Accounting Questions and Answer

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Basics Of Financial Statement
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Accounting concepts S
QuestionnaireG I N
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InvestmentA Nbanking
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institute
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ES www.ibinstitute.in
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www.ibinstitute.in 1
Discussion topics
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 Introduction
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 Technical Question And Answers
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 Accounting Question And Answers – Basics
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 Accounting Questions And Answers – Advanced
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Introduction
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the interviewer basically ask from its interviewee. We start itTwith basics
In these slides we will discuss questions regarding basics and fundamental which
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concepts so that it may be clear to every body and previous
I concepts may be
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reviewed. Slowly ,we move forward in the upper direction or advanced version
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to come in contact with actual questions. So before move to tough section we
questionnaire.
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should review our basic concepts to understand the toughest part of
Interviewer ask question “why you B

N T want to join my company”. Most of
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interviewee gives answer , “wants to join to earn more money” . In this answer
M because everybody wants to do job to earn money,

their motive of learning and increasing their skills does not show, this may make
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bad impact on interviewer
what’s new in this S
So the answerV
E answer , that can impress interviewer.
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to increase Nmy hidden talent, and to learn my skills that may compete me from
of this question will be like that , “ Sir, I want to join this company
the external environment.

Answer should be concise and short but may impact great effect on interviewer.
Technical question and answer
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Now a days interviewer do not ask questions directly like,I T “ how
would you calculate the value of company”. S
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They start asking question from the basics andIthen
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strongest part slowly so that you may able
K Ithe basic part of accounting
to think instantly.
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They try to know that how strongest in
that candidate can give answer. A
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So in these slides we will start
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focusing from basic questions which
most commonly ask in E Ninterview.
the
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I am not covering all
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question of interview.
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These questions can help you to cover 60% to 80% of the question.
ACCOUNTING (QUESTION AND ANSWER) – BASICS
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Here are the five most common accounting concepts you need I T
Teach one means.
to know:
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1. Accounting consists of three financial statements and what
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2. How the three statements link together .
3. Different methods of accounting.
4. When to expense something and when toK I N
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5. What individual items on the statements like goodwill, other intangible and
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share holder’s equity, actually means.
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The question will cover all these concepts.
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Q.No. 1. WALK ME THROUGH THE 3 FINANCIAL STATEMENTS ?
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Answer :- the three major financial statements are the income

