Here are commonly asked basic and advanced accounting interview questions and

answers for fresher as well as experienced candidates to get their dream job.
1) Why choose accounting as a profession?
Accounting is chosen as a profession because:

 Become a part of an extensive network of professionals.

 Accept or experience a challenging role.
 Explore new opportunities.
 Offers all kinds of career options.

Accounting Interview Questions & Answers

2) What are the skills needed to work as an accountant?

Skills needed to work as an accountant are:

 Excellent at math
 Strong analytical skills
 Structured work style
 Aptitude for technology.

3) Mention some accounting software

The best accounting software are:

 FreshBooks
 NetSuite ERP
 Tipalti
 FreeAgent
 Zoho Books
 Sage Business Cloud Accounting
 Sage 50cloud
 Tally

4) Mention the difference between SAP Memory and ABAP

Memory
 SAP Memory is a global user-related memory that extends beyond the limit
of transaction.
 ABAP Memory is a memory area within each main session and can be
accessed by programs using the import-export statement.
5) What is Microsoft Accounting Professional?
Microsoft Accounting Professional is an accounting application that offers reliable
and fast processing of accounting transactions. It also helps with financial analysis.

6) What is the abbreviation for the accounting terms debit and

credit?
The debit abbreviation is “dr” and credit abbreviation is “cr”.

7) How many types of business transactions are there in accounting?

There are two types of transactions in accounting, i.e., revenue and capital.

8) What is the balance sheet?

It is a statement that states all the liabilities and assets of the company at a certain
point.

Accounting Interview Questions

9) What is TDS?
TDS stands for Tax Deduction at Source. It is introduced to collect text from the
company from where the employee income is generated.

10) Where to show TDS in the balance sheet?

TDS is shown on the assets section, right after the head current asset.

11) What is GST?

GST stands for Goods and Service Tax. It’s an indirect tax other than the income
tax. It charges on the value of the service or product sold to a customer. The
customer/clients pay the GST, and the seller deposits the GST with the
government. Some countries have sales, service tax with works more or less the
same as GST.

12) What is the key difference between inactive and dormant

accounts?
Yes, both are different terms in accounting. Inactive accounts mean that accounts
have been closed and will not be used in the future as well. Dormant accounts are
those that are not functional today but may be used in the future.
13) What is tally accounting?
It is the software used for accounting in small business and shops for managing
routine accounting transactions.

14) How to define departmental accounting?

Departmental accounting is a type of accounting in which a separate account is
created for departments. It is managed separately as well, as shown independently
in the balance sheet.

15) Define fictitious assets

These are the assets that cannot be shown or touch. Fictitious assets can only be
felt, such as goodwill, rights, etc.

16) What is the meaning of a perpetual or periodic inventory

system?
In the perpetual inventory system, the accounts are adjusted on a continual basis. In
this inventory system, the accounts are changed periodically.

17) What is premises in accounting?

Premises refers to fixed assets that are shown in the balance sheet.

18) What is the abbreviation of VAT?

The abbreviation of VAT is Value Added Tax.

19) How many accounting standards are published by ICAI?

There is a total of 33 accounting standards published by ICAI. The purpose of
these standards is to implement the same policies and practices in any country.

20) What is ICAI?

ICAI the abbreviation of the Institute of Chartered Accountants in India.

21) What is the basic accounting equation?

Accounting is all about assets, liabilities, and capital. Therefore, the accounting
equation is:

Assets = Liabilities + Owners Equity.

22) Define executive accounting
Executive accounting is a type of accounting that is specifically designed for a
business that offers services to users.

23) Define public accounting

Public accounting offers audits and CPAs to review company financial records to
ensure accountability. It is for the general public.

24) What is a CPA?

CPA stands for Certified Public Accountant. To become a CPA, one should have
to do many other qualifications as well. It is a qualification with a 150-hour
requirement. It means that one should complete 150 credit hours at an accredited
university.

25) What is a bank reconciliation statement?

A reconciliation statement is prepared when the passbook balance differs from the
cash book balance.

26) What is the primary difference between public and private

accounting?
Public accounting is a type of accounting that is done by one company for another
company. Private accounting is done for your own company.

27) What is project implementation?

Project implementation involves six steps in total, such as:

 Identify need
 Generate and screen ideas
 Conduct a feasible study
 Develop the project
 Implement the project
 Handle the project

28) Why accounting standards are mandatory?

Accounting standards are mandatory because:
  They play a crucial role in preparing good quality and accurate financial
reports.
 It ensures reliability and relevance in financial statements.

29) Name different branches of accounting

There are three branches of accounting:

 Financial accounting
 Management accounting
 Cost accounting

30) What is the basic difference between accounting and auditing?

Accounting is all about recording daily business activities. Auditing is the
checking whether all these events have been noted down correctly or not.

31) Define dual aspect term in accounting

As the name implies, the dual aspect concept states that every transaction has two
sides. For example, when you buy something, you give the cash and get the thing.
Similarly, when you sell something, you lose the thing and get the money. So this
getting and losing are two aspects of every transaction.

32) What do we mean by purchase return in accounting?

Purchase return is a term used to record every defective or unsatisfactory product
returned to its supplier.

33) Define the term material facts in accounting

Material facts are the bills or any document that becomes the base of every account
book. It means that all those documents, on which account book is prepared, are
called material facts.

34) What are the MIS reports?

MIS reports are created to identify the efficiency of any department of a company.

35) Define a company’s payable cycle

It is the time required by the company to pay all its account payables.
36) Define retail banking
Retail banking is a type of banking that involves a retail client. These clients are
normal people and not any organizational customers.

37) How much mathematics knowledge is necessary or required in

accounting?
Not much knowledge, but the basic mathematical background is required in
accounting for operations like addition, subtraction, multiplication, and division.

38) Define bills receivable

All types of exchange bills, bonds, and other securities owned by a merchant that is
payable to him are said as bills receivable.

39) Define depreciation and its types

Depreciation can be defined as the value of an asset that is decreasing as it is in
use. It has two types, such as:

 Straight line method

 Diminishing value method
 Annuity method
 Depletion method
 Written down value method.

