Here are some sample questions that you may expect during Technical rounds at a Finance Job Interview. This is only an indicative list of questions and answers. Your own preparation, clarity of concepts and an aptitude to apply the concepts would be key to get through the interviews.
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What are Financial Statements?
Financial Statements are summary statements that reflect the financial position and result of an entity. The Balance Sheet shows the Assets, Liabilities and Resultant Equity as on any particular date. The Profit & Loss Statement shows the financial result of an entity during a particular period and the Cash Flow Statement shows the movement in cash over a particular period. There is a Statement of Changes in Equity as well that shows the movement in shareholders’ worth over the same period.
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What is Net Worth?
Net worth is the amount by which assets exceed liabilities. Net worth is a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health. In simple terms, it is also known as Shareholders\’ Funds i.e. Total amount that belongs to the shareholders (owners) of the company. If the Liabilities (Debt) exceed the total Assets, it leads to a Negative Net Worth. While these numbers are usually taken from the Balance Sheet, sometimes, we may consider the Market Values of Assets and Liabilities leading to calculating Net Worth on Market Value basis.
Net Worth = Assets – Liabilities
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Explain Earnings Per Share
Earnings Per Share (EPS) refers to the share of profits for each shareholder in a given period. It is calculated as Profit After Tax / Number of shares outstanding.
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Explain a Cash Flow Statement?
Since accounting records are prepare on Accrual Basis, there is a need to understand the movement of cash. Cash flow statement helps in understanding the movement of cash and classifies this movement into Operating, Investing and Financing activities, also reconciling Opening Cash with Closing Cash Balance.
Opening Cash Balance + Cash Flows from Operating Activities + Cash Flows from Investing Activities + Cash Flows from Financing Activities = Closing Cash Balance
First, we start with net profit, proceed line by line while making adjustments to non operating income and expenses and changes in Working capital to arrive at cash flows from operations. Now, you will have to mention capital expenditures, purchase of intangible assets, purchase or sale of investment securities, and asset sales to arrive at cash flow from investments. After getting the cash flow from investments, you’ll need to mention funds raised through Equity or Debt issue, and paying out dividends to arrive at finances. Then, you need to add cash flows from investments, operations, and financing to get the total change in cash. Finally, the cash balance at the beginning of the period and the change in cash lets you arrive at the cash balance of the period’s end. This is essentially what a cash flow statement looks like.
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How can a company’s Cash Flow increase despite incurring losses?
A company’s cash flows may increase through fund infusion through Debt or Equity. Also, sometimes, past recovery of outstanding receivables may push up cash flow despite losses in the current period. Finally, the company may delay its payments and manage to keep cash flows higher.
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What is Depreciation? Why do we charge Depreciation?
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.
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What is the difference between Reserve and Provision?
Reserve is an appropriation of profit. That is, once the profits are earned, Reserve is an amount set aside for general or specific (e.g. Debenture Redemption, Revaluation) purpose. Provision is a charge against profit and it is an anticipated liability that is deducted from expenses. E.g. The entity expects a bill for insurance expenses in the coming month. As a principle of conservatism, it would create a provision for such expected liability or expense.
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What is Goodwill?
From a Finance perspective, Goodwill is an intangible asset that contains the excess of the purchase price over the fair market value of an acquired business. When a company acquires another company and pays an amount which is above the acquired’s company’s fair value, the difference between the price paid and the value of business acquired is recorded as Goodwill in the acquirer’s Balance Sheet.
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What is Impairment?
While Depreciation is charged on the value of the asset on a systematic basis over its useful life, sometimes, asset values may decline beyond the depreciated amount. This additional decline in the value of the asset is called Impairment. In short, Impairment is Carrying Value of the Asset less, its Fair Value.
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How can a Company Show Positive Net Income but go Bankrupt?
There may be many reasons how a company can go bankrupt despite having profits. One of the most common is if the company continues to sell its products on credit without realising money in cash.
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What does Working Capital Mean?
Working Capital refers to the amount of funds required to run the business on a day-to-day basis. Usually, it is calculated as Current Assets Less, Current Liabilities. It tells you how much cash is tied up in the business through inventories and receivable and how much cash you need to pay off the business’s short term obligations (in the coming 12 months).
Current Assets are short term assets (usually less than 1 year) that include Cash, Bank Balance, Trade Receivables (Debtors), Inventory, Short Term Loans and advances given etc.
Current Liabilities include Short term Borrowing, Trade Payables (Creditors), Accrued expenses etc.
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How would you interpret Negative Working Capital?
Usually, Negative Working Capital implies that the entity does not have enough liquid assets to meet its short term obligations. Its not good for the entity as it has poor liquidity position. It will either have to defer its payments leading to poor reputation, or it will have to sell its long term assets to meet short term obligations. In some businesses, it may be good to have negative working capital. E.g. in Service businesses where the entity takes money in advance and pays to its vendors later. Grocery retail and restaurant business are also examples of industries that may have negative working capital. 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.
