Finance Analyst And Finance Research Interview

Question
1. What is a Financial Analyst?
A financial analyst is someone who makes business recommendations for an organization based on analyses they
carry out on factors like market trends, the financial status of a company (or companies) and the predicted outcomes
of a certain type of deal.
2. What does a Financial Analyst do?
Financial analysts are primarily responsible for creating financial models that can predict the outcome of certain
business decisions
In order to do this properly, they need to aggregate a large amount of financial data while also taking in account
factors like financial market trends and past transactions of a similar nature.

The role of financial analysts is to audit or inspect the economy. Along with this, they also assist the industries and
companies to decide in investment decisions for banks, corporations, investment firms and insurance companies.
They are said to be the title for many chore responsibilities which can be budgeting, accounting, or cost analysis.
The main aspect required to attend a financial analyst interview is to present your skills in analyzing the economic
conditions and understanding the basic financial analysis.

3. What is goodwill?
Goodwill is an intangible asset associated with the purchase of one company by another. ... The value of a
company's brand name, solid customer base, good customer relations, good employee relations, and any patents or
proprietary technology represent some examples of goodwill.
Specifically, goodwill is recorded in a situation in which the purchase price is higher than the sum of the fair value
of all identifiable tangible and intangible assets purchased in the acquisition and the liabilities assumed in the
process.

4. Please provide a definition of what working capital is.

Working capital, also known as net working capital (NWC), is the difference between a company’s current assets,
such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods,
and its current liabilities, such as accounts payable.
5. Why would a company's quick ratio be lower than its current ratio?
The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to
meet its short-term obligations with its most liquid assets.
In the Numerator, we deduct Inventory as well as pre -paid expenses as compared to Current Ratio.
That is why it is lower
6. What is a long-term liability?
A long-term liability is an obligation resulting from a previous event that is not due within one year of the date of
the balance sheet (or not due within the company's operating cycle if it is longer than one year). Long-term
liabilities are also known as noncurrent liabilities.
7. Name two advantages of raising debt over equity.
Debt acts as a tax shield and debt is cheaper than equity
8. A company's cash conversion cycle is 50 days. Its days of sales outstanding is 45 days and
days of inventory outstanding is 63 days. What is the days of payables outstanding?
50=63+45-X
8. Under US GAAP how are dividends treated on the cash flow statement?

US GAAP Requirements
 Interest received must be classified as an operating activity.
  Interest paid must be classified as an operating activity.
 Dividends received must be classified as an operating activity.
 Dividends paid must be classified as a financing activity.
 Income tax expense must be classified as an operating activity.
 Bank overdrafts are not considered to be a part of ‘cash and cash equivalents’ but are
instead classified as a financing activity.
 Either the Direct or Indirect Method may be used for reporting Cash Flow from Operating
Activities, although the Direct Method is encouraged. Unlike under IFRS however, a
reconciliation of net income to cash flo w from op erating activities must be provided
regardless of the method used.

9. What is the formula for basic earnings per share?

PAT/Total Number of Shares
11. During periods of inflation, describe the impact of a LIFO inventory method on the
financial statements of a business?
During periods of inflation, LIFO shows the largest cost of goods sold of any of the
costing methods because the newest costs charged to cost of goods sold are also the highest costs.

12. What does the DuPont Model measure?

The Dupont analysis also called the Dupont model is a financial ratio based on the return on
equity ratio that is used to analyze a company's ability to increase its return on equity. In other
words, this model breaks down the return on equity ratio to explain how co mpanies can increase
their return for investors.

13. What are key factors financial analysts should consider when evaluating prospective
investments?
You should check belo w points as a key factor being a financial analyst.
1. Company's management and it's b ackground
2. Future business growth prospect
3. Reserve cash
4. Asset and liability
5. Stock price - Most Important

14. Can you explain why financial reports do not list dividends on the income statement?
A dividend is not an expense or a loss. Therefore, dividends declared and/or paid are not part of
the computation of net income that is presented on the income statement. Dividends declared by
corporations are reported in their statements of changes in Retained Earnings and Stockholders'
Equity.