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statements , balance sheet and cash flow statements.
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The income statement company gets net income from various
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operations like revenue and expenses( interest, tax, depreciation
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etc.)
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The balance sheet shows the company’s assets - such as cash,
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inventory & PP&E as well as its liabilities – such as debt and account
payable and shareholder’s equity. Assets must be equal to
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shareholder’s fund and equity fund.
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The Cash Flow Statement help the company to identify how much
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cash it has generated from inflow and outflow of cash .
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Q.No.2 :- Can you give examples of major line items on each of the
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financial statements ?
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Answers :- Income statements :- Revenue; Cost of Goods Sold; SG&A
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(Selling, General & Administrative Expenses); Operating Income;
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Income tax , interest will get ( Net Income) . I
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Balance Sheet: Cash; Accounts Receivable; Inventory; Plants, Property
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& Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt;
Shareholders’ Equity.
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Cash Flow Statement: Net Income; Depreciation & Amortization; Stock-
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Based Compensation; Changes in Operating Assets & Liabilities; Cash
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Flow From Operations; Capital Expenditures; Cash Flow From
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Investing; Sale/Purchase of Securities; Dividends Issued; Cash Flow
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From Financing.
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Q. No. 3. How do the 3 statements link together?
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Answer :- “To tie the statements together, Net Income from the Income
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Statement flows into Shareholders” Equity on the Balance Sheet, and
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into the top line of the Cash Flow Statement. Changes to Balance
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Sheet items appear as working capital changes on the Cash Flow
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Statement, and investing and financing activities affect Balance Sheet
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items such as PP&E, Debt and Shareholders’ Equity.
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Q. No. 4 :- If I were stranded on a desert island, only had 1 statement
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and I wanted to review the overall health of a company – which
statement would I use and why?
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Answer :- You would use the Cash Flow Statement because it gives a
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true picture of how much cash the company is actually generating,
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independent of all the non-cash expenses you might have. And
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that’s the #1 thing you care about when analyzing the overall
financial health of any business – its cash flow.
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Q.No.5 :- Let’s say I could only look at 2 statements to assess a
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company’s prospects – which 2 would I use and why?
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Answer :- You would pick the Income Statement and Balance Sheet,
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because you can create the Cash Flow Statement from both of those.
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Q.No. 6:- Walk me through how Depreciation going up by Rs.10 would
affect the statements.
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Answer :-
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Income Statement: - Operating Income would decline by Rs.10 and
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assuming a 40% tax rate, Net Income would go down by Rs.6.
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Cash Flow Statement: - The Net Income at the top goes down by Rs.6, but
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the Rs.10 Depreciation is a non-cash expense that gets added back, so
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overall Cash Flow from Operations goes up by Rs.4. There are no
changes elsewhere, so the overall Net Change in Cash goes up by Rs.4.
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Balance Sheet: - Plants, Property & Equipment goes down by Rs.10 on the
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Assets side because of the Depreciation, and Cash is up by Rs.4 from
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the changes on the Cash Flow Statement. Overall, Assets is down by
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Rs.6. Since Net Income fell by Rs.6 as well, Shareholders’ Equity on
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the Liabilities side is down by Rs.6 and both sides of the Balance Sheet
balance.
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Q.No.7:- If Depreciation is a non-cash expense, why does it affect the
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cash balance?
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Answer :- Although Depreciation is a non-cash expense, it is tax-
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deductible. Since taxes are a cash expense, Depreciation affects cash
by reducing the amount of taxes you pay.
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Q.No. 8:- Where does Depreciation usually show up on the Income
Statement?
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Answer :- It could be in a separate line item, or it could be embedded in
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Cost of Goods Sold or Operating Expenses – every company does it
differently. Note that the end result for accounting questions is the
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same: Depreciation always reduces Income tax .
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Q.No.9 :- What happens when Accrued Compensation goes up by Rs.10?
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Answer :- For this question, confirm that the accrued compensation is
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now being recognized as an expense (as opposed to just changing non-
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accrued to accrued compensation). In the income statement,
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Operating Expenses on the Income Statement go up by Rs.10, Pre-Tax
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Income falls by Rs.10, and Net Income falls by Rs.6 (assuming a 40%
tax rate). On the Cash Flow Statement, Net Income is down by RS.6,
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and Accrued Compensation will increase Cash Flow by Rs.10, so overall
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Cash Flow from Operations is up by Rs.4 and the Net Change in Cash at
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the bottom is up by RS.4. On the Balance Sheet, Cash is up by Rs.4 as a
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result, so Assets are up by Rs.4. On the Liabilities & Equity side,
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Accrued Compensation is a liability so Liabilities are up by Rs.10 and
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Retained Earnings are down by Rs.6 due to the Net Income, so both
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sides balance.
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10. What happens when Inventory goes up by Rs.10, assuming you pay
for it with cash?
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No changes to the Income Statement. On the Cash Flow Statement,
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Inventory is an asset so that decreases your Cash Flow from Operations
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– it goes down by Rs.10, as does the Net Change in Cash at the bottom.
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On the Balance Sheet under Assets, Inventory is up by Rs.10 but Cash is
down by Rs.10, so the changes cancel out and Assets still equals
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Liabilities & Shareholders’ Equity. N
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11. Why is the Income Statement not affected by changes in Inventory?
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This is a common interview mistake – incorrectly stating that Working
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Capital changes show up on the Income Statement. In the case of
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Inventory, the expense is only recorded when the goods associated
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with it are sold – so if it’s just sitting in a warehouse, it does not count
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as a Cost of Good Sold or Operating Expense until the company
manufactures it into a product and sells it.
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12. Let’s say Apple is buying Rs.100 worth of new iPad factories with
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debt. How are all 3 statements affected at the start of “Year 1,”
before anything else happens?
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At the start of “Year 1,” before anything else has happened, there
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would be no changes on Apple’s Income Statement (yet). On the
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Cash Flow Statement, the additional investment in factories would
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show up under Cash Flow from Investing as a net reduction in Cash
Flow (so Cash Flow is down by Rs.100 so far). And the additional
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Rs.100 worth of debt raised would show up as an addition to Cash
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Flow, canceling out the investment activity. So the cash number stays
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the same. On the Balance Sheet, there is now an additional Rs.100
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worth of factories in the Plants, Property & Equipment line, so PP&E
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(assets ) is up by Rs.100 . On the other side, debt is up by RS.100 as
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well and so both sides balance.
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13. Now let’s go out 1 year, to the start of Year 2. Assume the debt is high-yield