40) Differentiate between consignor and consignee

Consigner is the owner of the goods, or you can say he is the person who delivers
the goods to the consignee. The consignee is the person who receives the goods.

41) Define balancing in accounting

Balancing means to equate both sides of the account, i.e., the debit and credit sides
of an account must be equal/balanced.

42) How much statistics knowledge is necessary or required in

accounting?
You must be very good at statistics if you want to do well in accounting.
Otherwise, with minimum knowledge, you cannot manage your day to day
transactions effectively in accounting.
43) Define Scrap value in accounting
It is the residual value of an asset. The residual value is the value that any asset
holds after its estimated lifetime.

44) What is the marginal cost?

Marginal cost is defined as an increase or decrease in the cost of producing units or
serving customers.

45) Define Partitioning in accounting

It is a kind of group made based on the same responses by a system.

46) What is the key difference between provision and reserve?

Provisions are the liabilities or the anticipated items, such as depreciation. In
contrast, Reserves are the profits of any company, placed back to the business to
keep it sustainable in tough times of a company.

47) Define offset accounting

Offset accounting is one that decreases the net amount of another account to create
a net balance.

48) Define overhead in terms of accounting

It is the indirect expenditure of a company such as salaries, rent dues, etc.

49) Define trade bills

The trade bills are accounting documents generated against each transaction.

50) Define fair value in accounting

Fair value is the measurement of liabilities and assets according to the current
value of the market. It shows the estimated price at which any assets are sold.
Liability shows third party transactions under the current condition of the market.

51) What is compound journal entry?

A compound journal entry is just like other accounting entries where there is more
than one debit, more than one credit, or more than one of both debits and credits. It
is essentially a combination of several simple journal entries.
52) What are the accounting events that are frequently involved in
compound entries?
The accounting events that are frequently involved in compound entries are:

 Record multiple line items in a supplier invoice that address to different

expenses
 Record all bank deductions associated with a bank reconciliation
 Record deduction and payments related to a payroll
 Record the account receivable and sales taxes related to a customer invoice

53) Mention the types of accounts involved in double-entry book-

keeping
Double-entry book-keeping includes five types of accounts:

 Income accounts
 Expense accounts
 Asset accounts
 Liability accounts
 Capital accounts

54) What are the rules for debit and credit for different accounts to
increase the amount in your business accounts?
The rules for debit and credit for different accounts are:

 For a capital account, credit to increase it and debit to decrease it.

 For an asset account, debit to increase it and credit to decrease it.
 For a liability account, credit to increase it and debit to decrease it.
 For an expense account, debit to increase it, and credit to decrease it.
 For an income account, credit to increase it and debit to decrease it.

55) List out the stages of double entry system

The stages of the double-entry system are:

 Recording of transactions in the journal

 Posting of a journal entry into the respective ledger accounts and then
preparing a trial balance
 Preparing final accounts and closing of books of accounts
56) What are the disadvantages of a double-entry system?
The disadvantages of the double-entry system are:

 If there are any compensatory errors, it is difficult to find out by this system
 This system needs more clerical labor.
 It is difficult to find errors if the errors are in the transactions recorded in the
books.
 The double-entry system is not preferable to disclose all the information of a
transaction, which is not properly recorded in the journal.

57) What is General ledger account?

The general ledger account is an account used to record all the information. It can
be expenses and income types that are recorded into separate accounts.

In this account debits and credits, transactions are entered in one place and kept
balanced.

58) What is the general classification of accounts that usually ledger

account involve?
The general classification of accounts that usually ledger account involves are:

 Assets: cash, accounts receivable

 Liabilities: accounts payable, loans payable
 Stockholders’ equity: common stock
 Operating revenues: revenues through sales
 Operating expenses: rent expense, salaries expense
 Non-operating revenues and gains: investment income, gain on disposal of
equipment
 Non-operating revenues and losses: interest expense, loss on disposal of
equipment

59) List things will not be included in a bank reconciliation

statement
Things will not be included in a bank reconciliation statement are:

 Cheques dishonored not recorded in the cash book

 Direct payments made by the bank not entered in Cashbook
 Bank Charges or Interest debited by the bank.
  Cheques deposited but not cleared.
 Wrong debits given by the bank.
 Banks direct payment not entered in Cashbook.

60) When are revenues reported in the accounting period?

Revenues are reported in the accounting period when service or goods have been
delivered.

61) List down important cost control techniques

Important cost controlling techniques are:

 Budgetary control
 Labor control
 Material control
 Standard costing
 Overheads control

62) Mention whether the account “Cash” will be credited or debited

when a company pays a bill?
The account “Cash” will be credited when a company pays a bill.

63) What are assets minus liabilities?

Assets minus liabilities are defined as:

Assets minus liabilities = owners' equity / stockholder's equity.

64) List the three basic elements of cost

The three basic elements of cost are 1) Material, 2) Labour, and 3) Expenses.

65) What is the main difference between accumulated depreciation

and depreciation expense?
The difference between accumulated depreciation and depreciation expense is that:

Accumulated depreciation is the total amount of depreciation that has been taken
on a company’s assets up to the date of the balance sheet.

Depreciation expense is the amount of depreciation that is reported on the income

statement.
66) List out some of the examples for liability accounts?
Some of the examples of liability accounts are:

 Accounts payable
 Accrued expenses
 Short-term loans payable
 Unearned or deferred revenues
 Installment loans payable
 Current portion of long-term debt
 Mortgage loans payable

67) How to adjust entries into account?

Entries can be adjusted into account by sorting entries into five categories:

 Accrued expenses: Expenses have been incurred, but the vendor’s invoices
are not generated or processed yet
 Accrued revenues: Revenues have been earned, but the sales invoices are
not generated or processed yet.
 Deferred revenues: Money was received in advance of having been paid or
earned.
 Deferred expenses: Money was paid for a future expense.
 Depreciation expense: An asset purchased in one period must be allocated
to expense in each of the accounting periods of the asset’s useful life.

68) Explain deferred asset with example

A deferred asset refers to a deferred debit or a deferred charge. An example of a
deferred charge is bond issue costs. These costs involve all of the fees or charges
that an organization incurs to register and issue bonds.