15. What is the best metric to use to analyze a company's stock?

There is no one best metric. Each industry has it’s own metric. General ones are P/E, P/B
16. Which statements (income, balance, cash flow) would you reference to assess the
company's liabilities and assets and why?
Balance sheet because it consists of Assets & Laibilities

17. What makes good financial analysts these days?

On top of having good decision-making skills and being detail-oriented, financial analysts must have
Analytical/Math skills. Financial analysts must be able to mentally process information and use mathematical skills
when estimating the value of financial situations.

31. What is the difference between a journal and a ledger?

The Journal is a book where all the financial transactions are recorded for the first time. When the transactions are
entered in the journal, then they are posted into individual accounts known as Ledger. The Journal is a subsidiary
book, whereas Ledger is a principal book.

32. Mention one difference between a P&L statement and a balance sheet?
The balance sheet summarizes the financial position of a company for one specific point in time. The P&L
statement shows revenues and expenses during a set period of time.

33. What is ‘cost accountancy’?

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.

34. Is it possible for a company to show positive cash flows but be in grave trouble?
A common explanation for a company with a net loss to report a positive cash flow is depreciation expense.
Depreciation expense reduces a company's net income (or increases its net loss) but it does not involve a payment
of cash in the current period.
Second example is when a company is in loss but has taken borrowings to finance business.

35. What is NPV? Where is it used?

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash
outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the
profitability of a projected investment or project
36. How many financial statements are there? Name them
Three are there. Balance sheet, Cash Flow Statement and Profit & Loss Statement
37. What are ‘adjustment entries’
Adjusting entries are journal entries made at the end of an accounting cycle to update certain revenue and expense
accounts and to make sure you comply with the matching principle. The matching principle states that expenses
have to be matched to the accounting period in which the revenue paying for them is earned.

38. Do you follow the stock market? Which stocks in particular?

39. How is it possible for a company to show positive net income but go bankrupt?
Yes, it can.
XYZ Corp has profitable operations that generate say $100m of net free cashflow. It has $500m of cash in the bank.
Full steam ahead…
Trouble is - they have a $1bn bond redeeming soon. If the market doesn’t want to refinance this via a new bond
issue or equity rights issue etc., then XYZ is bust.
For Eg- Asset Liability Mismatch of NBFC
40. What is a ‘composite cost of capital’?
Composite cost of capital is a company's cost to finance its business, determined by, and also referred to as
"weighted average cost of capital" or WACC
41. What is ‘capital structure’?
The capital structure is the particular combination of debt and equity used by a company to finance its overall
operations and growth.
43. I buy a piece of equipment, walk me through the impact on the 3 financial statements.
Balance sheet- Cash decreases and F.A increase. P&L Statement- Depreciation expense will increase. Cash Flow-
Investment activity cash flow will increase
44. What processes do you use to create financial analysis reports?
For any financial professional, it is important to know how to effectively analyze the financial statements of a firm.
This requires an understanding of three key areas:
1. The structure of the financial statements
2. The economic characteristics of the industry in which the firm operates and
3. The strategies the firm pursues to differentiate itself from its competitors.
There are generally six steps to developing an effective analysis of financial statements.

1. Identify the industry economic characteristics.

2. Identify company strategies.

3. Assess the quality of the firm’s financial statements.

4. Analyze current profitability and risk.

5. Prepare forecasted financial statements.

6. Value the firm.

The next steps

Once the analysis of the firm and its financial statements are completed, there are further questions that must be
answered. One of the most critical is: “Can we really trust the numbers that are being provided?” There are many
reported instances of accounting irregularities. Whether it is called aggressive accounting, earnings management, or
outright fraudulent financial reporting, it is important for the financial professional to understand how these types of
manipulations are perpetrated and more importantly, how to detect them.

45. Which profitability model do you consider best for forecasting projects?
Historical
A stable market and financial results that are changing slowly and predictably let you use historical data to forecast
profitability. Your model extends past rates of change into the future. For example, if your profits have been
growing at 5 percent per year for three years, you can predict they will be 5 percent higher next year. To check the
performance of your model, you can track related variables such as revenue and expenditures. Extend their past rates
of change into the future and calculate profitability by subtracting expenditures from revenue to see if the result
matches your profitability forecast.
Financial
If your finances are changing, you can't use a historical model. For example, if you have just taken out a loan to
finance expansion or if a key material for your production is suddenly increasing in price, your profitability will
change. In that case you can rely on financial calculations to forecast profitability. You can calculate interest charges
or increasing material costs and add them to expenditures while projecting increasing revenue due to higher sales.
Your calculations allow you to estimate profits and forecast company profitability.