so no principal is paid off, and assume an interest rate of 10%. Also assume
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the factories depreciate at a rate of 10% per year. What happens?
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After a year has passed, Apple must pay interest expense and must record
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the depreciation. Operating Income would decrease by RS.10 due to the 10%
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depreciation charge each year, and the Rs.10 in additional Interest Expense
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would decrease the Pre-Tax Income by Rs.20 altogether (RS.10 from the
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depreciation and Rs.10 from Interest Expense). Assuming a tax rate of 40%,
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Net Income would fall by RS.12. On the Cash Flow Statement, Net Income at
the top is down by RS.12. Depreciation is a non-cash expense, so you add it
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back and the end result is that Cash Flow from Operations is down by RS.2.
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That’s the only change on the Cash Flow Statement, so overall Cash is down
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by Rs.2. On the Balance Sheet, under Assets, Cash is down by Rs.2 and PP&E
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is down by RS.10 due to the depreciation, so overall Assets are down by
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RS.12. On the other side, since Net Income was down by RS.12,
Shareholders’ Equity is also down by RS.12 and both sides balance.
Remember, the debt number under Liabilities does not change since we’ve
assumed none of the debt is actually paid back.
14. At the start of Year 3, the factories all break down and the value of the
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equipment is written down to Rs.0. The loan must also be paid back now.
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Walk me through the 3 statements.
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After 2 years, the value of the factories is now RS.80 if we go with the 10%
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depreciation per year assumption. It is this RS.80 that we will write down in
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the 3 statements. First, on the Income Statement, the RS.80 write-down
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shows up in the Pre-Tax Income line. With a 40% tax rate, Net Income
declines by Rs.48. On the Cash Flow Statement, Net Income is down by
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Rs.48 but the write-down is a non- cash expense, so we add it back – and
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therefore Cash Flow from Operations increases by Rs.32. There are no
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changes under Cash Flow from Investing, but under Cash Flow from
Financing there is a RS.100 charge for the loan payback – so Cash Flow from
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Investing falls by RS.100. Overall, the Net Change in Cash falls by RS.68. On
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the Balance Sheet, Cash is now down by RS.68 and PP&E is down by RS.80,
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so Assets have decreased by RS.148 altogether. On the other side, Debt is
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down RS.100 since it was paid off, and since Net Income was down by RS.48,
Shareholders’ Equity is down by RS.48 as well. Altogether, Liabilities &
Shareholders’ Equity are down by Rs.148 and both sides balance.
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T They order
15. Now let’s look at a different scenario and assume Apple is ordering
RS. 10 of additional iPad inventory, using cash onShand.
the inventory, but they have not manufactured INor sold anything yet
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– what happens to the 3 statements?
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No changes to the Income Statement.KCash Flow Statement –
Inventory is up by Rs.10, so CashA N from Operations decreases by
Flow
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Rs.10. There are no further changes, so overall Cash is down by
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E number stays the same and the Balance
Rs.10. On the Balance Sheet, Inventory is up by Rs.10 and Cash is
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down by Rs.10 so the Assets
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Sheet remains in balance.
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16. Now let’s say they sell the iPads for revenue of Rs.20, at a cost of
Rs. 10. Walk me through the 3 statements under this scenario.
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Income Statement: Revenue is up by Rs.20 and COGS is up by Rs.10,
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so Gross Profit is up by Rs.10 and Operating Income is up by Rs.10 as
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well. Assuming a 40% tax rate, Net Income is up by Rs.6. Cash Flow
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Statement: Net Income at the top is up by Rs.6 and Inventory has
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decreased by Rs.10 (since we just manufactured the inventory into
real iPads), which is a net addition to cash flow – so Cash Flow from
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Operations is up by Rs.16 overall. These are the only changes on the
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Cash Flow Statement, so Net Change in Cash is up by Rs.16. On the
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Balance Sheet, Cash is up by Rs.16 and Inventory is down by Rs.10, so
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Assets is up by RS.6 overall. On the other side, Net Income was up by
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RS.6 so Shareholders’ Equity is up by RS.6 and both sides balance.
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17. Could you ever end up with negative shareholders’ equity? What
does it
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Yes. It is common to see this in 2 scenarios: 1. Leveraged Buyouts
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with dividend recapitalizations – it means that the owner of the
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company has taken out a large portion of its equity (usually in the
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form of cash), which can sometimes turn the number negative. 2. It
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can also happen if the company has been losing money consistently
and therefore has a declining Retained Earnings balance, which is a
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portion of Shareholders’ Equity. It doesn’t “mean” anything in
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particular, but it can be a cause for concern and possibly
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demonstrate that the company is struggling (in the second scenario).
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18. What is Working Capital? How is it used?
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Working Capital = Current Assets – Current Liabilities. If it’s positive,
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it means a company can pay off its short-term liabilities with its
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short- term assets. It is often presented as a financial metric and its
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magnitude and sign (negative or positive) tells you whether or not
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the company is “sound.” Bankers look at Operating Working Capital
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more commonly in models, and that is defined as (Current Assets –
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Cash & Cash Equivalents) – (Current Liabilities – Debt). The point of
Operating Working Capital is to exclude items that relate to a
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company’s financing activities – cash and debt – from the calculation
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19. What does negative Working Capital mean? Is that a bad sign?
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Not necessarily. It depends on the type of company and the specific
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situation – here are a few different things it could mean: 1. Some
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companies with subscriptions or longer-term contracts often have
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negative Working Capital because of high Deferred Revenue
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balances. 2. Retail and restaurant companies like Amazon, Wal-Mart,
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and McDonald’s often have negative Working Capital because
customers pay upfront – so they can use the cash generated to pay
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off their Accounts Payable rather than keeping a large cash balance
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on-hand. This can be a sign of business efficiency. 3. In other cases,
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negative Working Capital could point to financial trouble or possible
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bankruptcy (for example, when customers don’t pay quickly and
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upfront and the company is carrying a high debt balance).
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20. Recently, banks have been writing down their assets and taking
huge quarterly losses. Walk me through what happens on the 3
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statements when there’s a write- down of Rs.100.
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First, on the Income Statement, the RS.100 write-down shows up in
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the Pre-Tax Income line. With a 40% tax rate, Net Income declines by
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Rs.60. On the Cash Flow Statement, Net Income is down by Rs.60
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but the write-down is a non- cash expense, so we add it back – and
therefore Cash Flow from Operations increases by RS.40. Overall, the
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Net Change in Cash rises by RS.40.
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On the Balance Sheet, Cash is now up by RS.40 and an asset is down
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by RS.100 (it’s not clear which asset since the question never stated
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the specific asset to write-down). Overall, the Assets side is down by
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Rs.60. On the other side, since Net Income was down by Rs.60,
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Shareholders’ Equity is also down by Rs.60 – and both sides balance.
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21.Walk me through a Rs.100 “bailout” of a company and how it