These fees are paid in a near time when the bonds are issued, but it will not be
expensed at that time.

69) What is Bank Reconciliation?

A bank reconciliation is a process done by a company. It ensures that the
company’s records are correct and that the bank’s records are also correct. These
records can be check register, balance sheet, a general ledger account, etc.

70) What is “deposit in transit”?

A deposit in transit is a check or cash that has been received and recorded by an
entity. It should not yet been entered in the records of the bank where the funds are
deposited.

71) What is an over accrual?

An over accrual is a condition where the estimate for an accrual journal entry is too
high. This estimate may apply to the accrual of expense or revenue.

72) What is the account receivable?

A short term amounts due from buyers to a seller, who have purchased goods or
services from the seller on credit is referred to as account receivable.

73) What are the activities that are included in the Cash Flow
Statement?
The cash flow statement showcase the cash generated and used during the year or
months. Various activities that are involved for the cash flow are

 Operating activities: Business activities accounting to cash

 Investing activities: Sale and purchase of equipment or property
 Financial activities: Purchase of stock and own bonds
 Supplemental information: exchange of significant items that don’t
involve cash

74) What happens to the company’s “Cash Account” if it borrows

money from the bank by signing a note payable?
Due to double entry, the “cash account” will increase as such the liability account
increases.

75) Which account is responsible for interest payable?

The account which is responsible or affected by the interest payable is “Current
liability account.”

76) What is reversing journal entries?

Reversing journal entries are entries made at the beginning of an accounting period
to cancel out the adjusting journal entries. These entries are made at the end of the
previous accounting period.
77) Where do generally accruals appear on the balance sheet?
Accrued expenses usually tend to be extremely short-term. So you would record
them within the “current liabilities section” of the balance sheet.

78) List out some of the accrued expenses and the accounts to record
them
Accrued expenses and the accounts are:

Wage accrual is entered with a credit to the “wages payable account.”

Interest accrual is entered with a credit to the “interest payable account.”

Payroll tax accrual is entered with a credit to the “payroll taxes payable account.”

79) Deferred taxation is a part of which equity?

Deferred taxation is a part of the owner’s equity.

80) What is a journal?

Journal is a book that is maintained regularly for recording various financial
entries.

81) What is the equation for Acid-Test Ratio in accounting?

The equation for Acid-Test Ratio in accounting
Acid-Test Ratio = (Current assets - Inventory) / Current Liabilities

82) List out things that fall under intangible assets

Things that fall under intangible asset are:

 Patents
 Copyrights
 Trademarks
 Brand names
 Domain names
83) What is a trial balance in accounting?
In accounting, the trial balance is an accounting report that lists the balances in
each of an organization’s general ledger accounts. This is done at the end of the
posting journal entry to ensure that there are no posting errors.

84) Where a cash discount should be recorded in a journal entry?

A cash discount should be recorded in a journal entry as a reduction of expense in
a cash account.

85) Why some asset accounts have a credit balance?

Some asset accounts have a credit balance due to:

 Receiving and posting an amount that was higher than the recorded
receivable.
 Expenses occurred faster than the agreed-upon prepayments.
 An error caused by posting an amount to a wrong account.
 The number of checks written exceeded the positive amount in the Cash
account.
 Continuing to amortize or depreciate an asset after its balance has reached
zero.

86) What is bad debt expense?

A Bad debt expense is the amount of an account receivable that is considered to
NOT be collectible.

87) What is the master account?

A master account has subsidiary accounts. A master account receivable could be
anything, it can be account receivable for various individual receivable accounts.

88) In which account does the unpresented cheque will get

recorded? The unpresented cheque will get recorded as a credit to the cash
account in the company’s General ledger.
89) What knowledge should financial accountant have?
A certified financial accountant should have knowledge about:

 Accounting/Bookkeeping principles and practices

 Reporting and analysis of financial data
 Auditing practices and principles
 Account management
 Budgets
 Software knowledge dealing with Accounting
 Knowledge of relevant laws, codes, and regulations
 Good soft skills
 Being a team player
 Ability to learn quickly and up skill
 Basic Technical skills

90) What are the three factors that can affect your cash flow and
business profitability?
The three factors that can affect your cash flow and business profit include:

 Cash flows from investing activities: It includes shares, bonds, physical

property, machinery, etc.
 Cash flows from operating activities: It does not include cash received from
other sources like investments.
 Cash flow from financing activities: It includes any activities that involve:
1. Dividend payments that the company made to its shareholders.
2. Any money that includes stock to the public.
3. Money borrower going to borrow from the lender.

91) What is accrual accounting?

Accrual Accounting is a method for measuring the performance and position of the
company by identifying economic events.

In this method, revenue is compared with the expenditures at the time in which the
transaction occurs rather than when the payment is made.
92) Explain the term account payable
Account payable is referred to as the amount the company owes to its suppliers, its
employees, and its partners. In other words, it is the basic cost levied on the
company to run a business process that is outstanding.

Account payable for one company may be account receivable for another firm or
company.

93) Explain the meaning of long-term notes payable is or long-term

liabilities
Long-term notes payable or liabilities are referred for that loan that is not supposed
to due for more than a year.

These are the loans from banks or financial institution that are secured against
various assets on the balance sheet, such as inventories.
 94) What is the difference between depreciation and amortization?
The difference between depreciation and amortization is:

Depreciation Amortization
Amortize means to write off or pay the debt over a period of
Depreciate means to lose the value of an asset due to its
time. Amortization can be for loans, or it can be for Intangible
usage, wear, and tear, outdated, etc.
assets.
The depreciation cost is calculated in terms of tangible assets Amortization cost is calculated in terms of intangible assets like
like furniture, plant & machinery, building, etc. goodwill, trademark, loans, patents, etc.
The purpose of calculating depreciation costs recovery The purpose of calculating amortization is also for cost recovery
The easiest or better way to calculate depreciation is to know Amortization calculates the amount spent after the intangible
the loss of value of an asset over its life. assets throughout the life for that asset.
For example, a car worth $30,000 has estimated the lifetime
For example, Pharmaceutical Company spent $20 million dollars
of 10 years after that, it will have no value in the market. The
on a drug patent with a useful life of 20 years. The amortization
cost or loss in value throughout these 10 years is known as
value for that company will be $1 million each year
depreciation
Various method for depreciation includes straight-line
Various method for amortization is negative amortization, zoning
depreciation, declining balance method, group depreciation
amortization, business amortization, etc.
method, unit of time/production depreciation method, etc.

