Most Common Finance Interview Questions
We’ve compiled a list of the most common and frequently asked finance interview questions. If you want to ace your finance interview, then make sure you master the answers to these challenging questions below. This guide is perfect for anyone interviewing for a financial analyst jobGuide to Becoming a Financial AnalystHow to become a financial analyst. Follow CFI’s guide on networking, resume, interviews, financial modeling skills and more. We’ve helped thousands of people become financial analysts over the years and know precisely what it takes., and it’s based on real questions asked at global investment banksBulge Bracket Investment BanksBulge Bracket investment banks are the top global investment banks. The list includes companies such as Goldman Sachs, Morgan Stanley, BAML, and JP Morgan. What is a Bulge Bracket Investment Bank and to make hiring decisions.
In conjunction with this comprehensive guide to finance interview questions (and answers), you may also want to read our guide on how to be a great financial analyst, where we outline “The Analyst TrifectaThe Analyst Trifecta® GuideThe ultimate guide on how to be a world-class financial analyst. Do you want to be a world-class financial analyst? Are you looking to follow industry-leading best practices and stand out from the crowd? Our process, called The Analyst Trifecta® consists of analytics, presentation & soft skills.”
General Finance Interview Tips
There are two main categories of finance interview questions you will face:
- Behavioral/fit questions
- Technical questions
#1 Behavioral and fit questions relate more to soft skills such as your ability to work with a team, leadershipLeadership TraitsLeadership traits refer to personal qualities that define effective leaders. Leadership refers to the ability of an individual or an organization to guide individuals, teams, or organizations toward the fulfillment of goals and objectives. Leadership plays an important function in management, commitment, creative thinking, and your overall personality type. Being prepared for these types of questions is critical, and the best strategy is to pick 5-7 examples of specific situations from your resume that you can use as examples of leadership, teamwork, a weaknessPublic Speaking WeaknessThe “public speaking weakness” answer is a great way to get around the question, “what is your biggest weakness?”. If public speaking is not, hard work, problem-solving, etc. To help you tackle this aspect of the interview, we’ve created a separate guide to behavioral interview questionsInterviewsAce your next interview! Check out CFI’s interview guides with the most common questions and best answers for any corporate finance job position. Interview questions and answer for finance, accounting, investment banking, equity research, commercial banking, FP&A, more! Free guides and practice to ace your interview.
#2 Technical questions are related to specific accountingAccountingAccounting is a term that describes the process of consolidating financial information to make it clear and understandable for all and financeFinanceCFI’s Finance Articles are designed as self-study guides to learn important finance concepts online at your own pace. Browse hundreds of articles! topics. This guide focuses exclusively on technical finance interview questions.
General best-practices for finance interview questions include:
- Take a couple of seconds to plan your answer and repeat the question back to the interviewer out loud (you buy some time by repeating part of the question back at the start of your answer).
- Use a structured approach to answering each question. This typically means having points 1, 2, and 3, for example. Be as organized as possible.
- If you don’t know the exact answer, state the things you do know that are relevant (and don’t be afraid to say “I don’t know exactly,” which is much better than guessing or making stuff up).
- Demonstrate your line of reasoning (show that you have a logical thought process and can solve problems, even if you don’t know the exact answer).
Finance Interview Questions (and Answers):
Walk me through the three financial statements.
The balance sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. These statements are key to both financial modeling and accounting shows a company’s assets, liabilities, and shareholders’ equity (put another way: what it owns, what it owes, and its net worth). The income statementIncome StatementThe Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time. The profit or outlines the company’s revenuesSales RevenueSales revenue is the income received by a company from its sales of goods or the provision of services. In accounting, the terms “sales” and, expenses, and net income. The cash flow statementCash Flow StatementA Cash Flow Statement (officially called the Statement of Cash Flows) contains information on how much cash a company has generated and used during a given period. It contains 3 sections: cash from operations, cash from investing and cash from financing. shows cash inflows and outflows from three areas: operating activities, investing activities, and financing activities.
If I could use only one statement to review the overall health of a company, which statement would I use, and why?
Cash is king. The statement of cash flowsStatement of Cash FlowsThe Statement of Cash Flows (also referred to as the cash flow statement) is one of the three key financial statements that report the cash gives a true picture of how much cash the company is generating. Ironically, it often gets the least attention. You can probably pick a different answer for this question, but you need to provide a good justification (e.g., the balance sheet because assets are the true driver of cash flow; or the income statement because it shows the earning power and profitability of a company on a smoothed out accrualAccrual AccountingIn financial accounting, accruals refer to the recording of revenues that a company has earned but has yet to receive payment for, and the basis).