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affects the 3 statements.
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First, confirm what type of “bailout” this is – Debt? Equity? A
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combination? The most common scenario here is an equity
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investment from the government, so here’s what happens: No
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changes to the Income Statement. On the Cash Flow Statement, Cash
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Flow from Financing goes up by Rs.100 to reflect the government’s
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investment, so the Net Change in Cash is up by Rs.100. On the
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Balance Sheet, Cash is up by RS.100 ; on the other side,
Shareholders’ Equity would go up by RS.100 to make it balance.
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22. Walk me through a Rs.100 write-down of debt – as in OWED debt,
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a liability – on a company’s balance sheet and how it affects the 3
statements.
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This is counter-intuitive. When a liability is written down you record
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it as a gain on the Income Statement (with an asset write-down, it’s
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a loss) – so Pre-Tax Income goes up by Rs.100 due to this write-
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down. Assuming a 40% tax rate, Net Income is up by Rs.60. On the
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Cash Flow Statement, Net Income is up by Rs.60, but we need to
subtract that debt write-down – so Cash Flow from Operations is
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down by Rs.40, and Net Change in Cash is down by Rs.40. On the
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Balance Sheet, Cash is down by Rs.40 so Assets are down by Rs.40.
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On the liabilities side, Debt is down by Rs.100 but Shareholders’
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Equity is up by Rs.60 because the Net Income was up by Rs.60 – so
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Liabilities & Shareholders’ Equity is down by Rs.40 and it balances.
23.When would a company collect cash from a customer and not record
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it as revenue?
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Three examples come to mind: 1. Web-based subscription software. 2.
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Cell phone carriers that sell annual contracts. 3. Magazine publishers
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that sell subscriptions. Companies that agree to services in the future
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often collect cash upfront to ensure stable revenue – this makes
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investors happy as well since they can better predict a company’s
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performance. Per the rules of accounting, you only record revenue
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when you actually perform the services – so the company would not
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record everything as revenue right away.
24.If cash collected is not recorded as revenue, what happens to it?
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Usually it goes into the Deferred Revenue balance on the Balance Sheet
under Liabilities. Over time, as the services are performed, the
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Deferred Revenue balance becomes real revenue on the Income
Statement and the Deferred Revenue balance decreases.
25. What’s the difference between accounts receivable and deferred
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revenue?
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Accounts receivable has not yet been collected in cash fromT
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customers, whereas deferred revenue has been. Accounts receivable
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represents how much revenue the company is waiting on, whereas
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deferred revenue represents how much it has already collected in
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cash but is waiting to record as revenue.
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26.How long does it usually take for a company to collect its accounts
receivable balance?
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Generally the accounts receivable days are in the 30-60 day range,
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though it’s higher for companies selling high-end items and it might
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be lower for smaller, lower transaction- value companies.
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27.What’s the difference between cash-based and accrual accounting?
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Cash-based accounting recognizes revenue and expenses when cash is

