1. What do you understand by the term working capital?

Working capital may be defined as the overall, generalized portrait of an organization’s assets.
Technically speaking, the working capital is the current assets minus the current liabilities.
Basically, the working capital is chiefly concerned with the estimates of cash present in the
organization.

2. Do you think it is possible that a company with an assertive cash flow can still find itself in dire
straits?

Indeed, it is possible. In fact, there is no such corresponding relationship. Specifically speaking,

a company which sells inventories and delays the concerned payables will reflect substantial
cash flow but is essentially in financial trouble. Apart from that, a company’s prospective
revenues may hint at a strenuous situation, even though the company’s present revenues are
very much kicking.

3. Can you define the meaning of goodwill?

Goodwill may be defined as the redundant value of the cost price against the essential market
value of the same. Fundamentally, goodwill qualifies in the category of intangible assets.

4. Can you highlight the meaning and purpose of a deferred tax liability?

Essentially, a deferred tax liability comes into the view when the concerned amount of tax is
shelled at a future date to the IRS. In fact, it can be summed up as the opposite of the deferred
tax asset. Generally speaking, the case for deferred tax liability arises when there is a
discrepancy between the IRS reporting and the GAAP reporting. Such subtle differences might
eventually translate to the payment of lower taxes to the IRS.

5. What do you understand by the term debentures?

A debenture is nothing but a certificate of loan agreement furnished under the company’s
stamp. Essentially, the debenture holder is mandated to receive a fixed return along with the
principal amount at the time of the maturity of the debenture.

6. Highlight the difference between real money and nominal money. Also, explain the meaning
of treasury bills.

Real money is the one which is loaded with its basic purchasing potency. Nominal money, on
the other hand, is related to the aspect of technical enumeration or counting. So it turns out the
nominal money is what reflected in the bill.
Treasury bills may be defined as the money market instruments in order to sponsor the short
term financial requisites of the Government of India. Essentially, all treasury bills are discounted
securities which are provided at discount to face value.

7. Can you define hedging and preference capital?

Understood simply, hedging may be defined as an instrument to alleviate risks. In other words,
hedging may correspond to the essential purpose of insurance. However, what precisely marks
the difference between the two is that hedging is not concerned with augmenting profits but
alleviating risks.
Preference capital, on the other hand, may be defined as the capital which carries preference
over equity capital at the time of the payment of dividend and the winding up of the company.

8. What do you understand by the term composite cost of capital?

Simply put, the weighted average cost of capital is indicative of the composite cost of capital.
Such parameters as the debt, preferred stock and common stock are reflected in the
eventualities of the composite cost of capital. Essentially, its purpose is to highlight the cost of
each additional capital against the backdrop of the average capital cost.

9. What do you mean by the term adjustment entries?

Entries which are passed at the end of each accounting period are known as the adjustment
entries. As the name itself suggests, the chief purpose of the adjustment entries is to adjust the
nominal and other accounts in order to engender a stable account on the balance sheet. In fact,
a balance sheet is an essential component in order to decipher the fairness of a business. In
other words, it can also be said that adjustment entries act as drafts before the final entries are
passed.

10. What do you understand by the term cost accountancy?

Cost accountancy may be defined as the overall presentation of cost control and other account
figures in order to uphold the fairness of a particular venture and to aid the prospects of a
grounded managerial decision making. Apart from accounting of the costs, cost accountancy is
also concerned with reflecting profitability.

11. Walk me through the three financial statements.

The balance sheet shows a company’s assets, liabilities, and shareholders’ equity (put another
way: what it owns, what it owes, and its net worth). The income statement outlines the
company’s revenues, expenses, and net income. The cash flow statement shows cash inflows
and outflows from three areas: operating activities, investing activities, and financing activities.
12. If I could use only one statement to review the overall health of a company, which statement
would I use, and why?

Cash is king. The statement of cash flows gives a true picture of how much cash the company is
generating. Ironically, it often gets the least attention. You can probably pick a different answer
for this question, but you need to provide a good justification (e.g., the balance sheet because
assets are the true driver of cash flow; or the income statement because it shows the earning
power and profitability of a company on a smoothed out accrual basis).

13. If it were up to you, what would our company’s budgeting process look like?

This is somewhat subjective. A good budget is one that has buy-in from all departments in the
company, is realistic yet strives for achievement, has been risk-adjusted to allow for a margin of
error, and is tied to the company’s overall strategic plan. In order to achieve this, the budget
needs to be an iterative process that includes all departments. It can be zero-based (starting
from scratch each time) or building off the previous year, but it depends on what type of
business you’re running as to which approach is better. It’s important to have a good
budgeting/planning calendar that everyone can follow.