95) What does the financial statement of the company include?

Financial statement of the company includes various information like:

 Balance Sheet ( Assets, liabilities, and equity)

 Income statement ( Profit or Loss statement)
 Equity statement
 Cash flow statement
96) What is working capital?
Working capital is a financial metric that calculates the resources available to the
company to finance its day-to-day operations. It is typically calculated by
deducting current liabilities from current assets.

97) What is ledger?

A ledger can be referred to as an accounting book that keeps the record of journal
entries in chronological order to individual accounts. The process of recording this
journal entries is known as posting.

98) Mention the types of ledgers

There are three types of ledger

 General ledger
 Debtors ledger
 Creditors ledger

99) What is GAAP?

GAAP means Generally Accepted Accounting Principle; it is a framework of
accounting, standards, procedures & rules determined by the professional
accounting industry and practiced by publicly traded U.S companies all over the
U.S.A.

100) Explain double-entry accounting with an example

Double-entry accounting is an accounting system that requires recording business
transactions or events in at least two accounts. It is the same concept of accounting,
where every debit account should be matched with a credit account.

For example, if a company takes a loan from a bank, it receives cash as an asset,
but at the same time, it creates a liability for a company.

This single entry will affect both accounts, the asset accounts, and the liabilities
accounts. It is referred to as double-entry accounting.

101) Explain what does the standard journal entry includes?

A standard journal entry includes, date of the business transaction, the name of the
accounts affected, amounts to be debited or credited, and a brief description of the
event.
 102) What are liabilities?
Liability can be defined as an obligation towards another company or party. It may
consist of delivering goods, rendering services, or paying money. They are the
opposite of assets, and it may include:

 Account payable
 Interest and dividend payable
 Bonds payable
 Consumer deposits
 Reserves for federal taxes
 Short term loans

103) What is the basic difference between asset, equity, and

liabilities?
Asset describes what financial institute (bank) or people owe.

Liabilities is something you owe people or organization.

Equity is something you own, for example, the amount of your house loan you
paid off.

104) Explain nominal accounts with example

A nominal account is a type of account that contains income and expenses. For
example, wages account, salary account, etc.

105) What is double-entry bookkeeping?

Double-entry bookkeeping is a principle of accounting where every debit entry has
a corresponding credit. Therefore, the total debt is equal to the total credit.

106) What is the primary difference between the trial balance and
balance sheet?
Trail Balance Balance Sheet
A trial balance is basically a list of balances in A balance sheet is a statement that shows the
the ledger account. liabilities, equity, and assets, of organization.
Trail balance is used to check the arithmetical The balance sheet is used to ascertain its
accuracy in recording and posting. financial position on a particular date.
 107) Differentiate between account payable and account receivable
Account Payable Account Receivable
It is the amount an organization owes to It is the amount collected by a company because of the
purchase services or goods on credit. selling of goods or services on credit.
Accounts payables are liabilities. Accounts receivables are assets.

108) What are the most common errors in accounting?

The most common errors in accounting are:

 Compensating error
 Errors of commission
 Errors of omission
 Errors of principle

109) What are the famous accounting applications?

Famous accounting applications are:

 CGram Software
 Microsoft Small Business Financials
 Microsoft Accounting Professional
 Financial Force
 Microsoft Dynamics AX

110) Mention four types of special journals

Four types of special journals are:

 Sales journals
 Cash payments journals
 Purchases journals
 Cash receipts journals

111) What are accounting transactions?

Accounting transactions refer to the execution of the user program that contains a
list of actions.
112) Define creative accounting
Creative accounting is a practice to create a picture that is not technically correct
from the perspective of the intended user.

113) What Is accounting normalization?

Accounting normalization is a process of removing items from the statement of
income or balance sheet. Once the normalization process is done, the result shows
the future earning capacity of the buyer.

114) What is a normative theory?

The normative theory is a theory that prescribes how the accounting process should
be done.

115) Explain computerized accounting?

Computerized accounting is a method in which financial information is collected,
processed, and summarized into financial reports.

The purpose of this accounting is to provide information used for decision making.
It can be viewed as a process that converts data into helpful information.

116) What is accounting ethics?

Accounting ethics is a field of applied judgments, ethics, and the study of moral
values.

117) What do you mean by vouching?

Vouching is a process of checking the voucher authentication maintain by the
management using respective supportive documents.

118) What is an EA in Accounting?

The full form of EA is Enrolled, Agent. It is a tax advisor who has unlimited
practice rights. EA represents as a taxpayer and collects and audits, financial
transactions.

119) What Is Payroll?

The term payroll is defined as a list of employees who get paid by the organization.
It refers to the money employer pays to their employees.

120) Define Payroll Source Documents

The Payroll source documents are timesheets of the employee.

 It is used to record the task completed by the employee.

 These records are audited by the labor department and the Equal
Employment Opportunity Commission.
 Source documents are must be kept into the payroll source folder.

121) What is Ratio Analysis?

Ratio analysis is the analysis of various goods in the business financial statement.

122) What are non-performing assets?

A non-performing asset is an account of borrower, that has been classified by a
financial institution or bank. It should be as per guidelines given by RBI.

123) Explain various methods of calculating depreciation in details

Various methods of calculating depreciation are:

 Double declining method: This method is used to calculate book value,

which is multiplied by a fixed depreciation rate.
 Units of production method: It is a way of charging depreciation on assets.
This method is used when the asset’s value is closer to the units produces
then years it is in used.
 Straight-line method: It can be calculated by dividing the difference
between the cost of assets and its salvage value by the expected years to be
used.
  Sum of year digit method: This method is based on the assumption that the
assets productivity decreases with the passage of time.
 Sinking fund method: A technique which is used when the cost of
replacing asset is too high.

124) Define fixed asset

Fixed asset are assets which are tangible in nature. It is not used to sell in the near
future and from which future benefits are derived.