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actually received or paid out; accrual accounting recognizes revenue when
collection is reasonably certain (i.e. after a customer has ordered the product)
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and recognizes expenses when they are incurred rather than when they are
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paid out in cash. Most large companies use accrual accounting because
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paying with credit cards and lines of credit is so prevalent these days; very
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small businesses may use cash-based accounting to simplify their financial
statements.
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28. Let’s say a customer pays for a TV with a credit card. What would this look
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like under cash-based vs. accrual accounting?
In cash-based accounting, the revenue would not show up until the company
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charges the customer’s credit card, receives authorization, and deposits the
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funds in its bank account – at which point it would show up as both Revenue
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on the Income Statement and Cash on the Balance Sheet. In accrual
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accounting, it would show up as Revenue right away but instead of appearing
in Cash on the Balance Sheet, it would go into Accounts Receivable at first.
Then, once the cash is actually deposited in the company’s bank account, it
would “turn into” Cash.
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29.How do you decide when to capitalize rather than
T I T expense a
purchase?
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If the asset has a useful life of over 1 year, it isIcapitalized
anGexpense on the Income
(put on the
Balance Sheet rather than shown as N
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Statement). Then it is depreciatedK(tangible
(intangible assets) over a certain A N assets) or amortized
number of years. Purchases like
factories, equipment and land
T B all last longer than a year and
cost of manufacturing E
therefore show up on the N Balance Sheet. Employee salaries and the
T M products (COGS) only cover a short period of
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operations and therefore show up on the Income Statement as
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normal expenses instead.
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30.Why do companies report both GAAP and non-GAAP (or “Pro Forma”)
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earnings?
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These days, many companies have “non-cash” charges such as Amortization of
Intangibles, Stock-Based Compensation, and Deferred Revenue Write-down in
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their Income Statements. As a result, some argue that Income Statements
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under GAAP no longer reflect how profitable most companies truly are. Non-
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GAAP earnings are almost always higher because these expenses are excluded.
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31.A company has had positive EBITDA for the past 10 years, but it recently went
bankrupt. How could this happen?
A N
B
Several possibilities: 1. The company is spending too much on Capital
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Expenditures – these are not reflected at all in EBITDA, but it could still be cash-
flow negative. 2. The company has high interest expense and is no longer able
TM
to afford its debt. 3. The company’s debt all matures on one date and it is
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unable to refinance it due to a “credit crunch” – and it runs out of cash
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completely when paying back the debt. 4. It has significant one-time charges
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(from litigation, for example) and those are high enough to bankrupt the
company. Remember, EBITDA excludes investment in (and depreciation of)
long-term assets, interest and one-time charges – and all of these could end up
bankrupting the company.
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be impaired and what does Goodwill Impairment mean?

