Beginner-Level Finance Interview Questions 

1. How can a Company Show Positive Net Income but go Bankrupt?

Ans: A company can show positive net income while facing bankruptcy by
deteriorating working capital (by enhancing accounts receivable and reducing
accounts payable) and financial tactics.

2. What does Working Capital Mean?

Ans: Working capital is the amount you get after deducting current liabilities
from current assets. 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). 

3. Why do Capital Expenditures Increase Assets When other Cash

Outflows don’t and Instead Create Expenses? 
Ans: 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. 

4. Explain a Cash Flow Statement.

Ans: First we start with net income, proceed line by line while making
adjustments 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 issuance or repurchase of equity and debt 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. 
5. Can a Company Show Positive Cash Flows While Facing Financial
Problems?
Ans: Yes, a company can show positive cash flows even while facing
financial trouble through impractical enhancements in working capital
(delaying payables and selling inventory) or by not letting revenue go
forward in the pipeline.

6. What do you Mean by Preference Capital?

Ans: In simple words, preference capital refers to the amount raised by
issuing preference shares. This is a hybrid method of financing the firm as it
offers some features of debentures and some features of equity. It is the
capital that has preference over equity capital at the time of dividend
payment.

7. What do you Mean by Hedging?

Ans: Hedging is a risk management strategy we implement to offset losses in
investments. We do so by taking an opposite position in a related asset.
However, the amount of risk hedging reduces results in a similar reduction in
the potential profit. You can say that hedging is similar to having insurance
where you pay a certain premium and get assured compensation.
With hedging, if the asset in question causes you a loss, the opposite position
in the related asset will make up for this loss. This is why a hedger is quite
different from speculators as a hedger doesn’t focus on maximizing profits
but on minimizing risks.
Intermediate-Level Finance Interview
Questions 

1. What is RAROC?
Ans: RAROC stands for Risk-Adjusted Return On Capital and is a risk-based
profitability measurement framework we use to analyze risk-adjusted
financial performance. It gives a proper view of profitability across
organizations. It is one of the best tools to measure a bank’s profitability. By
combining it with the risk exposure and the ascertained economic capital, you
can calculate the expected returns more accurately with RAROC. 

2. What do you Mean by Fair Value?

Ans: Fair value refers to the unbiased and rational estimate of the potential
market price of an asset, good, or service. The fair value of an asset is the
amount at which you can buy or sell the asset in a current transaction
between willing parties other than a liquidation. Similarly, the fair value of
liability refers to the amount at which you can incur or settle in a current
transaction between two willing parties other than a liquidation. 

3.What do you Mean by the Secondary Market?

Ans: Secondary market is where people trade securities that have been
offered to the public in the primary market beforehand and are listed on the
stock exchange. The secondary market is also known as the aftermarket and
some of the prominent examples of them include NASDAQ, Bombay Stock
Exchange (BSE), and New York Stock Exchange (NYSE). 

4. What is the Difference Between Cost Accounting and Costing?

Ans: Costing is the process of identifying a product’s or service’s cost while
cost accounting is the mechanism of analyzing a business’s expenditure. Cost
accounting is a branch of accounting that determines the expenses incurred
from a venture through examining, analyzing, and predicting the cost data.
On the other hand, costing is the process of asserting the costs and prices of
products. Costing is a technique while cost accounting is a branch of
accountancy. The former has very little impact on a business’s decision-
making while the latter is crucial for informed decision-making.
 5. What do you Mean by Cost Accountancy? Do you Know the
Objectives of Cost Accountancy?
Ans: Cost accountancy is the combination of costing and cost accounting
where you classify, record, and allocate expenditure to determine a product’s
or service’s cost. It records and analyses the related data and presents them
appropriately to help in guiding the decision-making process.
Following are the objectives of cost accountancy:
 To get correct analysis of cost (by process and different elements of
cost).
 To ascertain the cost per unit of various products.
 To ascertain the profitability of every product.
 To advise the management on how they can maximize their profits.
 To disclose the sources of wastage (time, resources, or money).
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Advanced-Level Finance Interview Questions

1. What do you Mean by Adjustment Entries? Why do We Pass Them?
Ans: The entries we pass at the end of every accounting period to the
nominal and related accounts so we can indicate the correct profit and loss in
the profits and loss accounts and keep the balance sheet accurate, are called
adjustment entries.
It is crucial to passing adjustment before we prepare the final financial
statements as in their absence the final statements would reflect incorrect
information resulting in error and confusion. Moreover, the balance sheet
wouldn’t show the accurate position of the business if we don’t pass the
adjustment entries. 

2. What do you Mean by the Put Option?

Ans: Put option is a financial market derivative instrument that allows the
holder to sell an asset at a specific price by a specific date to the writer of the
put. The purchase of a put option sends a negative message about the future
of the stock in question. 
3. What do you Mean by Deferred Tax Liability?
Ans: Deferred tax liability is the amount the company hasn’t paid yet to the
tax department but is expecting to pay it in the future. It happens when a
company’s tax expenses are lesser than the amount they reflect in their tax
reports or financial statement. 