14. When should a company consider issuing debt instead of equity?

A company should always optimize its capital structure. If it has taxable income, then it can
benefit from the tax shield of issuing debt. If the firm has immediately steady cash flows and is
able to make the required interest payments, then it may make sense to issue debt if it lowers
the company’s weighted average cost of capital.

15. How do you calculate the WACC?

WACC (stands for Weighted Average Cost of Capital) is calculated by taking the percentage of
debt to total capital, multiplied by the debt interest rate, multiplied by one minus the effective tax
rate, plus the percentage of equity to capital, multiplied by the required return on equity. Learn
more in CFI’s free Guide to Understanding WACC.

16. Which is cheaper, debt or equity?

Debt is cheaper because it is paid before equity and has collateral backing it. Debt ranks ahead
of equity on liquidation of the business. There are pros and cons to financing with debt vs.
equity that a business needs to consider. It is not automatically better to use debt financing
simply because it’s cheaper. A good answer to the question may highlight the tradeoffs if there
is any follow-up required. Learn more about the cost of debt and cost of equity.

17. A company has learned that due to a new accounting rule, it can start capitalizing R&D
costs instead of expensing them.
This question has four parts to it:

Part I) What is the impact on the company’s EBITDA?

Part II) What is the impact on the company’s Net Income?
Part III) What is the impact on the company’s cash flow?
Part IV) What is the impact on the company’s valuation?

Answer:

Part I) EBITDA increases by the exact amount of R&D expense that is capitalized.
Part II) Net Income increases, and the amount depends on the depreciation method and tax
treatment.
Part III) Cash flow is almost unimpacted – however, cash taxes may be different due to changes
in depreciation expense, and therefore cash flow could be slightly different.
Part IV) Valuation is essentially constant – except for the cash taxes impact/timing impact on the
net present value (NPV) of cash flows.

18. What, in your opinion, makes a good financial model?

It’s important to have strong financial modeling principles. Wherever possible, model
assumptions (inputs) should be in one place and distinctly colored (bank models typically use
blue font for model inputs). Good Excel models also make it easy for users to understand how
inputs are translated into outputs. Good models also include error checks to ensure the model
is working correctly (e.g., the balance sheet balances, the cash flow calculations are correct,
etc.). They contain enough detail, but not too much, and they have a dashboard that clearly
displays the key outputs with charts and graphs. For more, check out CFI’s complete guide to
financial modeling.

19. What happens on the income statement if inventory goes up by $10?

Nothing. This is a trick question – only the balance sheet and cash flow statements are
impacted by the purchasing of inventory.

20. What does negative working capital mean?

Negative working capital is common in some industries, such as grocery retail and the
restaurant business. 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.

In answer to this interview question, it’s important to consider the company’s normal working
capital cycle.

21. When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and
depreciated according to the company’s accounting policies.

22. How do you record PP&E and why is this important?

There are essentially four areas to consider when accounting for Property, Plant & Equipment
(PP&E) on the balance sheet: (I) initial purchase, (II) depreciation, (III) additions (capital
expenditures), and (IV) dispositions. In addition to these four, you may also have to consider
revaluation. For many businesses, PP&E is the main capital asset that generates revenue,
profitability, and cash flow.

23. How does an inventory write-down affect the three financial statements?

This is a classic finance interview question. On the balance sheet, the asset account of
inventory is reduced by the amount of the write-down, and so is shareholders’ equity. The
income statement is hit with an expense in either cost of goods sold (COGS) or a separate line
item for the amount of the write-down, reducing net income. On the cash flow statement, the
write-down is added back to cash from operating activities, as it’s a non-cash expense (but must
not be double-counted in the changes of non-cash working capital).

24. Why would two companies merge? What major factors drive mergers and acquisitions?

There are many reasons companies go through the M&A process: to achieve synergies (cost
savings), enter new markets, gain new technology, eliminate a competitor, and because it’s
“accretive” to financial metrics. Learn more about accretion/dilution in M&A.
[Note: Social reasons are important too, but you have to be careful about mentioning them,
depending on who you’re interviewing with. These include ego, empire-building, and to justify
higher executive compensation.]