125) What is BEP?

BEP or Break Event Point can be defined as a situation in which the company
neither gets profit nor no loss. It involves the activity in which total revenues equal
total costs.

126) Define cost sheet

The cost sheet is a cost statement of product for a specific period of time. It
contains direct and indirect expenses involved in producing a product.

127) What is Chargeback?

A chargeback is a process in the industry where wholesaler request amount, which
is the difference between the price of manufacture and wholesaler.

128) What Is CMMI?

CMMI stands for Capability Maturity Model Integration. It is an approach to
improve the organization’s approach to get the essential elements of the process.

129) What is CMM?

Candidate can answer this question as:

CMM is a standard for measuring the maturity of a company’s software

development processes. It is judged by IT service providers to deliver high-quality
software.
 130) Explain Cost Sheets
The cost sheet contains both direct and indirect expenses incurred in producing any
product. The classifying the expenses incurred based on administration, office,
distribution, and selling overheads.

131) What is an invoice?

Invoice is a statement that contains:

 Invoice Number
 Invoice date
 Name and address of the person
 Name and address of the buyer
 Description of services or goods involved
 Applicable rates and taxes with percentages
 Rate of the service or goods.
 Quantity of the services and goods.
 Price of the services and goods.
 The invoice should be signed by the person making it.
 Conditions of making the payment.

132) Differentiate between internal audit and statutory audit

Candidate can answer the question of interviewer like, the difference between
internal audit and statutory audit is:

Internal audit Statutory audit

An internal audit is an inspection
A statutory audit is an inspection conducted by the
conducted by the internal auditors of the
external auditors.
organization.
It is not mandatory for the company. It is mandatory for the company.

133) What is the main difference between billable and Non-billable

expenses?
The main difference between Billable and Non-billable Expenses is:
Billable expenses are the expenses incurred by the seller on behalf of the customer
in performing service or duties.

Non-billable expenses are the expenses incurred by the seller for carrying out
responsibilities.

134) What is the abbreviation of WCC?

The abbreviation of WCC is Working Capital Cycle.

CHAPTER FIVE
THE TIME VALUE OF MONEY
LEARNING OBJECTIVES
After studying this chapter you should understand the following terms and concepts:
1. The time value of money (TVM) and how to solve problems involving present and future
value using both the table and calculator methods;
2. Ordinary annuities, annuities due and how to solve TVM problems including annuities;
3. Compound interest, effective annual rates (EAR) and how to use them in TVM problems;
4. Amortized loans (e.g. mortgage loans) and how they are calculated;
5. Perpetuities, continuous compounding, multi-part problems, uneven streams, and imbedded
annuity problems.
CHAPTER SUMMARY
This chapter concentrates on the concept of the time value of money–the idea that a dollar
received today is more valuable than a dollar received at some point in the future. Problems
involving the present and future value of individual amounts and of annuities are carefully
explained and solved. The effect of the interest rate and interest rate compounding on the value
of money is explained and demonstrated through various examples. The concepts expressed in
this chapter are of vital importance to the understanding of the field of finance, and the student
should carefully follow the instructions for problem-solving presented throughout the chapter.
CHAPTER REVIEW
1. The time value of money (TVM) is the concept that treats money as having two dimensions:
(1) a dollar amount, and (2) a specific time at which the money is received or spent. The
fundamental assumption underlying TVM is that “money received today is more valuable than
money received at some point in the future, because today’s money can be invested and grow by
earning interest for a longer period of time.” Closely related to this idea is the understanding that
if a person wants to accumulate a particular amount of money at a future date, the interest rate
paid on the original amount invested will determine how much must be invested in order for it to
grow to the required future amount. The higher the interest rate received the less money that
must be originally invested to grow to the desired amount.

AMOUNT PROBLEMS

2. An amount refers to a single amount of money that will grow into a larger sum in the future
because of earning interest. Amount problems involve two important and related concepts:
present value and future value.

3. “Future value of an amount” problems determine how much an amount of money deposited
today will be worth at some specified time in the future. The future value will be determined by
how much is originally deposited; how long the money remains on deposit; and how often the
interest will be paid and at what rate. This amount can be calculated by using the formula,

FVn = PV [FVFk,n]

where the future value factor (FVF) is determined by the interest rate per period (k) and the
number of periods the amount is on deposit (n). These factors can be found in Table A-1 in the
text. The formula can also be stated as

FUTURE VALUE OF AN AMOUNT = AMOUNT DEPOSITED  TABLE FACTOR

This is a simple problem to solve when only one sum of money is deposited, but the
calculations become more complicated when multiple sums are involved. When more than one
amount is involved, separate calculations must be performed for each amount, and then the
answers are added together to get the future value of the various amounts.

4. The opportunity cost rate is defined as the rate of interest at which a person could have
invested his or her money. The opportunity cost will vary from person to person depending upon
his or her investment opportunities.
5. “Present value of an amount” problems compute the value of a specified future amount of
money in today's terms. If a person wants to have a certain amount of money in five years, he or
she will want to know what must be invested today so that it will grow to the desired amount in
the time available. The amount that must be deposited today is the present value of that future
amount. The amount that must be deposited today will also depend upon the following: the value
of the future amount, how long the money will remain on deposit, and how often interest will be
paid and the rate of that interest.

As with future value calculations, present value amounts may be calculated by using the formula

PV = FVn (PVFk,n)

where the present value factor (PVF) is determined by the interest rate per period (k) and the
number of periods the amount is on deposit (n). These factors can be found in Table A-2 in the
text. The formula can also be stated as:

PRESENT VALUE OF AN AMOUNT = FUTURE AMOUNT DESIRED  TABLE FACTOR

6. Financial calculators provide the simplest way to solve most TVM problems, particularly
those involving numbers whose values fall in-between the values listed on the tables.

ANNUITY PROBLEMS

7. Annuities are defined as a series of equal payments that occur at equal intervals for a specified
period of time. Annuity problems are more difficult to visualize and can often be more easily
understood through the use of time lines. Time lines are one way to graphically present the
timing and amount of cash flows that relate to a specific problem.