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32.Normally Goodwill remains constant on the Balance Sheet – why would it
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Usually this happens when a company has been acquired and the acquirer
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re-assesses its intangible assets (such as customers, brand, and intellectual
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property) and finds that they are worth significantly less than they originally
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thought. It often happens in acquisitions where the buyer “overpaid” for
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the seller and can result in a large net loss on the Income Statement (see:
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BA
eBay/Skype). It can also happen when a company discontinues part of its
operations and must impair the associated goodwill.
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33.Under what circumstances would Goodwill increase?
Technically Goodwill can increase if the company re-assesses its value and
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finds that it is worth more, but that is rare. What usually happens is 1 of 2
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scenarios: 1. The company gets acquired or bought out and Goodwill
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changes as a result, since it’s an accounting “plug” for the purchase price in
an acquisition.
2. The company acquires another company and pays more than what its
assets are worth – this is then reflected in the Goodwill number
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34. What’s the difference between LIFO and FIFO? Can you walk me through
an example of how they differ?

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First, note that this question does not apply to you if you’re outside the US
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as IFRS does not permit the use of LIFO. But you may want to read this
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anyway because it’s good to know in case you ever work with US-based
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companies. LIFO stands for “Last-In, First-Out” and FIFO stands for “First-
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In, First-Out” – they are 2 different ways of recording the value of inventory
K
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and the Cost of Goods Sold (COGS). With LIFO, you use the value of the
A
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most recent inventory additions for COGS, but with FIFO you use the value
of the oldest inventory additions for COGS. Here’s an example: let’s say
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your starting inventory balance is Rs.100 (10 units valued at Rs.10 each).
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You add 10 units each quarter for RS.12 each in Q1, Rs.15 each in Q2, Rs.17
T
S
each in Q3, and Rs.20 each in Q4, so that the total is Rs.120 in Q1, Rs.150
E
V
in Q2, Rs.170 in Q3, and Rs.200 in Q4. You sell 40 of these units
IN
throughout the year for Rs.30 each. In both LIFO and FIFO, you record 40 *
RS.30 or RS.1,200 for the annual revenue.
E
Accounting Questions & Answers – Advanced
U T
T
These more advanced questions cover topics like deferredI T tax assets
S
statements in an operating model. You mayIN
and liabilities and how to actually project a company’s financial
get some of these in
N G
investment banking interviews, but they’re
I interviewing for private
had significant finance experience orKyou’re
more common if you’ve
A N
equity, or with a more technical group.
T B
1. How is GAAP accountingN
E different from tax accounting?
M
Tor a few other methods whereas tax accounting is
1. GAAP is accrual-based but tax is cash-based. 2. GAAP uses straight-
E
line depreciationS
V
IN tracks assets/liabilities whereas tax accounting is
different (accelerated depreciation). 3. GAAP is more complex and
more accurately
only concerned with revenue/expenses in the current period and
what income tax you owe.
E
U T
T I
2. What are deferred tax assets/liabilities and how do they arise?T
They arise because of temporary differences between S
deduct for cash tax purposes vs. what they can deductI N for book tax
what a company can
G
Income Statement but haven’t actually paidIN
purposes. Deferred Tax Liabilities arise when you have a tax expense on the
Tax Assets arise when you pay taxes inN K but haven’t expensed them on
that tax in cash yet; Deferred
the Income Statement yet. They’reA

