Is It Always Best to Pay Cash for a House

Accounting Interview Questions & Answers (Bones)

Hither are the the most important Accounting concepts you demand to know.

i. Walk me through the 3 financial statements.

"The 3 major fiscal statements are the Income Argument, Residuum Sheet and Greenbacks Flow Statement.

The Income Statement gives the company's revenue and expenses, and goes downwards to Net Income, the final line on the statement.

The Residual Sheet shows the company's Assets - its resources - such as Cash, Inventory and PP&East, as well equally its Liabilities - such as Debt and Accounts Payable - and Shareholders' Equity. Assets must equal Liabilities plus Shareholders' Equity.

The Cash Flow Statement begins with Net Income, adjusts for not-greenbacks expenses and working capital changes, and so lists cash catamenia from investing and financing activities; at the finish, you lot see the company's net change in cash."

two. Can you give examples of major line items on each of the financial statements?

Income Statement: Acquirement; Toll of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating Income; Pretax Income; Cyberspace Income.

Balance Canvass: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts Payable; Accrued

Expenses; Debt; Shareholders' Equity.

Cash Menstruation Statement: Net Income; Depreciation & Acquittal; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Menstruum From Operations; Capital Expenditures; Cash Flow From Investing; Auction/Purchase of Securities; Dividends Issued; Greenbacks Flow From Financing.

three. How practice the 3 statements link together?

"To tie the statements together, Net Income from the Income Statement flows into Shareholders' Disinterestedness on the Residue Canvas, and into the top line of the Cash Menstruation Statement.

Changes to Balance Canvas items appear as working majuscule changes on the Cash Flow Statement, and investing and financing activities affect Balance Sheet items such as PP&E, Debt and Shareholders' Equity. The Cash and Shareholders' Disinterestedness items on the Balance Sheet human activity every bit "plugs," with Cash flowing in from the final line on the Cash Flow Argument."

iv. If I were stranded on a desert island, only had one statement and I wanted to review the overall health of a company - which statement would I use and why?

Y'all would utilize the Greenbacks Period Argument considering it gives a true picture of how much cash the company is actually generating, independent of all the not-cash expenses yous might have. And that'south the #1 matter you care about when analyzing the overall financial wellness of whatever concern - its cash flow.

5. Allow'south say I could simply await at 2 statements to appraise a company'south prospects - which 2 would I use and why?

You would pick the Income Argument and Balance Sheet, because you tin can create the Cash Flow Statement from both of those (bold, of form that you take "before" and "after" versions of the Balance Canvass that correspond to the same period the Income Statement is tracking).

6. Walk me through how Depreciation going up by $x would affect the statements.

Income Statement: Operating Income would decline past $10 and assuming a 40% revenue enhancement rate, Net Income would get down by $6.

Greenbacks Menstruation Statement: The Net Income at the height goes down by $half dozen, but the $10 Depreciation is a not-cash expense that gets added back, so overall Cash Flow from Operations goes up past $4. There are no changes elsewhere, so the overall Net Change in Greenbacks goes up past $4.

Residuum Sheet: Plants, Property & Equipment goes down past $ten on the Assets side because of the Depreciation, and Cash is upwardly past $4 from the changes on the Cash Flow Argument.

Overall, Avails is downwardly by $half-dozen. Since Net Income fell by $6 as well, Shareholders' Equity on the Liabilities & Shareholders' Disinterestedness side is downwardly by $6 and both sides of the Balance Sheet balance.

Note: With this blazon of question I always recommend going in the social club:

1. Income Argument
2. Cash Flow Statement
3. Residuum Sheet

This is and then you tin can check yourself at the cease and brand sure the Balance Canvas balances.

Retrieve that an Nugget going up decreases your Cash Flow, whereas a Liability going up increases your Cash Catamenia.

7. If Depreciation is a non-greenbacks expense, why does it impact the cash residue?

Although Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash expense, Depreciation affects cash by reducing the corporeality of taxes you pay.

eight. Where does Depreciation usually show up on the Income Statement?