Annuity payments occur once per period (e.g. once a year or once a month). Annuities can
have different characteristics based on when the payment occurs during the period. If the
payment occurs at the end of the period, then the annuity is called an ordinary annuity. Annuities
whose payments occur at the beginning of the period are called annuities due. Since payments
occur sooner with an annuity due, they are more attractive to the recipient of the payment and
less attractive to the payer.
8. “Future and present value of annuities” problems are solved in much the same way as
future and present value amount problems discussed above. A common application for the
future value of an annuity would be to determine how much money could be accumulated over a
period of time by making regular deposits in an interest bearing account (e.g. $100/month for 10
years in an account paying 8% per year). The formula for the future value of an annuity is

FVAn = PMT [FVFAk,n]

where PMT represents the regular deposit (payment) and the future value factor for the annuity

(FVFA) is determined by the interest rate per period (k) and the number of periods the amount is
on deposit (n). These factors can be found in Table A-3 in the text.

9. A common application for the present value of an annuity is for amortized loans, such as a
car loan or a home mortgage, where the principal is paid off gradually during the life of the loan.
In this case a borrower might want to know how large a home mortgage could be supported
based on an estimated monthly payment (e.g. how large a loan could a borrower get for 30 years,
monthly payments, if interest rates are 6% and the borrower can make $1,000 payments every
month). The formula for the future value of an annuity is

PVAn = PMT [PVFAk,n]

where PMT represents the regular payment and the present value factor for the annuity (PVFA)
is determined by the interest rate per period (k) and the number of periods of the loan (n). These
factors can be found in Table A-4 in the text.

10. Annuities typically do not last forever. If the series of equal payments at equal
intervals continues forever, it is called perpetuity. The formula for calculating the present value
of perpetuity is as follows:

PVP = PMT/k

Where PMT is the amount of the equal payment and k is the interest rate. This formula is most
often used to calculate the price of preferred stock, or to calculate the value of a fair price for a
company using the present value of the company's earnings into perpetuity.
11. A sinking fund is a special account set up and regularly paid into by borrowers, and
dedicated to repaying a bond's principal. Bonds are non-amortized debt, which means that
borrowers make only interest payments until the maturity date when the principal is due. When
bonds mature, a great deal of money becomes due, and there is often justifiable concern as to
whether a company will have the large amounts needed to pay off the debt. The sinking fund is a
solution to this problem.

12. Interest rates are usually paid more than once a year; this is known as
compounding.

Compounding is important because after the first compounding period, the investor is earning
interest not only on the principal but also on the previously earned interest. The more often
interest is compounded, the better off the investor will be but the more it will cost the borrower.

In order to use the present and future value tables when interest is compounded more than once a
year, adjustments must be made to the number of periods and to the rate used.

NUMBER OF PERIODS = NUMBER OF YEARS NUMBER OF TIMES A YEAR

COMPOUNDING OCCURS

RATE = INTEREST RATE/NUMBER OF TIMES A YEAR COMPOUNDING OCCURS

13. Because compounding will affect the amount of interest a person pays or receives, the
nominal or stated interest rates may make comparisons between loan terms difficult (e.g. 8.5%
compounded quarterly vs. 8.35% compounded monthly) The percentages used in the previous
example are called the annual percentage rates or the nominal rates. Lenders are required to
state the effective annual rate (EAR), which is the annually compounded interest rate that pays
the same interest as a lower rate compounded more frequently. In other words, it is the rate
which regardless of the stated interest (e.g. 12% compounded monthly), equates to the rate if the
interest was only compounded annually. In this case of 12% compounded monthly, the EAR
would be 12.68%.

The EAR allows comparison between loans that are compounded differently. As a quick method
of comparing the same rate but when compounding occurs more frequently, the more often
compounding occurs with the same nominal rate, the higher the EAR will be. At a 12% nominal
interest rate, the borrower will pay less interest with less frequent compounding, while the lender
will collect more interest when the interest is compounded more frequently.

14. Mortgage loans or mortgages are used to buy real estate such as homes or office buildings.
A mortgage is an amortized loan, typically with monthly compounding and payments that may
be spread out over as long as 30 years. During the early years of the loan, most of the payment
will be devoted to interest, while during the last years of the loan; most of the payment will go to
repay the principal. Because mortgage interest is tax deductible, homeowners will have larger
tax deductions during the early years of the mortgage.

15. Many problems will involve multiple parts that require combining two or more time value
of money techniques. Time lines to graphically represent the various parts of the problem will
assist in solving these types of problems. The separate parts are resolved sequentially, and then
their answers are combined to achieve a final answer for the problem.

16. When problems involve uneven streams of payments, which is the most common
way for persons to pay into retirement or savings plans over their lifetime, the annuity
method of calculating future value cannot be used. Each payment must then be handled as an
individual problem to come up with an accurate solution. When uneven streams of payments
have sections of even streams of payments, this is called an imbedded annuity. The section that
contains the even stream of payments may be treated as an annuity in order to reduce the number
of separate calculations that are required to solve the problem. Many financial calculators and/or
computers have the capability to solve problems with uneven cash streams. These
techniques are particularly important in capital budgeting, discussed in Chapters 10 and 11.

TESTING YOUR UNDERSTANDING

TRUE-FALSE QUESTIONS

____1. All persons will have the identical opportunity cost rate.

____2. A perpetuity may be thought of as an annuity that continues forever.

____3. The Truth in Lending Act requires that lenders disclose the EAR.
____4. The present value of a future amount will be higher with a higher interest rate.

____5. Present value and future value problems in real-life often require combining two or more
time value problems.

____6. Most annuities are categorized as annuities due.

____7. In order to calculate the future value of a perpetuity, one need only to consult an existing
table.

____8. Lenders prefer less frequent compounding; borrowers prefer more frequent
compounding.

____9. When the compounding period is one year and the interest is compounded annually, the
EAR and the nominal rate of interest will be the same.