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What is Operating Cycle?
The operating cycle is also known as the cash conversion cycle. In the context of a manufacturer, the operating cycle has been described as the amount of time that it takes for a manufacturer’s cash to be converted into products plus the time it takes for those products to be sold and turned back into cash. A very high Operating Cycle means that it takes longer for the entity to rotate funds into the business and more funds is blocked into operations. Conversely, lower Operating Cycles imply that funds rotate faster and less funds is blocked into operations.
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Explain Working Capital Ratios?
Working Capital Ratios explain the liquidity position of the entity.
Current Ratio = Current Assets / Current Liabilities. It explains how much current assets (e.g. Cash) an entity has to meet its short term obligations (e.g. short term debt). Ideally, Current Ratio should be 2:1 but it may differ according to industry standards.
Quick Ratio = (Current Assets – Inventory) / Current Liabilities. It explains a stronger measure of liquidity so that the entity does not have to sell its inventory under pressure to meet its short term obligations.
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What is Auditing?
An Audit is the independent examination of financial information of any entity with a view to expressing an opinion thereon”. Auditing is the process of checking, vouching and verification. It is the method by means of which an auditor seeks to establish the accuracy or otherwise of the financial records and of the balance sheet or other statement of figures.
Usually auditors would examine the financial statements to ensure that all material transactions are recorded correctly and in the correct period. All assets and liabilities relating to the entity are appropriately recorded in the financial statements; and the financial statements show a true and fair view of the entity.
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When we spend money, it is either called an Asset or an Expense. What’s the difference between the two?
Money spent is always a consumption of resource. One consumption gives immediate benefit (e.g. Expense) and other other gives benefit in long term (Asset). Expenses are usually made for consumption that has already taken place (e.g. Salaries paid for services consumed) But Assets provide benefit in the future (e.g. Machine purchased will provide benefit in future).
Capital expenditures are capitalized because they give benefits to the firm for a substantial amount of time. For example, a new branch would make a lot of money for the firm for a long while but an employee’s work will only benefit until the time of paying the wages and that’s why they create an expense. This is the primary difference between an asset and an expense.
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What is a Derivative?
Derivatives are financial instruments which derive their value from an underlying asset. For Example, a Call option on the stock will derive its value from the stock price itself.
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What is a Put Option?
Put option is a financial market derivative instrument that allows the holder (purchaser) to sell an asset at a specific price by a specific date to the writer of the put. The purchaser of a put option would usually believe that the stock price is expected to go down.
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What is a Call Option?
Call option is a financial market derivative instrument that allows the holder (purchaser) to BUY an asset at a specific price by a specific date to the writer of the Call. The purchaser of a call option would usually believe that the stock price is expected to go up.
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What is Free Cash Flow (FCF)?
Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after paying all cash expenses and taxes, and after providing for investments in working capital, and capital investments. FCFF is a measurement of a company’s profitability after all expenses and reinvestments. It is one of the many benchmarks used to compare and analyze a firm’s financial health. Free Cash Flow can be for Firm (Shareholders and lenders) or Free Cash Flow for Equity (equity shareholders).
Free Cash Flow for Firm (FCFF) = Net profit After Taxes + Non Cash Expenses (E.g. Depreciation and Amortisation) + Interest (1 – Tax Rate) – Capital Expenditure (i.e. CAPEX) – Changes in Net Non-Cash Working Capital
Free Cash Flow for Equity (FCFE) = Net profit After Taxes + Non Cash Expenses (E.g. Depreciation and Amortisation) + Net Borrowing – Capital Expenditure (i.e. CAPEX) – Changes in Net Non-Cash Working Capital
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What is Return on Equity?
Return on equity (ROE) is a ratio that provides investors with insight into how efficiently a company is managing the equity that shareholders have contributed to the company. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.
ROE = Profit After Tax (PAT) / Shareholders’ Equity
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What is the difference between EBIT and EBITDA?
Earnings Before Interest and Tax (EBIT) represents the approximate amount of operating income generated by a business, while Earnings Before Interest, Tax Depreciation and Amortisation (EBITDA) roughly represents the cash flow generated by the operations of a business. Both are used as measures of Operating Profit.
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What is Enterprise Value?
Enterprise Value (EV) is the market value of the entity.
EV = market value of common stock + market value of preferred equity + market value of debt + minority interest – cash and investments.
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What is Net Present Value?
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. When NPV is positive, it implies that the project contributes positively towards the shareholder’s wealth maximisation objective. It simply means that the project is earning a return beyond the cost of capital.
NPV = Cash inflows / (1+r)^n – Cash outflows
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What is Internal Rate of Return (IRR)?