If it were up to you, what would our company’s budgeting process look like?
This is somewhat subjective. A good budgetTypes of BudgetsThere are four common types of budgeting methods that companies use: (1) incremental, (2) activity-based, (3) value proposition, and (4) is one that has buy-in from all departments in the company, is realistic yet strives for achievement, has been risk-adjusted to allow for a margin of error, and is tied to the company’s overall strategic planStrategic PlanningStrategic planning is the art of formulating business strategies, implementing them, and evaluating their impact on organizational objectives. The concept. In order to achieve this, the budget needs to be an iterative process that includes all departments. It can be zero-basedZero-Based BudgetingZero-based budgeting (ZBB) is a budgeting technique that allocates funding based on efficiency and necessity rather than on budget history (starting from scratch each time) or building off the previous year, but it depends on what type of business you’re running as to which approach is better. It’s important to have a good budgeting/planning calendar that everyone can follow.
When should a company consider issuing debt instead of equity?
A company should always optimize its capital structureCapital StructureCapital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm’s capital structure. If it has taxable income, then it can benefit from the tax shieldTax ShieldA Tax Shield is an allowable deduction from taxable income that results in a reduction of taxes owed. The value of these shields depends on the effective tax rate for the corporation or individual. Common expenses that are deductible include depreciation, amortization, mortgage payments and interest expense of issuing debt. If the firm has immediately steady cash flows and is able to make the required interest paymentsInterest ExpenseInterest expense arises out of a company that finances through debt or capital leases. Interest is found in the income statement, but can also, then it may make sense to issue debt if it lowers the company’s weighted average cost of capitalCost of CapitalCost of capital is the minimum rate of return that a business must earn before generating value. Before a business can turn a profit, it must at least generate sufficient income to cover the cost of funding its operation..
How do you calculate the WACC?
WACC (stands for Weighted Average Cost of Capital) is calculated by taking the percentage of debt to total capital, multiplied by the debt interest rate, multiplied by one minus the effective tax rate, plus the percentage of equity to capital, multiplied by the required return on equity. Learn more in CFI’s free Guide to Understanding WACCWACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt..
Which is cheaper, debt or equity?
Debt is cheaper because it is paid before equity and has collateralCollateralCollateral is an asset or property that an individual or entity offers to a lender as security for a loan. It is used as a way to obtain a loan, acting as a protection against potential loss for the lender should the borrower default in his payments. backing it. Debt ranks ahead of equity on liquidationNet Asset LiquidationNet asset liquidation or net asset dissolution is the process by which a business sells off its assets and ceases operations thereafter. Net assets are the excess value of a firm’s assets over its liabilities. However, the revenue generated by the sale of the net assets in the market might be different from their recorded book value. of the business. There are pros and cons to financing with debt vs. equity that a business needs to consider. It is not automatically better to use debt financing simply because it’s cheaper. A good answer to the question may highlight the tradeoffs if there is any follow-up required. Learn more about the cost of debtCost of DebtThe cost of debt is the return that a company provides to its debtholders and creditors. Cost of debt is used in WACC calculations for valuation analysis. and cost of equityCost of EquityCost of Equity is the rate of return a shareholder requires for investing in a business. The rate of return required is based on the level of risk associated with the investment.
A company has learned that due to a new accounting rule, it can start capitalizing R&D costs instead of expensing them.
This question has four parts to it:
Part I) What is the impact on the company’s EBITDAEBITDAEBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company’s profits before any of these net deductions are made. EBITDA focuses on the operating decisions of a business because it looks at the business’ profitability from core operations before the impact of capital structure. Formula, examples?
Part II) What is the impact on the company’s Net IncomeNet IncomeNet Income is a key line item, not only in the income statement, but in all three core financial statements. While it is arrived at through?
Part III) What is the impact on the company’s cash flowCash FlowCash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of CF?
Part IV) What is the impact on the company’s valuationValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent?
Part I) EBITDAEBITDAEBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company’s profits before any of these net deductions are made. EBITDA focuses on the operating decisions of a business because it looks at the business’ profitability from core operations before the impact of capital structure. Formula, examples increases by the exact amount of R&D expense that is capitalized.
Part II) Net IncomeNet IncomeNet Income is a key line item, not only in the income statement, but in all three core financial statements. While it is arrived at through increases, and the amount depends on the depreciation methodDepreciation MethodsThe most common types of depreciation methods include straight-line, double declining balance, units of production, and sum of years digits. There are various formulas for calculating depreciation of an asset. Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life. and tax treatment.
Part III) Cash flowCash FlowCash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of CF is almost unimpacted – however, cash taxes may be different due to changes in depreciation expense, and therefore cash flow could be slightly different.