25. If you were CFO of our company, what would keep you up at night?

This is one of the great finance interview questions. Step back and give a high-level overview of
the company’s current financial position or the position of companies in that industry in general.
Highlight something on each of the three financial statements.

Income statement: growth rates, margins, and profitability.

Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios, leverage, return on assets
(ROA), and return on equity (ROE).
Cash flow statement: short-term and long-term cash flow profile, any need to raise money or
return capital to shareholders.
Non-financial statement: company culture, government regulation, conditions in the capital
markets.

26. 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?

Capital expenditures are capitalized because of the timing of their estimated benefits – the
lemonade stand will benefit the firm for many years. The employees’ work, on the other hand,
benefits the period in which the wages are generated only and should be expensed then. This is
what differentiates an asset from an expense.

27. Walk me through a cash flow statement.

Start with net income, go line by line through major adjustments (depreciation, changes in
working capital and deferred taxes) to arrive at cash flows from operating activities.

Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of
investment securities to arrive at cash flow from investing activities.
Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow
from financing activities.
Adding cash flows from operations, cash flows from investments, and cash flows from financing
gets you to total change of cash.
Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period
cash balance.

28. Is it possible for a company to show positive cash flows but be in grave trouble?
Absolutely. Two examples involve unsustainable improvements in working capital (a company is
selling off inventory and delaying payables), and another example involves lack of revenues
going forward in the pipeline.

29. How is it possible for a company to show positive net income but go bankrupt?

Two examples include deterioration of working capital (i.e. increasing accounts receivable,
lowering accounts payable), and financial shenanigans.

29. I buy a piece of equipment, walk me through the impact on the 3 financial statements.

Initially, there is no impact (income statement); cash goes down, while PP&E goes up (balance
sheet), and the purchase of PP&E is a cash outflow (cash flow statement)

Over the life of the asset: depreciation reduces net income (income statement); PP&E goes
down by depreciation, while retained earnings go down (balance sheet); and depreciation is
added back (because it is a non-cash expense that reduced net income) in the cash from
operations section (cash flow statement).

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

Since our cash flow statement starts with net income, an increase in accounts receivable is an
adjustment to net income to reflect the fact that the company never actually received those
funds.

31. How is the income statement linked to the balance sheet?

Net income flows into retained earnings.

32. What is goodwill?

Goodwill is an asset that captures excess of the purchase price over fair market value of an
acquired business. Let’s walk through the following example: Acquirer buys Target for $500m in
cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m =
book value (A-L) of $50m.

Acquirer records cash decline of $500 to finance acquisition

Acquirer’s PP&E increases by $100m
Acquirer’s debt increases by $50m
Acquirer records goodwill of $450m

33. What is a deferred tax liability and why might one be created?
 Deferred tax liability is a tax expense amount reported on a company’s income statement that
is not actually paid to the IRS in that time period, but is expected to be paid in the future. It
arises because when a company actually pays less in taxes to the IRS than they show as an
expense on their income statement in a reporting period.

Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead
to differences in income between the two, which ultimately leads to differences in tax expense
reported in the financial statements and taxes payable to the IRS.

34. What is a deferred tax asset and why might one be created?

Deferred tax asset arises when a company actually pays more in taxes to the IRS than they
show as an expense on their income statement in a reporting period.

Differences in revenue recognition, expense recognition (such as warranty expense), and net
operating losses (NOLs) can create deferred tax assets.
I hope you enjoyed this article and found these finance interview questions hepful. Please feel
free to add any comments or recommendations in the comments section below.

35. Explain three sources of short-term Finance used by a company

Ans. Short-term financing is done by the company to fulfill its current cash needs. Short-term
sources of finance are required to be repaid within 12 months from the financing date. Some of
the short-term sources of financing are: Trade Credit, Unsecured Bank Loans, Bank Over-drafts,
Commercial Papers, Secured Short-term loans.

Trade Credit is an agreement between a buyer and a seller of goods. In this case, the buyer of
the goods purchases the goods on a credit i.e. the buyer pays no cash to the seller at the time
of buying the goods, only to pay at a later specified date. Trade credit is based on mutual trust
that the buyer of the goods will pay the amount of cash after a specified date
Bank Overdraft is a type of short-term credit that is offered to an individual or a business entity
having a current account which is subject to the bank’s regulation. In this case, an individual or
a business entity can withdraw cash more than what is present in the account. Interest is
charged on the amount of over-draft which is withdrawn as a credit from the bank.
Unsecured Bank Loan is a type of credit that banks are ready to give and is payable within 12
months. The reason why it is called an unsecured bank loan is that no collateral is required by
the individual or a business entity taking this loan.