cash
write-downs in M&A deals – an T B most common with asset write-ups and

asset write-up will produce a deferred tax
liability while a write-downN
3. Walk me through howM
E will produce a deferred tax asset.
There are 2 ways S T could do this: a bottoms-up build and a tops-down

you create a revenue model for a company.
V E you
IN Start with individual products / customers, estimate the

build.
Bottoms-Up:
average sale value or customer value, and then the growth rate in sales and
sale values to tie everything together.
E
U T
I T
T in coming
Tops-Down: Start with “big-picture” metrics like overall market size, then
estimate the company’s market share and how that willSchange
years, and multiply to get to their revenue. Of theseI Ntwo methods,
bottoms-up is more common and is taken moreGseriously because
N
estimating “big-picture” numbers is almostIimpossible.
K model for a company.
N
Astart with each different department of
4. Walk me through how you create an expense
To do a true bottoms-up build, you B
a company, the # of employeesTin each, the average salary, bonuses, and
E N
benefits, and then make assumptions on those going forward. Usually you
assume that the numberM
Tfor salary, bonuses, benefits, and other metrics. Cost
of employees is tied to revenue, and then you
S
E be tied directly to Revenue and each “unit” produced
assume growth rates
of Goods SoldVshould
I N an expense. Other items such as rent, Capital Expenditures,
should incur
and miscellaneous expenses are either linked to the company’s internal
plans for building expansion plans (if they have them), or to Revenue for a
more simple model.
E
U T
5. Let’s say we’re trying to create these models but don’tI T
Tin its filings –
have enough
S
IN
information or the company doesn’t tell us enough
what do we do?
N G
K I of the company, you can
Use estimates. For the revenue if you don’t have enough information
N future years. For the expenses,

to look at separate product lines or divisions
just assume a simple growth rateAinto
T
if you don’t have employee-levelB information then you can just
E
assume that major expensesN like SG&A are a percent of revenue and
M
carry that assumption forward.
T
6. Walk me through
E S the major items in Shareholders’ Equity.
V
INStock – Simply the par value of however much stock the
Common items include:
Common
company has issued.
E
U T
Retained Earnings – How much of the company’s Net IncomeIT
up” over time.
S T it has “saved
I
Additional Paid in Capital – This keeps track of how muchN stock-based
compensation has been issued and how much new
N G stock employees exercising
raises in an IPO or other equity offering. K

I
options have created. It also includes how much over par value a company
N
Ashares that the company has bought
back.
T B
Treasury Stock – The dollar amount of
E N Income – This is a “catch-all” that

Accumulated Other Comprehensive
Mchanging.
includes other items that don’t fit anywhere else, like the effect of foreign
T
S
currency exchange rates
7. Walk me throughEwhat flows into Retained Earnings.
N V
Retained IEarnings = Old Retained Earnings Balance + Net Income – Dividends
Issued If you’re calculating Retained Earnings for the current year, take last
year’s Retained Earnings number, add this year’s Net Income, and subtract
however much the company paid out in dividends
E
U T
I T
T of Stock
8. Walk me through what flows into Additional Paid-In Capital (APIC).
S
N last year, add this
APIC = Old APIC + Stock-Based Compensation + Value
Created by Option Exercises Take the balance Ifrom
N G
year’s stock-based compensation number,
K I options this year.
and then add in the value
N
of new stock created by employees exercising
A
T B
9. What is the Statement of Shareholders’ Equity and why do we use
it? E N
T
This statement showsMeverything we went through above – the major
E S Shareholders’ Equity, and how we arrive at each
items that comprise
V
INmuch, but it can be helpful for analyzing companies with
of them using the numbers elsewhere in the statement. You don’t
use it too
unusual stock-based compensation and stock option situations.
10. What are examples of non-recurring charges we need to add back to a
E
company’s EBIT / EBITDA when looking at its financial statements?
U T
Restructuring Charges
TI T
Goodwill Impairment
N S
Asset Write-Downs
I
Bad Debt Expenses
N G
Legal Expenses
KI
Disaster Expenses
A N
B
Change in Accounting Procedures Note that to be an “add-back” or “non-
T
EN
recurring” charge for EBITDA / EBIT purposes, it needs to affect Operating
Income on the Income Statement. So if you have one of these charges
TM
“below the line” then you do not add it back for the EBITDA / EBIT
ES
calculation. Also note that you do add back Depreciation, Amortization, and
V
sometimes Stock-Based Compensation for EBITDA / EBIT, but that these are
IN
not “non-recurring charges” because all companies have them every year –
these are just non-cash charges.
E
11. How do you project Balance Sheet items like Accounts Receivable
and Accrued Expenses in a 3-statement model?
U T
TI T
Normally you make very simple assumptions and assume these are
N S
percentages of revenue, operating expenses, or cost of goods sold.
I
Examples:
N G
Accounts Receivable: % of Revenue.
KI
Deferred Revenue: % of Revenue.
A N
B
Accounts Payable: % of COGS.
T
EN
Accrued Expenses: % of operating expenses or SG&A.
M
Then you either carry the same percentages across in future years or
T
S
assume slight changes depending on the company.
E
V
IN
E
U T
T I T
12. How should you project Depreciation and Capital Expenditures?
S
PP&E balance. The more complex way: create IaN
The simple way: project each one as a % of revenue or previous
splits out different assets by their useful N G assumes straight-line