Internal rate of return (IRR) is a metric used in capital budgeting to measure the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. The higher a project’s IRR, the more desirable it is to undertake the project. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects a firm is considering on a relatively even basis. Usually, if the IRR is more than the entity’s Cost of Capital, the project is accepted, else rejected.
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What is Beta?
Beta is a measure of systematic risk and is often calculated using regression equation. A Beta of 1.2 implies that if the market moves up by 10 percent, the stock will move up by 12 percent. A Beta of 0.8 implies that if the market moves up by 10 percent, the stock will move up by 8 percent. It is calculated as Covariance of the Stock divided by Variance of Market.
If a portfolio is well diversified, the unsystematic risk gets almost eliminated. The systematic risk arising from wide movement of security prices is very important. Riskiness of a security is its vulnerability to market risk. This vulnerability is measured by the sensitivity of the stock with respect to the market return and is measured by Beta.
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Can Beta be negative?
Yes. Theoretically, Beta can be negative. As a statistical expression, it would imply that if the market moves up, the stcok would move down i.e. opposite direction. Such stocks exist but may turn into positive beta in the long run.
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How can you calculate Beta of a Private Company?
In order to assess the Beta of a Private Company, we take the Beta of a publicly traded company that is comparable to the subject private company. We have to de-lever the beta first and then re-lever it using the target’s D/E ratio.
Unlevered Beta = Levered Beta of comparable listed companies / (1 + (1 – Tax Rate) x D/E ratio of comparable listed companies)
Levered Beta = Unlevered beta x (1 + (1 – tax rate) x Target D/E Ratio of subject private company)
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What is Market Capitalisation?
Market Capitalisation is the Market Value of the entity based on market prices of its shares.
Market Capitalisation = Price per share x Number of Shares
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What is Price Earnings Multiple or P/E Ratio?
The Price-Earnings Multiple (P/E ratio) is measured by Price per share divided by Earnings Per Share (EPS). P/E ratios are used by investors and analysts to determine the relative value of a company’s shares based on comparable companies. P/E may be estimated on a trailing (backward-looking) or forward (projected) basis. A reasonably high P/E Ratio may imply that the company is in high-growth state, however, a very high P/E Multiple may mean that the stock is over valued.
Note that Earnings Per Share (EPS) is given by Profit Divided by Number of Shares issued by the company. It may be Basic or Diluted.
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What is Hedging?
Hedging is a risk management strategy that we enter into to hedge (i.e. protect against) our losses. Just like Insurance, Hedge involves making some payment to compensate or offset the losses. It may involve taking an opposite position in a related asset. So that when the asset value declines, the hedged item protects us against losses.
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What is Deferred Tax / Deferred Tax Asset / Deferred Tax Liability?
There may be differences in Accounting and Tax regulations. Due to this, it is possible that an entity saves tax currently but has to pay higher tax in future leading to a Deferred Tax Liability. Conversely, it is possible that the entity pays a higher tax now and will save on taxes in future, this may lead to a Deferred Tax Asset.
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You’re considering raising funds. What factors would you consider when you have to choose between Debt and Equity?
If I am a start-up and not making enough profits, I would consider raising Equity. However, while doing so, I will be careful not to give away too much of stake to the shareholders as it will dilute my stake in the company.
If I am a matured organisation making enough profits, I may consider Debt as I can afford to pay interest and save taxes on the same. This way, I will also protect my shareholders’ stake.
However, If the company already has a lot of debt, I will ensure that the Debt levels are not exorbitantly high as it may pose threat in future. From a numbers’ perspective, I will evaluate options and choose one that ensures highest Earnings Per Share (EPS).
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What factors may drive a company towards Mergers and Acquisitions?
There are innumerable reasons and each company may have its own unique position. However, some common reasons for M&As could be inorganic expansion, access to different geographic market, access to technology and so on.
Examples: Walmart acquired a large stake in Flipkart to access Indian Market due to regulatory issues.
Maruti entered into a Joint Venture with Suzuki to access their technology. Byju’s acquire Aakash institute to access physical classrooms and a larger customer base and so on.
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Can you explain a situation where raising Debt may be beneficial over raising Equity?
Debt has an advantage over Equity in the sense that it has tax benefits on the interests being paid. Also, Debt is considered to be cheaper than Equity (since Debt holders have security and command their repayment before equity holders). In case a project is almost guaranteed to be profitable and the company does not have too much of existing debt, it may be beneficial for the company to raise money through Debt.
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What are some of the key things you would assess while analysing a company\’s financial statements?
Qualitatively, I would check the company\’s business model, how it earns money and is it sustainable and legitimate. I would evaluate management\’s capability and integrity towards business and its growth. I would check the industry environment and see if it is favourable for company\’s growth.