36. A company buys an asset; walk me through the impact on the 3 financial statements

Ans. The purchase of Assets is a transaction done by the company which will impact all the
three statements of the company. Let’s say that the asset is the equipment of $5million.
In Balance Sheet, cash will go down by $5million; decreasing the asset side of the balance
sheet and at the same time the asset will be recorded as equipment of $5million which will
increase the asset side of the balance sheet by the same amount. Hence, the balance sheet of
the company will be tallied.
In Income Statement, there will be no impact on the first year of income statement but after the
first year, the company will have to charge depreciation expense on the purchased equipment
which the company will have to show it in the Income Statement of the company.
Cash Flow Statement, assuming that only cash has been paid by the company to purchase the
equipment. The Cash Flow from Investing will result in the cash outflow of $5million.

37. What is EPS and how is it calculated?

Ans. EPS is the Earnings per Share of the company. This is calculated for the common
stockholders of the company. As the name suggests, it is the per-share earnings of the
company. It acts as an indicator of profitability. Calculation:

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EPS = (Net Income – Preferred Dividends) / weighted average number of shares outstanding
during the year

38. Different types of EPS

Colgate Case Study - Earnings Per Share

Ans. There are basically three types of EPS which an analyst can use to calculate the
company’s earnings: Basic EPS, Dilutive EPS, and Anti-Dilutive EPS.

Basic EPS: It is useful for companies that have a simple capital structure. In other words, it can
be used to calculate earnings of the company which has no convertible securities outstanding
like convertible bonds or convertible preference shares.
Dilutive EPS: It has a dilutive characteristic attached to it. When a company has a complex
capital structure, it is better to calculate Dilutive EPS instead of Basic EPS. In other words, when
a company has convertible securities such as convertible bonds, convertible preference shares
and/or stock options which after conversion, dilutes the earnings i.e. lower the earnings
calculated for common shareholders of the company.
Anti-Dilutive EPS: This is the kind of EPS in which the convertible securities after conversion,
increases the earnings for the common shareholders of the company.

39. What is a difference between Futures Contract and Forwards Contract?

Ans. A futures contract is a standardized contract which means that the buyer or seller of the
contract can buy or sell in lot sizes that are already specified by the exchange and is traded
through exchanges. Future markets have clearinghouses that manage the market and
therefore, there is no counterparty risk.

Forwards Contract is a customizable contract which means that the buyer or seller can buy or
sell any amount of contract they wish to. These contracts are OTC (over the counter) contracts
i.e. no exchange is required for trading. These contracts do not have a clearinghouse and
therefore, the buyer or the seller of the contract is exposed to the counterparty risk.

40. What are the different types of Bonds?

Ans. A bond is a fixed-income security that has a coupon payment attached to it which is paid
by the bond issuer annually or as per the conditions set at the time of issuance. These are the
types of bonds:

Corporate Bond, which is issued by the corporations.

Supra-National Bond is issued by super-national entities like the IMF and World Bank.
Sovereign National Bond is a bond issued by the government of the country.

41. What is a securitized Bond?

Ans. A bond that is repaid by the issuing entity by the cash flows which come from the asset set
as collateral for the bond issued is known as securitized Bond. We can understand by the
example: A bank sells its house loans to a Special Purpose Entity and then that entity issues the
bonds which are repaid by the cash flows generated by those house loans, in this case, it is the
EMI payments made by the house owners.

42. What is Deferred Tax Liability and why it might be created?

Ans. Deferred Tax Liability is a form of tax expense that was not paid to the income tax
authorities in the previous years but is expected to be paid in future years. This is because of
the reason that the company pays less in taxes to the income tax authorities than what is
reported as payable. For example, if a company uses a straight-line method for charging
depreciation in its income statement for shareholders but it uses a double-declining method in
the statements which are reported to income tax authorities and therefore, the company reports
a Deferred Tax Liability as the paid less than what was payable.

43. What is Financial Modeling in Corporate Finance?

What is Financial Modeling

First of all, financial modeling is a quantitative analysis that is used to make a decision or a
forecast about a project generally in the asset pricing model or corporate finance. Different
hypothetical variables are used in a formula to ascertain what future holds for a particular
industry or for a particular project.
In Corporate Finance, Financial modeling means forecasting companies financial statements
like Balance Sheet, Cash Flows, and Income Statement. These forecasts are in turn used for
company valuations and financial analysis.
With respect to Investment Banking, you can talk about the Financial Models that you have
prepared. You may refer to these Financial Modeling Templates.
Let us move to the next Corporate Finance interview question.