Trends
Sometimes you can observe trends, and you should take them into account for your profitability model. If you can
isolate the effect of a trend, you can use another model as a base and add the trend effects to get an accurate forecast.
For example, if a low cost competitor has been taking market share away from your company for two years but is
going bankrupt and will cease operations in six months, you can start by using a historical model. You add the effect
of declining market share over two years and the effect of increased market share due to the competitor's bankruptcy
in six months. Your model accurately shows a steady decline and then a bump in sales.
Analytic
An analytic model is the least accurate, but it is the only one available for new product introductions or rapidly
changing markets where relevant historical information or financial data doesn't exist. Analyze the business by using
your knowledge of the market, experience from similar situations and cost estimates. You may have to hire experts
with experience in the industry to get all the information you need. In the analytic model, calculate the expected
costs of manufacturing and marketing the product, add overhead, estimate sales and revenue and forecast your
profitability from the results.

46. Which methodologies do you use during financial analysis?

There are three main methods of financial analysis:

1. Horizontal and vertical analysis
When using the horizontal analysis method, financial information is compared over a sequence of reporting periods.
The vertical analysis method allows analysing financial information in a proportional manner, where every line item
on a financial statement is recorded as a proportion of another item. Naturally, this implies that each line item
detailed on the income statement is quantified as a proportion of gross sales, whereas each line item detailed on a
balance sheet is quantified as a proportion of total assets.
2. Ratio analysis
Ratios are used to calculate the comparative size of a number in relation to another number. After a ratio is
calculated, it can be used to compare a similar ratio calculated for a previous period, or a ratio founded on an
average of a particular industry in order to establish whether the company’s performance is in harmony with set
expectations. In a typical financial analysis exercise, the majority of ratios will be within set expectations while a
few will highlight potential issues, thereby attracting the reviewer’s attention. Ratios have been generalised into four
categories namely: liquidity ratios, activity ratios, leverage ratios, and profitability ratios.
3. Trend analysis
This entails reviewing financial statements of three or more periods, an extension of horizontal analysis. The earliest
year in the set data represents the base year. In trend analysis, users assess statements for incremental change
patterns. A change in financial statements can indicate that there are either increased income or decreased expenses.

49. Why are increases in accounts receivable a cash reduction on the cash flow statement?
Because, meaning of account receivable in itself is amount of money that others owe to you which is not there with
you currently.
Cash flow statement shows the inflow and outflow of cash in a buisness through out the year compared to last year.
Increase in accounts receivable determines that credit sales has increased during accounting period which means
inflow of cash through sales is not up to the mark similarly decrease in accounts receivable means that sales r mostly
on cash basis or accounts receivable have been recovered on time which leads to inflow of cash .Thus if accts
receivable increases then cash inflow is restricted due increase in credit sales.
50. How is the income statement linked to the balance sheet?
Through Profit which goes to Retained Earnings
51. Is it better to increase price by 1 percent or increase customer base by 1 percent?
If my customer base does not reduce by increasing price, It is better to increase price because the increased price
goes directly to my bottom line.
52. What do you think is the single best evaluation metric for analyzing a company's stock?
All depends on the type of industry company is operating in.
54. If you invested $100 right now and earned a 10 percent return in your first year and then lost
10 percent in year 2, how much money would you have at the end of year 2?
=100*110%*90%=99
55. 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?

CAPEX include considerable investment in equipment and machinery in a manufacturing concern, or a building for
any business, thus the benefits that can be derived from such assets exceed one accouting (or financial) period. Other
cash outflows like operating expenses (best examples are utilities, insurance, advertising, rent) can benefit a
company for a short period of time, thus they are not assets and are written down in the current financial year.
Operating expenses are classified as nominal accounts and are shown as reduction of Revenues, thus the net profit
(Revenues - Expenses) ultimately has to go to Retained Earnings. If it’s a net loss, then it further reduced RE.

