at period end, high receivables growth vs. sales.
• Conservative: Recognition only when cash received or risks fully transferred.
Que: What is the impact of one-time or exceptional items on profitability?
• They distort underlying performance. Analysts adjust normalized earnings by excluding such items.
Que: What’s the significance of EPS (Earnings per Share) and how is it calculated?
• EPS = Net profit available to equity shareholders ÷ Weighted average shares outstanding.
• Indicates profit per share; key for valuation (P/E ratio).
Que: What is Depreciation and Why do we charge depreciation?
Ans: Depreciation is a systematic decline in the value of any asset over its useful life. It is a Non Cash Expense that is charged to P&L. It has three benefits. It shows the Assets at its realistic value in the Balance Sheet; it matches Revenues against corresponding expenses in the P&L and it also allows the entity to accumulate funds for replacement of assets at the end of its useful life.
Que: A company shows rising revenues but declining gross margins. What could be the reasons?
Ans: Price cuts, higher raw material cost, product mix change. This is often found in startups when they focus on growth without focussing on margins in initial periods.
Que: You are comparing two companies: one has higher net profit margin, but lower ROE than the other. How is this possible?
Ans: Lower asset turnover or under-leveraged capital.
Que: A company’s other income is larger than its operating profit. How would you assess its quality of earnings?
Ans: Reliance on non-core income = lower quality of earnings
Que: Why would a company prefer to capitalise an expense rather than expense it immediately?
Ans: Asset benefit over multiple years; increases current profit but higher future depreciation.
Que: How can changes in accounting estimates (e.g., useful life of assets) impact profitability?
Ans: Can boost/reduce profits; needs scrutiny for manipulation
Cash Flow Statement and Liquidity
Que: How would you assess whether a company’s operations are generating enough cash to sustain growth?
• Look at Operating Cash Flow vs. capex needs.
• Sustainable growth if OCF > Capex + debt repayments consistently.
Que: Explain the difference between free cash flow to the firm (FCFF) and free cash flow to equity (FCFE).
• FCFF: Cash available to all providers of capital (debt + equity).
• FCFE: Cash available to equity shareholders after debt obligations.
Que: Why might a profitable company have negative operating cash flows?
• Over-investment in working capital (inventory, receivables).
• Timing mismatch in cash receipts/payments.
• Non-cash profit recognition.
Que: A company buys new machinery. Which sections of the cash flow statement are affected and how?
Ans: Outflow in investing section; depreciation in future OCF adjustments.
Que: If accounts payable days increase from 45 to 80, what does it say about working capital management?
Ans: Slower payments; improves short-term liquidity but may strain supplier relations
Que: Explain why an increase in inventory is a negative adjustment in the cash flow from operations.
Ans: Cash tied up in stock.
Que: A company issues new equity shares. How does it appear in the cash flow statement and balance sheet?
Ans: Financing inflow in CFS; increases share capital & reserves in BS.
Que: Why might “cash and cash equivalents” decrease even if net profit is positive?
Ans: WC increase (high customer collection period, lower trade payable period, cash stuck in high inventory), capex, debt repayment, dividends.
Analytical and Red Flags
Que: If given three years of financial statements, what trends would you look for first?
• Revenue and profit growth consistency.
• Margin trends.
• Debt levels vs. equity.
• Cash flow alignment with profit.
• Asset turnover efficiency.
Que: What financial ratios would you use to assess liquidity, profitability, and solvency?
• Liquidity: Current ratio, quick ratio.
• Profitability: ROE, ROA, net margin.
• Solvency: Debt-to-equity, interest coverage.
Que: What are common signs of financial statement manipulation or accounting red flags?
• Large swings in accruals.
• Revenue growth without cash flow growth.
• Unusual related-party transactions.
• Frequent changes in accounting policies.
Analytical Questions and Caselets
interviewers often ask Analytical and Reasoning based questions in interviews as well. Here are some Top Accounting Interview Questions and Sample Answers for your reference.
Que: A company’s current ratio has fallen from 2.0 to 1.2 in one year, but sales and profits are rising. What could explain this?
Ans: Faster liability growth, shorter payables cycle, or better asset utilisation (less WC).