____10. Mortgage interest is tax deductible for individuals.

____11. During the final years of a mortgage loan, most of the payments go toward the paying of
interest.

____12. The present value of a future amount is smaller when interest rates decrease.

____13. A sinking fund protects investors or lenders from big losses.

____14. Interest rates are usually compounded annually.

____15. When no compounding period is mentioned, quarterly compounding should be assumed.

____16. The frequency of compounding affects the actual amount of interest being paid.

____17. Amortized loans usually have payments that vary periodically over the loan’s life.

____18. Mortgage loans are structured so that halfway through a 30-year loan, half of the loan
has been paid off.

____19. The future value of perpetuity makes no sense because the payments never end.
____20. Problems involving uneven streams of payments require that each payment be handled
as an individual amount.

MULTIPLE CHOICE QUESTIONS

1. Financial calculators:

a. make most computations easier.

b. eliminate the need to understand the concepts behind time value.
c. are used almost exclusively in real-life.
d. a and c only.
2. The continuous compounding of interest:

a. is mathematically impossible.

b. can easily be calculated without a calculator.

c. requires a calculator to calculate.

d. none of the above.

3. The future or present value of an amount depends upon:

a. the interest rate.

b. the number of periods.

c. number of times per year compounding occurs.

d. all of the above.

4. When a firm is valued at the present value of its annual earnings divided by the relevant
interest rate:

a. this is called the Capitalization of Earnings.

b. the firm is being valued as a perpetuity.

c. a and b.
 d. none of the above.

5. In which case will an investor receive the most interest:

a. 10%, compounded annually. c. 10%, compounded continuously.

b. 10%, compounded monthly. d. 10%, compounded daily.

6. When a banker quotes an interest rate of 8% compounded semiannually, he is quoting the:

a. nominal rate. c. EAR.

b. APR. d. both a and b.

7. Annuities:

a. are a stream of equal payments at unequal time intervals.

b. are a stream of equal payments at equal time intervals.

c. are a stream of equal payments that continue forever.

d. all of the above.

e. none of the above.

8. Sinking funds:

a. are a series of equal payments.

b. are made to an account designated to pay off a bond’s principal.

c. help to reassure bondholders that a company can repay a bond’s principal at maturity.

d. all of the above.

9. At 12% interest compounded quarterly for 5 years, what is the interest rate and the number of

periods that will be computed before a present or future value table can be used?

a. 12%, 5 periods b. 6%, 10 periods

 c. 3%, 20 periods d. 4%, 15 periods

10. Mortgage loans:

a. are used to purchase real estate.

b. are primarily long term.

c. usually have more than half the balance remaining when the loan is half-way to maturity.

d. have tax deductible interest.

e. all of the above.

11. The basic rule of the time value of money is:

a. investments will always be worth more tomorrow than they are today

b. it’s always wiser to save a dollar for tomorrow than to spend it today

c. a dollar in hand today is worth more than a dollar promised at some time in the future

d. all of the above express an aspect of the basic rule of time value of money

12. The present value of a future amount:

a. will always be less than the future amount

b. can be calculated precisely if the discount rate and number of periods is known

c. is worth less than the future value

d. both a. and b. above are true

13. Which of the following formulas is the correct way to express a future value two years into
the future based on a present value and an interest rate? FV2 =

a. PV (1 + k) + PV (1 + k) (k) c. PV ( 1 + k)2

b. PV (1 +k) (1 + k) d. all of the above are correct

14. If you want to know how much money you will have at the end of 15 years if you make
quarterly deposits in a bank that pays 6% interest compounded quarterly, you should go to Table
A-3 and look up the value for n = _____ and k = _____.

a. 15, 6% c. 60, 6%

b. 15, 1.5% d. 60, 1.5%

15. If you use a financial calculator to solve a mortgage problem and you are given the amount
of the loan, the interest rate and the term of the loan, you will be solving for:

a. n d. FV

b. I/Y e. PMT

c. PV

16. When comparing an annuity due with an ordinary annuity with the same payment and
duration, the annuity due will always have a _______ present value and will always have a
_______ future value.

a. higher; higher c. lower, higher

b. higher; lower d. lower, lower

17. Which of the following terms mean the same thing

a. APR, EAR, nominal rate c. EAR, annual rate, nominal rate

b. APR, annual rate, nominal rate d. APR, EAR, annual rate

18. With amortized loans, such as a mortgage:

a. interest is always more than half of the payment amount

b. return of principal is always more than half of the payment amount

c. the proportion of interest to the total decreases later in the payment schedule

d. the proportion of interest to the total increases later in the payment schedule.
19. An imbedded annuity is:

a. an annuity that starts at the beginning of a stream of payments but doesn’t continue for the
entire payment stream

b. an annuity that starts during a payment stream (not at the beginning) and continues to the end
of the payment stream

c. an annuity that starts after the beginning of a payment stream and concludes before the end of
the payment stream

d. all of the above describe imbedded annuities

20. A perpetuity:

a. has infinite value because the payments continue forever

b. can be valued (PV) if the payment amount and interest rate are known

c. don’t exist in the financial world

d. none of the above are true

FILL IN THE BLANK QUESTIONS

1. An ___________________________ is a single sum of money that grows with interest over

time to a larger sum.

2. When a credit card company quotes an annual rate of 10% compounded monthly, the EAR
will be ___________________than the quoted rate.

3. If a person wants to know what an amount deposited today at 4% will be worth in 4 years, he
is asking its________________________ value.

4. An _______________________ annuity has payments that occur at the end of the time
periods

5. Debt is ________________________ when the principal is paid off during the life of the
loan.
6. When a person wants to know what he must deposit today so that in 5 years he will have
$5,000, he is asking its ___________________ value.

7. Preferred stock is valued as a ________________________.

8. ______________________are specially designated funds into which the company

deposits money so that a bond can be paid off at maturity.

9. A dollar received today is worth _______________ than a dollar received one year from
today.

10. _________________________ is earning interest on previously earned interest.

11. The ____________ is the same as the nominal rate.

PROBLEMS

1. If a person deposits $11,500 in the bank today, what will the money be worth in 3 years at
8% if it’s a.) compounded semi-annually; b.) compounded quarterly; and c.) compounded
annually.