It could be in a separate line detail, or it could exist embedded in Price of Appurtenances Sold or Operating Expenses - every visitor does information technology differently. Note that the stop result for accounting questions is the same: Depreciation always reduces Pre-Tax Income.

9. What happens when Accrued Compensation goes up by $ten?

For this question, ostend that the accrued compensation is now being recognized as an expense (as opposed to just changing non-accrued to accrued compensation).

Bold that'due south the case, Operating Expenses on the Income Statement go upwards by $x, Pre-Taxation Income falls past $ten, and Net Income falls by $half dozen (assuming a forty% revenue enhancement rate).

On the Cash Period Statement, Cyberspace Income is downward by $6, and Accrued Compensation will increment Greenbacks Menstruation by $10, and then overall Cash Period from Operations is upwardly by $4 and the Cyberspace Change in Cash at the bottom is up past $4.

On the Balance Sheet, Cash is upwardly by $4 every bit a result, and so Avails are up past $four. On the Liabilities & Disinterestedness side, Accrued Compensation is a liability and so Liabilities are up by $10 and Retained Earnings are down by $half dozen due to the Net Income, and then both sides balance.

10. What happens when Inventory goes upwards past $10, assuming yous pay for it with cash?

No changes to the Income Statement.

On the Cash Catamenia Statement, Inventory is an nugget so that decreases your Greenbacks Catamenia from Operations - it goes down by $ten, equally does the Net Change in Cash at the bottom.

On the Residuum Sheet nether Assets, Inventory is up by $ten but Cash is down by $10, so the changes abolish out and Assets withal equals Liabilities & Shareholders' Equity.

11. Why is the Income Statement not affected by changes in Inventory?

This is a common interview mistake - incorrectly stating that Working Capital changes show up on the Income Statement.

In the case of Inventory, the expense is only recorded when the appurtenances associated with it are sold - then if it'south simply sitting in a warehouse, information technology does not count as a Cost of Adept Sold or Operating Expense until the company articles it into a product and sells information technology.

12. Permit'due south say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements affected at the beginning of "Year ane," before anything else happens?

At the start of "Year ane," before annihilation else has happened, there would exist no changes on Apple's Income Statement (yet).

On the Cash Period Argument, the additional investment in factories would testify up under Greenbacks Menstruum from Investing as a net reduction in Cash Flow (and then Cash Flow is downwards by $100 and then far). And the additional $100 worth of debt raised would evidence up as an addition to Cash Flow, canceling out the investment activity. So the cash number stays the same.

On the Rest Sheet, at that place is now an additional $100 worth of factories in the Plants, Property & Equipment line, so PP&E is upwardly by $100 and Assets is therefore up by $100. On the other side, debt is upwardly past $100 besides and so both sides balance.

13. At present let's get out i year, to the start of Year ii. Presume the debt is high-yield so no principal is paid off, and assume an interest charge per unit of ten%. Also presume the factories depreciate at a rate of 10% per twelvemonth. What happens?

After a twelvemonth has passed, Apple must pay interest expense and must record the depreciation.

Operating Income would decrease by $10 due to the 10% depreciation charge each year, and the $x in additional Interest Expense would subtract the Pre-Tax Income past $xx birthday ($ten from the depreciation and $ten from Interest Expense).

Assuming a tax charge per unit of 40%, Internet Income would autumn by $12.

On the Cash Flow Statement, Net Income at the superlative is down past $12. Depreciation is a non-cash expense, so y'all add information technology back and the end result is that Cash Flow from Operations is down by $ii.

That's the only change on the Cash Menstruum Argument, so overall Cash is downwards by $2.

On the Remainder Canvass, nether Avails, Cash is downward past $2 and PP&E is downwards by $10 due to the depreciation, and so overall Assets are downwardly by $12.

On the other side, since Cyberspace Income was downwardly past $12, Shareholders' Equity is too down by $12 and both sides residuum.