56. Walk me through a cash flow statement.

The cash flows statement shows cash flows from operating, investing and financing activities. In the operating
activities area, for example, you would add back depreciation expense to net income (since no cash has actually left
your firm). Investing activities could include money from sales of land, and financing could include receiving cash
from a loan, or giving out dividends to shareholders.

58. What is a deferred tax liability and why might one be created?

A simple way to define the deferred tax liability is the amount of taxes a company has "underpaid" — which will
(eventually) be made up in the future. By saying it has underpaid doesn't necessarily mean that it hasn't fulfilled
its tax obligations, rather it is recognizing that the obligation is paid on a different timetable.
A deferred tax liability is a tax that is assessed or is due for the current period but has not yet been paid. The deferral
comes from the difference in timing between when the tax is accrued and when the tax is paid. A deferred tax
liability records the fact the company will, in the future, pay more income tax because of a transaction that took
place during the current period, such as an installment sale receivable.

59. What is a deferred tax asset and why might one be created?
A deferred tax asset is an asset on a company's balance sheet that may be used to reduce its taxable income. It can
refer to a situation where a business has overpaid taxes or taxes paid in advance on its balance sheet. These taxes are
eventually returned to the business in the form of tax relief, and the over-payment is, therefore, an asset for the
company.

60. What are the programs that you will use in order to prepare illustrated technical graphs,
charts or spreadsheets?
Microsoft Excel is probably the first program you would mention, and it would be a good answer. Excel offers
plenty of analytical, mathematical and statistical functions–all you need for both basic and (semi)advanced
financial analysis.
62. Explain quarterly forecasting, expense models and updating revenue?
The analysis of expenses and revenue which is predicted to be produced or incurred in future is called quarterly
forecasting. The product or the service and its respect and demand in the market are mentioned as revenues. At times
when it is mentioned that revenues would boom, it means that profits will enhance and also the expenses would
elevate when compared with incomes.
63. What challenges are you expecting in this financial analyst position?

The right way to move forward with this question is to mention the ways you would utilize your financial analyst
skills and experiences in the job role that you would be hired for.
You can mention that you are a person who is boosted by challenges and also possesses the capacity to face any
challenges in the career.
You can also make a point that you have the skills and knowledge to handle any challenge in the job. Remember to
mention the goals as well as challenges you met prior.

65. Why should we hire you for financial analyst position?

For this finance related interview question, the candidate should formulate the answer by associating his skills,
education, personality, and experience along with the job role.
To answer this question the candidate must understand the job description and also the culture of the company. You
can also show that you’re a good team player by linking them with examples.
When you do not possess much of skills, experience or qualification, it is important to show your energy and
passion.
Employers look out for charismatic people who have complete energy and confidence in their speech. And hence, it
is mandatory to present yourself as a confident, motivated and energetic individual.
66. What do you know about our company?
Nothing!
68. What kind of salary do you expect?
High one!
69. What is variance analysis and mention about the time that you used variance analysis to
conclude?
The evaluation of performance by means of variance is mentioned as variance analysis. Its timely reporting is one
which enhances the opportunity for remedial action.
You can mention your previous example about variance analysis and the way you used it.
In order to answer this question make sure to identify the issue, discourse about variance analysis, its reason and
impact and also a projected corrective measure.

70. Do you have any questions to ask us?

71. Tell me about your experience with annual planning processes.
72. When did you start following the stock market? Have you had success?
73. Explain one financial concept to me.
The term "double entry" means that every transaction affects at least two accounts. For example, if a company
borrows $50,000 from its bank, the company's Cash account increases, and the company's Notes Payable account
increases. Double entry also means that one of the accounts must have an amount entered as a debit, and one of the
accounts must have an amount entered as a credit. For any given transaction, the debit amount must equal the credit
amount.

74. Why do you want to become a financial analyst?

All companies need to make decisions about how to manage their money in order to grow. Financial
analysts and financial managers work together to research into current market conditions and investing vehicles.
They then make recommendations to the company about investments and other financial decisions.