Quantitatively, I would check for Positive Net Worth; Growing revenues; Positive and growing operating (e.g. EBITDA) and net profit margins; Appropriate long term investments for future growth; Positive and growing Operating Cash Flows and Liquidity and Solvency position. While there my be many more aspects to evaluate, these could be the first few things.
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What is Weighted Average Cost of Capital (WACC)?
WACC is the overall cost of capital for the entity. It is the Weighted Average of Cost of Equity and Post-Tax Cost of Debt. Usually, this is the discount rate used to discount the future cash flows from the company or its projects to assess the Net Present Value of Projects or assessing the firm\’s value.
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While evaluating a company\’s financial statements, you observe that the Acounts Receivables have increased significantly over the last year. how would you deal with this exception?
I will check if the increase in Accounts Receivable is aligned with the increase in Revenues. This would mean that the business is growing consistently. However, if the Accounts Receivable has grown disproportionately over last year, this could be a sign of worry that the Company is giving extended credit period to its customers. This may lead to higher Working Capital requirement or may even lead to bad debts in future. I may consider calculating Average Collection Period and, if possible, discuss the reason from the management.
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If you were the CFO of a company, what would keep you up at night?
Assuming that it is a large organisation (e.g. MNC or a listed company), first of all, I would ensure that my systems and teams are efficient so that my work is not affected for day to day operations.
From a finance perspective, I would always focus on the Return on Equity (Profit after tax / Shareholders’ Equity) that ensures that the shareholders earn a reasonable return on their investment in the entity. Further, I will have to ensure that the entity has appropriate funds to pay its obligations, appropriate investments to generate long term funds and enough margins to earn profits in the short term.
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List of Accounting Standards (AS) in India
- AS 1 Disclosure of Accounting Policies
- AS 2 Valuation of Inventories
- AS 3 Cash Flow Statements
- AS 4 Contingencies and Events Occurring After the Balance Sheet Date
- AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
- AS 6 Depreciation Accounting
- AS 7 Construction Contracts
- AS 9 Revenue Recognition
- AS 10 Property, Plant and Equipment
- AS 11 The Effects of Changes in Foreign Exchange Rates
- AS 12 Accounting for Government Grants
- AS 13 Accounting for Investments
- AS 14 Accounting for Amalgamations
- AS 15 Employee Benefits
- AS 16 Borrowing Costs
- AS 17 Segment Reporting
- AS 18 Related Party Disclosures
- AS 19 Leases
- AS 20 Earnings Per Share
- AS 21 Consolidated Financial Statements
- AS 22 Accounting for Taxes on Income
- AS 23 Accounting for Investments in Associates in Consolidated Financial Statements
- AS 24 Discontinuing Operations
- AS 25 Interim Financial Reporting
- AS 26 Intangible Assets
- AS 27 Financial Reporting of Interests in Joint Ventures
- AS 28 Impairment of Assets
- AS 29 Provisions, Contingent Liabilities and Contingent Assets
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List of Indian Accounting Standards (Ind AS) (converged from IFRS) in India
- Ind AS 101 First-time Adoption of Indian Accounting Standards
- Ind AS 102 Share-based Payment
- Ind AS 103 Business Combinations
- Ind AS 104 Insurance Contracts
- Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations
- Ind AS 106 Exploration for and Evaluation of Mineral Resources
- Ind AS 107 Financial Instruments Disclosures
- Ind AS 108 Operating Segments
- Ind AS 109 Financial Instruments
- Ind AS 110 Consolidated Financial Statements
- Ind AS 111 Joint Arrangements
- Ind AS 112 Disclosure of Interests in Other Entities
- Ind AS 113 Fair Value Measurement
- Ind AS 114 Regulatory Deferral Accounts
- Ind AS 115 Revenue from Contracts with Customers
- Ind AS 116 Leases
- Ind AS 1 Presentation of Financial Statements
- Ind AS 2 Inventories
- Ind AS 7 Statement of Cash Flows
- Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
- Ind AS 10 Events after the reporting period
- Ind AS 12 Income Taxes
- Ind AS 16 Property, Plant and Equipment
- Ind AS 19 Employee Benefits
- Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance
- Ind AS 21 The Effects of Changes in Foreign Exchange Rates
- Ind AS 23 Borrowing Costs
- Ind AS 24 Related Party Disclosures
- Ind AS 27 Separate Financial Statements
- Ind AS 28 Investments in Associates and Joint Ventures
- Ind AS 29 Financial Reporting in Hyperinflationary Economies
- Ind AS 32 Financial Instruments Presentation
- Ind AS 33 Earnings per Share
- Ind AS 34 Interim Financial Reporting
- Ind AS 36 Impairment of Assets
- Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
- Ind AS 38 Intangible Assets
- Ind AS 40 Investment Property
- Ind AS 41 Agriculture
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Best of luck!!
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