Recall, the debt number nether Liabilities does non change since we've assumed none of the debt is really paid back.

xiv. At the start of Year three, the factories all break downwardly and the value of the equipment is written down to $0. The loan must also exist paid back at present. Walk me through the iii statements.

After ii years, the value of the factories is now $lxxx if nosotros get with the 10% depreciation per yr supposition. It is this $eighty that we will write down in the 3 statements.

Get-go, on the Income Statement, the $80 write-down shows up in the Pre-Tax Income line. With a 40% taxation charge per unit, Net Income declines by $48.

On the Cash Flow Statement, Net Income is downward past $48 but the write-downwards is a non­cash expense, and so we add information technology dorsum - and therefore Cash Flow from Operations increases by $32.

At that place are no changes under Greenbacks Flow from Investing, but under Cash Flow from Financing there is a $100 charge for the loan payback - so Cash Flow from Investing falls by $100.

Overall, the Net Alter in Greenbacks falls by $68.

On the Balance Sail, Greenbacks is at present downwards by $68 and PP&East is downwards by $80, so Assets take decreased past $148 altogether.

On the other side, Debt is down $100 since it was paid off, and since Net Income was downwardly by $48, Shareholders' Disinterestedness is down by $48 equally well. Altogether, Liabilities & Shareholders' Equity are down by $148 and both sides balance.

xv. Now let'due south look at a different scenario and assume Apple is ordering $10 of additional iPod inventory, using greenbacks on manus. They lodge the inventory, but they take not manufactured or sold annihilation yet - what happens to the 3 statements?

No changes to the Income Statement.

Cash Menses Statement - Inventory is up by $10, so Cash Flow from Operations decreases by $10. At that place are no farther changes, so overall Cash is down by $10.

On the Balance Sail, Inventory is up by $x and Cash is down past $10 so the Assets number stays the aforementioned and the Rest Sheet remains in residual.

xvi. At present allow's say they sell the iPods for revenue of $xx, at a cost of $10. Walk me through the 3 statements nether this scenario.

Income Statement: Revenue is up past $20 and COGS is up past $x, and so Gross Profit is up by $10 and Operating Income is up by $10 as well. Assuming a xl% revenue enhancement rate, Net Income is upward by $six.

Cash Flow Statement: Cyberspace Income at the height is upwardly past $6 and Inventory has decreased by $ten (since we just manufactured the inventory into real iPods), which is a net addition to cash flow - so Greenbacks Flow from Operations is upwards by $16 overall.

These are the only changes on the Cash Flow Statement, so Net Change in Greenbacks is up by $xvi.

On the Balance Sheet, Cash is up by $sixteen and Inventory is down by $10, so Assets is upwardly past $6 overall.

On the other side, Net Income was upwards by $half dozen so Shareholders' Equity is up past $half dozen and both sides balance.

17. Could you ever end upwardly with negative shareholders' disinterestedness? What does it mean?

Yep. It is common to see this in 2 scenarios:

1. Leveraged Buyouts with dividend recapitalizations - it ways that the owner of the company has taken out a big portion of its equity (usually in the form of cash), which can sometimes plow the number negative.
2. It tin besides happen if the company has been losing money consistently and therefore has a failing Retained Earnings balance, which is a portion of Shareholders' Equity.

It doesn't "mean" anything in particular, but it can exist a cause for concern and maybe demonstrate that the company is struggling (in the 2d scenario).

Note: Shareholders' disinterestedness never turns negative immediately after an LBO - it would just happen following a dividend epitomize or continued net losses.

18. What is working capital? How is it used?

Working Capital = Current Assets - Current Liabilities.

If it'southward positive, it means a visitor can pay off its short-term liabilities with its short-term assets. Information technology is oft presented equally a financial metric and its magnitude and sign (negative or positive) tells you whether or not the visitor is "audio."

Bankers look at Operating Working Capital letter more than commonly in models, and that is defined as (Current Assets - Cash & Cash Equivalents) - (Current Liabilities - Debt).