44. What are the most common multiples used in valuation?

There are few common multiples which are frequently used in valuation –

EV/Sales
EV/EBITDA
EV/EBIT
PE Ratio
PEG Ratio
Price to Cash Flow
P/BV Ratio
EV/Assets

45. Describe WACC and its components

Ans. WACC is the Weighted Average Cost of Capital which the company is expected to pay on
the capital it has borrowed from different sources. WACC is sometimes referred to as the Firm’s
Cost of Capital. The cost to the company for borrowing the capital is dictated by the external
sources in the market and not by the management of the company. Its components are Debt,
Common Equity, and Preferred Equity.

46. What are Stock Options?

Ans. Stock Options are the options to convert into common shares at a predetermined price.
These options are given to the employees of the company in order to attract them and make
them stay longer. The options are generally provided by the company to its upper management
to align management’s interests with that of its shareholders. Stock Options generally have a
venting period i.e. a waiting period before the employee can actually exercise his or her option
to convert into common shares. A Qualified option is a tax-free option which means that they
are not subject to taxability after the conversion. An Unqualified option is a taxable option which
is taxed immediately after conversion and then again when the employee sells the stock.

47. What is the DCF method?

Ans. DCF is the DCF method. This method is used by analysts to value a company by
discounting its future cash flow and bringing it down to its current value. Discounted Cash Flow
uses different techniques to value a company. These techniques or methods are:
DDM, FCFF, and Free Cash Flow to Equity.

48. What is a Stock Split and Stock Dividend?

Ans. A stock split is when a company splits its stock into 2 or more pieces. For example a 2 for 1
split. A company splits its stock for various reasons. One of the reasons is to make the stock
available for the investors who invest in the stock of the companies which are inexpensive. The
probability of growth for those stocks also increases. Stock Dividend is when the company
distributes additional shares in lieu of cash as dividends.

49. What is the Rights Issue?

Ans. A rights offering is an issue that is offered to the existing shareholders of the company only
and at a predetermined price. A company issues this offer when it needs to raise money. Rights
Issues might be seen as a bad sign as the company might not be able to fulfill its future
obligations through the cash generated by the operating activities of the company. One needs to
dig deeper as to why the company needs to raise the capital.

50. What is a clean and dirty price of a bond?

Ans. Clean price is a price of a coupon bond not including the interest accrued. In other words,
the clean price is the present value of the discounted future cash flows of a bond excluding the
interest payments. Dirty price of a bond includes accrued interest in the calculation of bond.
Dirty price of the bond is the present value of the discounted future cash flows of a bond which
include the interest payments made by the issuing entity.

51. 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?

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.

52. Is It Possible For A Company To Have Positive Cash Flow But Be In Serious Financial
Trouble?
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

53. Is It Possible For A Company To Show Positive Net Income And Still Go Bankrupt?

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.)

54. 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.

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.

55. Why Are Increases In Accounts Receivable A Cash Reduction On The Cash Flow
Statement?

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.

56. What Is A Deferred Tax Asset And What Is Its Purpose?

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

57. What Is A Deferred Tax Liability And What Is Its Purpose?

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).

58. What Is Treasury Bills?

Answer :Treasury Bills are money market instruments to finance the short term requirements of
the Government of India. These are discounted securities and thus are issued at a discount to
face value.

59. What Is Networth?

Answer :Networth is the total assets minus total liabilities of a company.

60. What Is Carecredits Healthcare Financing? How Does It Work?

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provider simple.

61. What Is The Difference Between Journal Entry & Ledger?

Answer : A journal is also called as a book of prime entry.

transactions occured are first entered in this book to show which accounts should be debited
and which should be credited.
on the basis of entries made in the journal, accounts are prepared, the book which contains the
accounts is called a ledger.
transactions entered in the journal are classified according to their nature and posted in their
respective accounts in ledger.
it is also called as book of final entry.

62. What Are Debentures?

Answer : A Debenture is " A certificate of agreement of loans which is given under the
company's stamp and carries an undertaking that the debenture holder will get a fixed return
and the principal amount whenever the debenture matures.
63. 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?