2. What is the EAR for 8% if a.) compounded annually; b.) compounded semi-annually; and c.)
compounded quarterly.

3. What is the present value of an ordinary 12-year annuity that pays $1,000 per year when the
interest rate is 7%?

4. How much must a person put into the bank today if he wants $50,000 in 5 years at
6% compounded a.) annually and b.) semi-annually.

5. The Abracadabra Corporation issues preferred stock that pays a quarterly dividend of $3.50
indefinitely. Investors could invest their money at 6% compounded quarterly. For how much
will the preferred stock sell?

6. Using the Capitalization of Earnings technique, what is a fair valuation for a company that
consistently has earnings after taxes of $4,000,000 when interest rates are 8%? What if interest
rates instead were 9%?
7. John is selling an apartment building for $220,000. She will pay 10% down and $19,800 a
year for 10 years. What is the real purchase price if John could get an interest rate of 5% on
invested money?

8. How many years does it take money invested at 9% to double?

9. All right Corporation started making sinking fund deposits of $20,000 today. Its bank pays
6% compounded semi-annually and the payments will be made every six months for 20 years.
What will the fund be worth at the end of that time?

10. Billy thinks he can save enough to deposit $1,200 in the bank at the end of each year for the
next 30 years. How much will he have if the bank pays 6% interest, compounded annually?

11. See the previous problem. If instead, Billy can deposit $100 per month in the bank, and the
bank compounds interest monthly, how much will Billy have at the end of 30 years? What is
the effective annual interest rate (EAR) that Billy will be earning?

12. Barbara and Mike just borrowed $200,000 to purchase a home. The bank gave them a 6%
interest rate on a 15 year mortgage. How much will their monthly mortgage payments be? How
much less would their payments be if the mortgage was a 30 year mortgage?

ANSWERS TO QUESTIONS

TRUE-FALSE

1. F 6. F 11.F 16.T

2. T 7. F 12.F 17.F

3. T 8. F 13.T 18.F

4. F 9. T 14.F 19.T

5. T 10.T 15.F 20.T

MULTIPLE CHOICES

1. D 2. C 3. D 4. C
5. C 9. C 13. D 17. B

6. D 10. E 14. D 18. C

7. B 11. C 15. E 19. D

8. D 12. D 16. A 20. B

FILL IN THE BLANKS

1. Amount 5. Amortized 9. More

2. Higher 6. Present 10. Compounding

3. Future 7. Perpetuity 11. APR

4. Ordinary 8. Sinking Funds

ANSWERS TO PROBLEMS

1. a. FV = $11,500 [FVF4, 6] = $11,500 (1.2653) = $14,550.95

b. FV = $11,500 [FVF2, 12] = $11,500 (1.2682) = $14,584.30

c. FV = $11,500 [FVF8, 3] = $11,500 (1.2597) = $14,486.55

2. a. EAR = 8/100 = 8%

b. EAR = 8.16/100 = 8.16%

c. EAR = 8.24/100 = 8.24%

3. PVA = $1,000[PVFA7, 12] = $1,000 (7.9427) = $7,942.70

4. a. PV = $50,000[PVF6, 5] = $50,000 (0.7473) = $37,365

b. PV = $50,000 [PVF3, 10] = $50,000 (0.7441) = $37,205

5. 3.50 = $233.33
.015
6. $4,000,000 = $50,000,000
 .08
$4,000,000 = $44,444,444
.09
7. Effective price = 10% down payment + PVA

= $22,000 + $19,800[PVFA5, 10]

= $22,000 + $19,800 (7.7217)

= $22,000 + $152,889.66

= $174,889.66

8. FV = PV[FVF 9, n]$2 = $1 [FVF 9, n] FVF 9, n = 2.0000

Search Table A-1 in the 9% column. The closest factor to 2.000 is 1.9926 for 8 years.

9. FVA = $20,000[FVFA3, 40] (1.03)

=$20,000 (75.4013)(1.03)

=$1,553,266.78

10. PMT = 1,200

n = 30
I/Y = 6
PV = 0
FV =? = $94,869.82
11. PMT = 100 PV = 0
n = 360 FV = $100,451.50
I/Y = .5 EAR = (1 + .06/12) 12 – 1 = .0617 or 6.17%
12. PV = 200,000 FV = 0
n = 180 PMT = ? = $1,687.71
I/Y = .5 PV = 200,000
n = 360 PMT = ? = $1,199.10
I/Y = .5 Difference = $1,687.71 - $1,199.10 =
$488.61
FV = 0

Questions and answers

Q 1. Can you please name the guiding principles of leadership and integrity?

ANSWER;

1) Selection of people on the basis of:

 Personal integrity
 Competence and
 Suitability
2) Objectivity and impartiality of decision making. Ensuring decisions are not influenced by
nepotism, favourism, corruption etc.

3) Selfless service based on public interest

Honesty is execution of public duties
Declaration of conflict of interest in performing public duties.
Q 2. Name the principles of public service.

ANSWER;

1) Demonstrate respect for all the people who require service.

2) Avoid discrimination of any form e.g. religion, status or gender.
3) Serve in a manner that will bring honor to the office one holds.
 4) Ensure prompt, effective and efficient service is provided.
Q 3. What are the principles of public finance?

ANSWER;

1) Openness and accountability including public participation in financial matters.

2) nce system should promote an equitable society and equitable development in the country.
3) Public resources must be in a prudent and responsible way.
Q 4. What do you understand by Public debt?

ANSWER;

Public debt is a change on the consolidated fund. An act of parliament my provide for
charging all or part of the public debt to other public funds.
According to the constitution, public debt means all financial obligations attendant to loans
raised or guaranteed and securities issued by the national government.
Q 5. Explain the budgeting process at the national level:

ANSWER;

Two months before the end of each financial, the CS in charge of finance is expected to
submit to then national assembly estimates of the revenue and expenditure of the national
government for the next year to be tabled in parliament.
Parliamentary service commission should also submit their estimates. National assembly must
subject estimates to public participation.
Q 6. What are the values and prinviples of public service?

ANSWER; These include:

1) High standars of profesional ethics

2) Efficient, effective and economic use of resources
3) Responsive, promp, effective impartial and equitable provision of services
4) Involvement of people in policy making
5) Accountability for actions
6) Transparency and provisions of the public of timely and accurate information