PP&E schedule that
depreciation over each asset’s useful K I and then assumes capital

lives,
expenditures based on what theA N has invested historically.

life,
company
T B
EN
T M
E S
V
IN
E
13. How do Net Operating Losses (NOLs) affect a company’s 3
statements?
U T
TI T
The “quick and dirty” way to do this: reduce the Taxable Income by
N S
the portion of the NOLs that you can use each year, apply the same
I
G
tax rate, and then subtract that new Tax number from your old Pretax
N
I
Income number (which should stay the same). The way you should
K
A N
do this: create a book vs. cash tax schedule where you calculate the
Taxable Income based on NOLs, and then look at what you would pay
T B
in taxes without the NOLs. Then you book the difference as an
EN
increase to the Deferred Tax Liability on the Balance Sheet. This
M
method reflects the fact that you’re saving on cash flow – since the
T
S
DTL, a liability, is rising – but correctly separates the NOL impact into
E
V
book vs. cash taxes.
IN
E
14. What’s the difference between capital leases and operating leases?
U T
Operating leases are used for short-term leasing of equipment and
TI T
property, and do not involve ownership of anything. Operating lease
S
expenses show up as operating expenses on the Income Statement.
N
I
Capital leases are used for longer-term items and give the lessee
N G
ownership rights; they depreciate and incur interest payments, and
KI
are counted as debt. A lease is a capital lease if any one of the
A N
following 4 conditions is true: 1. If there’s a transfer of ownership at
B
the end of the term. 2. If there’s an option to purchase the asset at a
T
EN
bargain price at the end of the term. 3. If the term of the lease is
M
greater than 75% of the useful life of the asset. 4. If the present value
T
S
of the lease payments is greater than 90% of the asset’s fair market
E
value.
V
IN
E
U T
15. Why would the Depreciation & Amortization number I T
TCash Flow
on the
S
IN
Income Statement be different from what’s on the
Statement?
N G
K Iuse the Cash Flow Statement
This happens if D&A is embedded in other Income Statement line
A N
items. When this happens, you need to
number to arrive at EBITDA because otherwise you’re undercounting
D&A.
T B
EN
T M
E S
V
IN

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Accounting Questions and Answer

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E

Basics Of Financial Statement

Interviewer ask question “why you B

M because everybody wants to do job to earn money,

the external environment.

Answer :- the three major financial statements are the income

21.Walk me through a Rs.100 “bailout” of a company and how it

Cash-based accounting recognizes revenue and expenses when cash is

T M products (COGS) only cover a short period of

be impaired and what does Goodwill Impairment mean?

an example of how they differ?

the Income Statement yet. They’reA

write-downs in M&A deals – an T B most common with asset write-ups and

There are 2 ways S T could do this: a bottoms-up build and a tops-down

IN Start with individual products / customers, estimate the

N future years. For the expenses,

raises in an IPO or other equity offering. K

E N Income – This is a “catch-all” that

splits out different assets by their useful N G assumes straight-line

depreciation over each asset’s useful K I and then assumes capital

expenditures based on what theA N has invested historically.

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