Answer : Capital expenditures are capitalized because of the timing of their estimated benefits –
the lemonade stand will benefit the firm for many years. The employees’ work, on the other
hand, benefits the period in which the wages are generated only and should be expensed then.
This is what differentiates an asset from an expense.

64. Why Are Increases In Accounts Receivable A Cash Reduction On The Cash Flow
Statement?

Answer : Since our cash flow statement starts with net income, an increase in accounts
receivable is an adjustment to net income to reflect the fact that the company never actually
received those funds.

65. I Buy A Piece Of Equipment, Walk Me Through The Impact On The 3 Financial Statements.

Answer : Initially, there is no impact (income statement); cash goes down, while PP&E goes up
(balance sheet), and the purchase of PP&E is a cash outflow (cash flow statement).
Over the life of the asset: depreciation reduces net income (income statement); PP&E goes
down by depreciation, while retained earnings go down (balance sheet); and depreciation is
added back (because it is a non-cash expense that reduced net income) in the cash from
operations section (cash flow statement).

66. How Is It Possible For A Company To Show Positive Net Income But Go Bankrupt?

Answer : Two examples include deterioration of working capital (i.e. increasing accounts
receivable, lowering accounts payable), and financial shenanigans.

67. Is It Possible For A Company To Show Positive Cash Flows But Be In Grave Trouble?

Answer : Absolutely. Two examples involve unsustainable improvements in working capital (a

company is selling off inventory and delaying payables), and another example involves lack of
revenues going forward.in the pipeline

68. How Is The Income Statement Linked To The Balance Sheet?

Answer : Net income flows into retained earnings.

69. What Is A Deferred Tax Liability And Why Might One Be Created?

Answer : Deferred tax liability is a tax expense amount reported on a company’s income
statement that is not actually paid to the IRS in that time period, but is expected to be paid in the
future. It arises because when a company actually pays less in taxes to the IRS than they show
as an expense on their income statement in a reporting period.
Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead
to differences in income between the two, which ultimately leads to differences in tax expense
reported in the financial statements and taxes payable to the IRS.

70. What Is A Deferred Tax Asset And Why Might One Be Created?

Answer : Deferred tax asset arises when a company actually pays more in taxes to the IRS than
they show as an expense on their income statement in a reporting period.

Differences in revenue recognition, expense recognition (such as warranty expense), and net
operating losses (NOLs) can create deferred tax assets.

71. What Is Put Option?

Answer : A "Put option" gives the holder the right but not obligation to sell an asset by a certain
date for a certain price.

72. What Is Authorized Capital?

Answer : Authorized capital is the maximum capital that a company is authorized to raise.

73. What Is Discount Cash Flow Management?

The DCF for an investment is calculated by estimating: the cash that you will have to pay out,
and the cash which you expect to receive back. The timeframes that you expect to receive the
payments must also be estimated. Each cash transaction must then be recalculated, by
subtracting the opportunity cost of capital between now and the moment when you will pay or
receive the cash.

74. What Is Bull Market?

Answer : A financial market of a group of securities in which prices are rising or are expected to
rise.

75. Different Types Of Insurance

Answer : Types of insurance:

1. Auto insurance.
2. home insurance.
3. health insurance.
4. Disability.
5. casualty.
6. life.
7. property.
8. other types insurance.
9. insurance financing vehicles.
10. closed community self insurance.

76. Who Is A More Senior Creditor, A Bondholder Or Stockholder?

Answer : The bondholder is always more senior. Stockholders (including those who own
preferred stock) must wait until bondholders are paid during a bankruptcy before claiming
company assets.

77. What Is Inflaition?

Answer : In economic terms, inflation is the rise in the prices of goods and services in the given
economy over a period of time. As the prices rise, each unit of the country's currency will buy
fewer goods and services.

78. What Kind Of Stocks Would You Issue For A Startup?

Answer : A startup typically has more risk than a well-established firm. The kind of stocks that
one would issue for a startup would be those that protect the downside of equity holders while
giving them upside. Hence the stock issued may be a combination of common stock, preferred
stock and debt notes with warrants (options to buy stock).

79. What Is Trial Balance?

Answer : It is statement of balances of all the accounts in the ledger prepared to prove the
arithmetical accuracy of the books of accounts.

80. What Is Your Investing Strategy?

Answer : Different investors have different strategies. Some look for undervalued stocks, others
for stocks with growth potential and yet others for stocks with steady performance. A strategy
could also be focused on the long-term or short-term, and be more risky or less risky. Whatever
your investing strategy is, you should be able to articulate these attributes.