19. What does negative Working Capital mean? Is that a bad sign?

Not necessarily. It depends on the type of company and the specific situation - hither are a few different things it could hateful:

1. Some companies with subscriptions or longer-term contracts often accept negative Working Capital because of high Deferred Revenue balances.
2. Retail and eating house companies like Amazon, Wal-Mart, and McDonald's oft take negative Working Capital because customers pay upfront - and then they can use the cash generated to pay off their Accounts Payable rather than keeping a large cash residuum on-manus. This tin can be a sign of business efficiency.
3. In other cases, negative Working Capital could point to financial problem or possible bankruptcy (for instance, when customers don't pay quickly and upfront and the visitor is carrying a high debt residual).

20. Recently, banks have been writing down their assets and taking huge quarterly losses. Walk me through what happens on the 3 statements when there'south a write­down of $100.

Start, on the Income Statement, the $100 write-down shows up in the Pre-Tax Income line. With a 40% tax charge per unit, Net Income declines past $60.

On the Cash Menstruum Statement, Internet Income is down by $lx but the write-downwardly is a non­cash expense, and then we add it back - and therefore Cash Flow from Operations increases by $twoscore.

Overall, the Net Alter in Cash rises by $forty.

On the Residue Sheet, Cash is now up by $40 and an asset is down by $100 (information technology'south non clear which asset since the question never stated the specific asset to write-down). Overall, the Assets side is down by $threescore.

On the other side, since Net Income was down by $60, Shareholders' Disinterestedness is besides downwards past $60 - and both sides residuum.

21. Walk me through a $100 "bailout" of a company and how it affects the 3 statements.

Offset, confirm what type of "bailout" this is - Debt? Equity? A combination? The most common scenario here is an disinterestedness investment from the government, then here'southward what happens:

No changes to the Income Statement. On the Cash Menses Statement, Cash Flow from Financing goes upwardly by $100 to reflect the government'southward investment, so the Net Change in Cash is upwards by $100.

On the Rest Canvas, Cash is up by $100 so Assets are up by $100; on the other side, Shareholders' Disinterestedness would go up by $100 to get in balance.

22. Walk me through a $100 write-down of debt - as in OWED debt, a liability - on a visitor's residuum sheet and how it affects the 3 statements.

This is counter-intuitive. When a liability is written downward you record it as a gain on the Income Statement (with an nugget write-downwards, it's a loss) - and then Pre-Tax Income goes upward by $100 due to this write-down. Assuming a xl% tax rate, Net Income is up by $60.

On the Greenbacks Flow Argument, Net Income is up past $60, simply we need to subtract that debt write-down - and so Cash Flow from Operations is down past $xl, and Net Change in Greenbacks is downwards by $40.

On the Balance Sheet, Greenbacks is down past $40 then Avails are downward by $40. On the other side, Debt is down by $100 but Shareholders' Equity is up past $60 because the Cyberspace Income was up by $sixty - then Liabilities & Shareholders' Equity is downwards by $40 and it balances. If this seems strange to you, you lot're not solitary - encounter this Forbes article for more on why writing down debt really benefits companies accounting-wise:

http://world wide web.forbes.com/2009/07/31/fair-value-bookkeeping-markets-equities-fasb.html

23. When would a visitor collect cash from a customer and non record it as revenue?

Three examples come to mind:

1. Web-based subscription software
2. Jail cell phone carriers that cell annual contracts
3. Magazine publishers that sell subscriptions

Companies that agree to services in the future often collect greenbacks upfront to ensure stable revenue - this makes investors happy too since they can better predict a company's operation.

Per the rules of GAAP (By and large Accepted Bookkeeping Principles), yous but record revenue when y'all actually perform the services - so the company would not record everything as revenue right away.

24. If greenbacks nerveless is non recorded as acquirement, what happens to it?

Usually it goes into the Deferred Revenue balance on the Balance Canvas nether Liabilities.

Over time, as the services are performed, the Deferred Acquirement balance "turns into" real revenue on the Income Statement.

25. What's the difference between accounts receivable and deferred acquirement?

Accounts receivable has not yet been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how much revenue the company is waiting on, whereas deferred acquirement represents how much information technology is waiting to record as revenue.