Que: If the inventory turnover ratio decreases sharply, what are the possible reasons and implications?
Ans: Slower sales, overstocking, obsolete inventory
Que: A company reports net profit but has increasing borrowings every year. What could be happening?
Ans: Capex funded by debt, working capital needs, dividends exceeding OCF.
Que: How does a change in credit policy affect financial statements?
Ans: Looser terms → higher sales but more receivables.
Stricter terms → lower sales, better cash.
Que: What happens to EPS if a company issues bonus shares?
Ans: Shares increase, profit unchanged → EPS falls (purely accounting).
Que: Two companies in the same industry have similar revenues, but one trades at a much higher P/E. What could explain this difference?
Ans: PE is a function of various factors. Different PE could because of different growth prospects, risk, margins, or industry perception
Que: If a company consistently has a current ratio above 3.0, is this always good? Why or why not?
Ans: Not always; may mean idle assets or poor WC management. However, it varies according to industry.
Que: A manufacturing company shows a sudden jump in capital work-in-progress (CWIP). What questions will you ask management?
Ans: Project delays? Funding source? Expected completion?
Que: A company shows “Deferred Tax Asset” on its balance sheet. What does it indicate?
Ans: Overpaid tax now recoverable via future deductions/loss offsets based on reasonable certainty ot generating profits in future.
Que: A company has revenue ₹200 crore, COGS ₹120 crore, operating expenses ₹50 crore, interest ₹10 crore, tax rate 30%. Calculate net profit margin.
Ans: EBIT = 200 – 120 – 50 = 30; PBT = 20; PAT = 14; NPM = 14/200 = 7%.
Que: Given: Current Assets ₹80 lakh, Current Liabilities ₹40 lakh, Inventory ₹30 lakh. Calculate quick ratio.
Ans: (80 – 30)/40 = 1.25.
Que: Company A’s ROE is 12%, Company B’s ROE is 18%. Company B has higher debt. Which is riskier and why?
Ans: Company B. Higher ROE with more debt = higher risk from leverage.
Que: Sales = ₹100 crore, Receivables = ₹25 crore. Calculate receivables turnover and days sales outstanding.
Ans: Turnover = 100/25 = 4; DSO = 365/4 ≈ 91 days
Que: A company’s FCFF is consistently negative but profits are positive. What could this mean?
Ans: Heavy capex or WC build-up consuming cash.
Que: You see high revenue growth but declining operating cash flow over three years. What are possible causes?
Ans: Aggressive revenue booking, WC expansion.
Que: Management changes the depreciation method from WDV to SLM. How would you interpret this?
Ans: Reduces expense short term, boosts profit. (Not applicable if accounting treatment is retrospective)
Que: A company regularly shows large “exceptional gains” from sale of assets. What might be going on?
Ans: Reliance on asset sales; core business may be weak.
Que: What is “window dressing” in financial statements? Give examples.
Ans: Paying liabilities after year-end, delaying expenses, selling assets to boost year-end cash.
Que: How might management manipulate earnings without breaking accounting rules?
Ans: Change estimates, recognise revenue earlier, delay expenses
Que: You are a credit analyst. The borrower’s debt-to-equity has increased from 0.8 to 1.5 in a year. Sales are flat, profits down 10%. What’s your assessment?
Ans: Higher leverage risk without growth; financial stress possible.
Que: As an investor, you see a company with high ROE but also high dividend payout and increasing debt. What’s your view?
Ans: Returns boosted by leverage; payout policy may be unsustainable.
Que: A listed company’s auditor resigns mid-year citing “differences in opinion on revenue recognition.” What would you do as an analyst?
Ans: Investigate accounting policies, compare with peers, watch for restatements.
Que: You are evaluating an IPO prospectus. Revenue growth is strong, but most sales are to a single customer. What’s your concern?
Ans: Concentration risk; earnings vulnerable to one relationship.
Que: A company acquired another firm for ₹200 crore, recording goodwill of ₹120 crore. What are the risks to watch for?
Ans: Possible future impairment if acquisition underperforms
Hope you’ve enjoyed these top accounting interview questions and sample answers. These are likely going to be asked by employers from PwC, EY, KPMG, Deloitte, among others.