81. What Is Demat Account? What Is The Use Of It?

Answer : Demat means Dematerialisation of share, in simple it is an account with which a

person can trade in security market without which a person cannot buy or sell any share in
security market.

82. What Is Retained Earnings?

Answer : When a company or corporation earns a profit or surplus, that money can be put to
two uses it can either be re-invested in the business called retained earnings or it can be paid to
the shareholders as a dividends.

83. What Is The Difference Between Asset Management And Invest Management?

Answer : Investment and asset are really close in meaning.Investment is when you put your
money in stock, bond or other financial instruments. Whereas Asset is what you own generally
reffered to land, proprietorship , factory, etc.

84. Why Would An Investor Buy Preferred Stock?

Answer : An investor that wants the upside potential of equity but wants to minimize risk would
buy preferred stock. The investor would receive steady interest-like payments (dividends) from
the preferred stock that are more assured than the dividends from common stock.

The preferred stock owner gets a superior right to the company's assets should the company go
bankrupt.

A corporation would invest in preferred stock because the dividends on preferred stock are
taxed at a lower rate than the interest rates on bonds.

85. What Is Crossover Rate?

Answer : Crossover rates have to do with the amount of earnings that are generated by two
different but similar projects. The crossover rate is the point at which the two projects achieve
the same net present value. In terms of investments,calculating a crossover rate between two
similar securities can help an investor determine what to buy and what to sell.

86. Define Fair Value?

Answer : Fair Value is an accounting expression, originally defined by the SEC.Under GAAP,
the Fair Value of an asset is the amount at which that asset could be bought or sold in a current
transaction between willing parties, other than in a liquidation. On the other side of the balance
sheet, the Fair Value of a liability is the amount at which that liability could be incurred or settled
in a current transaction between willing parties, other than in a liquidation.

If available, a quoted market price in an active market is the best evidence of Fair Value and
should be used as the basis for the measurement. If a quoted market price is not available,
preparers should make an estimate of Fair Value using the best information available in the
circumstances. In many circumstances, quoted market prices are unavailable. As a result,
making estimates of Fair Value is often difficult.
87. What Is Meant By Take Over?

Answer : In business, a takeover is the purchase of one company by another.

88. What Is Secondary Market?

Answer : Secondary market refers to market where securities are traded after being initially
offered to the public in the primary market and/or listed on the stock exchange.

89. What Is Call Option?

Answer : Calls give the buyer the right but not the obligation to buy a given quantity of the
underlying asset, at a given price on or before a given future date.

90. What Is Raroc?

Answer : RAROC is a risk-adjusted framework for profitability measurement and profitability

management. It is a tool for measuring risk-adjusted financial performance. And it provides a
uniform view of profitability across businesses (Strategic Business Units / divisions). RAROC
and related concepts such as RORAC and RARORAC are mainly used within (business lines
of) banks and insurance companies. RAROC is defined as the ratio of risk-adjusted return to
economic capital.

91. What Is The Internal Rate Of Return(irr) Of Eurekaforbes?

Answer : Internal Rate of Return is that rate of Return at which the net present value is equal to
Zero or it is the Rate which equates the present value of the cash inflows to the cash outflows.

92. What Is Eps?

Answer : Earning per share thats portion of stehcompay profit.

93. What Is Hedging?

Answer : Hedging is a tool to minimize the risks. It is thus like an 'insurance' where one pays a
premium but gets an assured amount in case of some uncertain event to the extent of the loss
actually suffered on an equally opposite position for which the hedge was done. Thus, hedger is
different from arbitrageur and speculators, as the intention here is not to maximize the profit but
to minimize the loss.

E.g. In Capital Markets, suppose an investor has an equity portfolio of Rs. 2 lacs and the
portfolio consists of all the major stocks of NIFTY. He thinks the market will improve in the long
run but might go on a downside in the shortrun. NIFTY today stands at 4300. To minimize the
risk of downfall, he enters into an option contract by buying NIFTY-PUT of strike 4300 at a
premium of, say, Rs. 100. Thus, the actual amount paid is Rs. 5,000(lot size of NIFTY is 50).
Also, the number of NIFTY-PUTs to be bought will vary on the beta of the portfolio so as to
completely hedge the positon.

94. What Is The Punch Line Of Job?

Answer : No matter how efficiently goods / services are produced, if they cannot be delivered to
the customer in the quickest possible time it is vain.