4. What is Goodwill?
Ans: Goodwill is an asset that contains the excess of the purchase price over
the fair market value of an acquired business. 

5. What is the Difference Between a Journal Entry and a Ledger?

Ans: The journal is the book of prime entry and all the transactions are
recorded in it to show which account got debited and which one got credited.
However, the ledger is the book for keeping separate accounts. You’d have to
classify the recorded transactions in a journal and add them to the dedicated
accounts present in the ledger. The ledger is also known as the book of final
entry.

1. Compound interest
Compound interest is interest on the amount of money you have deposited or
borrowed.

When you’re investing or saving, compound interest is earned on the amount

you deposited, plus any interest you’ve accumulated over time.

However, when you’re borrowing, compound interest is charged on the

original amount you were loaned, as well as the interest charges that are
added to your outstanding balance over time.
2. FICO score
FICO is an acronym for Fair Isaac Corp., the company that came up with the
methodology for calculating a credit score.

Your score is based on several factors, including payment history, the length
of your credit history and total amount owed.

FICO scores range from 300 to 850, and the higher the score, the better the
terms you may receive on your next loan or credit card. People with scores
below 620 may have a harder time securing credit at a favorable interest rate.

3. Net worth
Your net worth is simply the difference between your assets (what you own)
and liabilities (what you owe).

You can calculate yours by adding up all of the money or investments you
have, including the current market value of your home and car, as well as the
balances in any checking, savings, retirement or other investment accounts.

Then subtract all of your debt, including your mortgage balance, credit card
balances and any other loans or obligations.

The resulting net worth number helps you take the pulse of your overall
financial health.
4. Asset allocation
Asset allocation is where you choose to put your money.

The three major asset classes are stocks, bonds and cash (or cash
equivalents). Each of these reacts differently to conditions in the market and
economy, so be sure you choose those that line up best with your personal
goals, risk tolerance and time horizon.

For example, investing in stocks could give you strong growth over time, but
they can also be quite volatile. Thus, one of the most common pieces of
investment advice out there is to diversify your portfolio — or put your money
in several buckets to make sure you’re risking as little as possible while still
achieving your particular goals.

5. Capital gains
Capital gains are the difference between how much something is worth now
versus how much it was originally purchased for.

The gain, however, is only on paper until the asset or investment is actually
sold. The flipside is a capital loss, which is the decrease in the asset’s or
investment’s value since you purchased it.

You pay taxes on both short-term capital gains (a year or less) and long-term
capital gains (more than a year) when you sell an investment.

By contrast, a capital loss could help reduce your taxes.

6. Rebalancing
Rebalancing is a standard practice in any portfolio. It is the process of bringing
your stocks and bonds back to your desired percentages.

For example, let’s say your target allocation is 60 percent stocks, 20 percent
bonds and 20 percent cash. If the stock market has performed particularly well
over the past year, your allocation may now have shifted to 70 percent stocks,
10 percent bonds and 20 percent cash.

To rebalance your portfolio, you could sell some of your stocks and reinvest
that money in bonds, or invest new money in bonds to bring the portfolio back
to the original balance.

7. Stock options
Stock options can be offered by companies as management incentives. These
options give you the right (but not the obligation) to buy your employer’s stock
at a pre-set price within a specified time period.

For example, if a manager helps boost the value of the company’s stock
above the price of his or her option, the manager can buy the stock at the
lower price and pocket the gain if they sell. But all shareholders benefit from
the increased value of the stock.

8. Defined-contribution plans
The most common examples of defined-contribution plans are the 401(k) and
the 403(b).
Essentially, they are retirement plans that companies may offer as a benefit in
which you, your employer or both make contributions on a regular basis.

The money that goes into these accounts comes out of earnings pretax, so
you don’t pay taxes on the amount you put away every year.

Qualified withdrawals from these (usually those you make at age 59½ or

older) are taxed as ordinary income. The value of the retirement benefit is
determined by its investment performance.

Unlike with defined-benefit plans, you, rather than your employer, shoulder the
investment risk in the account.

9. Term life insurance

Term life insurance provides coverage over a set period, generally anywhere
from five to 30 years.

If you die within the set term, your beneficiaries receive a payout. If you don’t,
the policy expires with no value. The policy owner can decide to renew
coverage after the term is over and can cancel at any time without penalty.

10. Umbrella insurance

Umbrella insurance provides additional liability coverage beyond what your
home, auto or boat insurance may provide.

You might consider umbrella insurance if you’re at risk for being sued for
property damage or other people’s injuries, such as a nanny or other
employees who regularly work in your home.

It can also protect your assets if someone sues you for slander or defamation
of character.