26. How long does it usually take for a company to collect its accounts receivable balance?

Generally the accounts receivable days are in the forty-50 day range, though information technology's higher for companies selling loftier-finish items and it might exist lower for smaller, lower transaction-value companies.

27. What's the deviation betwixt cash-based and accrual bookkeeping?

Greenbacks-based bookkeeping recognizes revenue and expenses when cash is actually received or paid out; accrual accounting recognizes acquirement when collection is reasonably sure (i.e. later a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are paid out in greenbacks.

Most big companies use accrual accounting because paying with credit cards and lines of credit is so prevalent these days; very modest businesses may use cash-based accounting to simplify their fiscal statements.

28. Let's say a customer pays for a TV with a credit card. What would this look like under cash-based vs. accrual accounting?

In cash-based accounting, the revenue would not show up until the company charges the customer's credit card, receives authorisation, and deposits the funds in its bank account - at which point it would testify up as both Revenue on the Income Statement and Cash on the Residue Sheet.

In accrual bookkeeping, it would show up as Acquirement right away merely instead of appearing in Cash on the Residuum Sheet, information technology would go into Accounts Receivable at first. Then, in one case the cash is actually deposited in the company'south depository financial institution account, it would "turn into" Cash.

29. How do you determine when to capitalize rather than expense a buy?

If the nugget has a useful life of over 1 yr, it is capitalized (put on the Balance Sheet rather than shown equally an expense on the Income Statement). So it is depreciated (tangible assets) or amortized (intangible assets) over a certain number of years.

Purchases similar factories, equipment and state all last longer than a year and therefore show up on the Balance Sheet. Employee salaries and the toll of manufacturing products (COGS) merely cover a short period of operations and therefore show upwardly on the Income Statement equally normal expenses instead.

30. Why practice companies written report both GAAP and non-GAAP (or "Pro Forma") earnings?

These days, many companies have "non-cash" charges such as Amortization of Intangibles, Stock-Based Compensation, and Deferred Revenue Write-downwardly in their Income Statements. Every bit a result, some argue that Income Statements under GAAP no longer reflect how profitable most companies truly are. Not-GAAP earnings are almost always college because these expenses are excluded.

31. A visitor has had positive EBITDA for the past 10 years, but it recently went broke. How could this happen?

Several possibilities:

1. The company is spending also much on Capital Expenditures - these are not reflected at all in EBITDA, but it could notwithstanding exist cash-flow negative.
2. The company has high interest expense and is no longer able to afford its debt.
3. The company'south debt all matures on one appointment and it is unable to refinance it due to a "credit crisis" - and it runs out of cash completely when paying dorsum the debt.
4. It has significant one-time charges (from litigation, for example) and those are high enough to broke the company.

Remember, EBITDA excludes investment in (and depreciation of) long-term assets, interest and former charges - and all of these could end up bankrupting the visitor.

32. Normally Goodwill remains constant on the Balance Sheet - why would it be impaired and what does Goodwill Impairment mean?

Usually this happens when a company has been acquired and the acquirer re-assesses its intangible avails (such as customers, brand, and intellectual property) and finds that they are worth significantly less than they originally thought.

It often happens in acquisitions where the buyer "overpaid" for the seller and can result in a large net loss on the Income Statement (see: eBay/Skype).

It can also happen when a company discontinues part of its operations and must impair the associated goodwill.

33. Under what circumstances would Goodwill increase?

Technically Goodwill can increase if the company re-assesses its value and finds that it is worth more, but that is rare. What commonly happens is 1 of two scenarios:

1. The company gets caused or bought out and Goodwill changes as a issue, since it's an bookkeeping "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.

Y'all may likewise be interested in our collections.:

• Large-3 Vacancies
• Big-4 Vacancies
• Goldman Sachs Vacancies

navarretesannater.blogspot.com

Source: https://finexecutive.com/en/news/accounting_interview_questions__answers_basic_2_4_2015