95. What Is The Entry For Deprecation?

Answer : Depreciation Account Dr

Accomulated Deprecitation Account Cr

96. What Is Preference Capital?

Answer : Preference Capital is the capital which carries preference over Equity capital at the
time of Payment of dividend and at the time of winding up of the comapany.

97. What Are The Two Most Basics Financial Statements Prepared By The Companies?

Answer : Financial statements are prepared in two forms:

Balance Sheet is a position statement as it refers to a particular date. It is also referred to as

Statement of Sources and Application of Funds. It informs about the various sources used by
the organization which are technically known as liabilities to raise the funds which are referred
as assets.

Profitability Statement also known as Profit and Loss Account. It is a period statement as it
refers to a particular period.

98. What Are The Various Systems Of Accounting? Explain Them.

Answer : There are two systems of Accounting:

1. Cash System of Accounting: This system records only cash receipts and payments. This
system assumes that there are no credit transactions. In this system of accounting, expenses
are considered only when they are paid and incomes are considered when they are actually
received. This system is used by the organizations which are established for non profit purpose.
But this system is considered to be defective in nature as it does not show the actual profits
earned and the current state of affairs of the organization.

2. Mercantile or Accrual System of Accounting: In this system, expenses and incomes are
considered during that period to which they pertain. This system of accounting is considered to
be ideal but it may result into unrealized profits which might reflect in the books of the accounts
on which the organization have to pay taxes too. All the company forms of organization are
legally required to follow Mercantile or Accrual System of Accounting.

99. Explain Balanced Capitalization.

Answer : Capitalization is a collection of share capital, loans, reserves and debentures. It

represents permanent investment in companies and it also removes the need of long-term loan
plans. It is used to show the reality of the industry by promoting competition, development, profit
and investment between individuals, companies and businesses. Balance capitalization is part
of this Capitalization only where it is compared to the relative importance, value and other things
to make it proportionate in every sense. In balance capitalization debits and credits should be
equal on both sides and the share should be shared among all in equal proportions.

100. What Is Capital Structure? What Are The Principles Of Capital Structure Management?

Answer : Capital structure is a term which is referred to be the mix of sources from which the
long term funds are required for business purposes which are raised to improve the capital of
the company. To fund an organization plan this capital structure is required which is the
combination of debt and equity. The management ensures the capital structure accesses which
are needed to fund future growth and enhance financial performance.

101. What Are The Principles Of Capital Structure Management?

Answer : The principles of capital structure management which are essentially required are as
follows:

Cost Principle
Risk Principle
Control Principle
Flexibility Principle
Timing Principle

102. What Is Composite Cost Of Capital? Explain The Process To Compute It?

Answer : Composite cost of capital is also known as weighted average cost of capital which is a
measurable unit for it. It also tells about the component costs of common stock, preferred stock,
and debt. Each of these components is given a weight on the basis of the associated interest
rate and other gains and losses with it. It shows the cost of each additional capital as against
the average cost of total capital raised. The process to compute this is first computing the
weighted average cost of capital which is the collection of weights of other costs summed
together.

The formula is given as:

WACC= Wd (cost of debt) + Ws (cost of stock/RE) + Wp (cost of pf. Stock)

In this the cost of debt is calculated in the beginning and it is used to find out the cost of capital
and other weights of cost is been calculated after the calculation each and every individual
weight of the component is added and then it gives the final composite cost.

103. What Are Adjustment Entries? Why Are They Passed?

Answer : Adjustment entries are the entries which are passed at the end of each accounting
period to adjust the nominal and other accounts so that correct net profit or net loss is indicated
in profit and loss account and balance sheet may also represent the true and fair view of the
financial condition of the business.

It is essential to pass these adjustment entries before preparing final statements. Otherwise in
the absence of these entries the profit and loss statement will be misleading and balance sheet
will not show the true financial condition of the business.

104. What Is Cost Accountancy? What Are The Objects Of Cost Accountancy?

Answer : 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.

Following are the objects of Cost Accountancy :

Ascertainment of Cost and Profitability

Determining Selling Price
Facilitating Cost Control
Presentation of information for effective managerial decision
Provide basis for operating policy
Facilitating preparation of financial or other statements

105. What Is The Difference Between Costing And Cost Accounting?

Answer :

Costing is the process of ascertaining costs whereas cost accounting is the process of recording
various costs in a systematic manner, in order to prepare statistical date to ascertain cost.