Part IV) ValuationValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent is essentially constant – except for the cash taxes impact/timing impact on the net present value (NPV)Net Present Value (NPV)Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present. NPV analysis is a form of intrinsic valuation and is used extensively across finance and accounting for determining the value of a business, investment security, of cash flows.
What, in your opinion, makes a good financial model?
It’s important to have strong financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company’s financial performance. Overview of what is financial modeling, how & why to build a model. principles. Wherever possible, model assumptions (inputs) should be in one place and distinctly colored (bank models typically use blue font for model inputs). Good Excel models also make it easy for users to understand how inputs are translated into outputs. Good models also include error checks to ensure the model is working correctly (e.g., the balance sheet balances, the cash flow calculations are correct, etc.). They contain enough detail, but not too much, and they have a dashboardFinancial Modeling DashboardA financial modeling dashboard is a great way to visually display the results of a financial model. Common dashboard features are cash flow and data tables that clearly displays the key outputs with charts and graphsTypes of GraphsTop 10 types of graphs for data presentation you must use – examples, tips, formatting, how to use these different graphs for effective communication and in presentations. Download the Excel template with bar chart, line chart, pie chart, histogram, waterfall, scatterplot, combo graph (bar and line), gauge chart,. For more, check out CFI’s complete guide to financial modelingFree Financial Modeling GuideThis financial modeling guide covers Excel tips and best practices on assumptions, drivers, forecasting, linking the three statements, DCF analysis, more.
Image: CFI’s Financial Modeling Courses.
What happens on the income statement if inventory goes up by $10?
Nothing. This is a trick question – only the balance sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. These statements are key to both financial modeling and accounting and cash flow statements are impacted by the purchasing of inventoryInventoryInventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a.
What is working capital?
Working capitalNet Working CapitalNet Working Capital (NWC) is the difference between a company’s current assets (net of cash) and current liabilities (net of debt) on its balance sheet. is typically defined as current assets minus current liabilities. In banking, working capital is normally defined more narrowly as current assets (excluding cash) less current liabilities (excluding interest-bearing debt). Sometimes it’s even more narrowly defined as accounts receivableAccounts ReceivableAccounts Receivable (AR) represents the credit sales of a business, which have not yet been collected from its customers. Companies allow plus inventory minus accounts payableAccounts PayableAccounts payable is a liability incurred when an organization receives goods or services from its suppliers on credit. Accounts payables are. By knowing all three of these definitions, you can provide a very thorough answer.
What does negative working capital mean?
Negative working capital is common in some industries, such as grocery retail and the restaurant business. For a grocery store, customers pay upfront, inventory moves relatively quickly, but suppliers often give 30 days (or more) credit. This means that the company receives cash from customers before it needs the cash to pay suppliers. Negative working capital is a sign of efficiency in businesses with low inventory and accounts receivable. In other situations, negative working capital may signal a company is facing financial trouble if it doesn’t have enough cash to pay its current liabilities.
In answer to this interview question, it’s important to consider the company’s normal working capital cycleWorking Capital CycleThe Working Capital Cycle for a business is the length of time it takes to convert the total net working capital (current assets less current.
When do you capitalize rather than expense a purchase?
If the purchase will be used in the business for more than one year, it is capitalized and depreciatedDepreciation ExpenseWhen a long-term asset is purchased, it should be capitalized instead of being expensed in the accounting period it is purchased in. It is according to the company’s accounting policies.
How do you record PP&E and why is this important?
There are essentially four areas to consider when accounting for Property, Plant & EquipmentPP&E (Property, Plant and Equipment)PP&E (Property, Plant, and Equipment) is one of the core non-current assets found on the balance sheet. PP&E is impacted by Capex, (PP&E) on the balance sheet: (I) initial purchase, (II) depreciation, (III) additions (capital expendituresCapital ExpendituresCapital expenditures refer to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve), and (IV) dispositions. In addition to these four, you may also have to consider revaluation. For many businesses, PP&E is the main capital asset that generates revenue, profitability, and cash flow.
How does an inventory write-down affect the three financial statements?
This is a classic finance interview question. On the balance sheet, the asset account of inventory is reduced by the amount of the write-down, and so is shareholders’ equity.Stockholders EquityStockholders Equity (also known as Shareholders Equity) is an account on a company’s balance sheet that consists of share capital plus The income statement is hit with an expense in either cost of goods sold (COGS) or a separate line item for the amount of the write-down, reducing net income. On the cash flow statement, the write-down is added back to cash from operating activitiesOperating Cash FlowOperating Cash Flow (OCF) is the amount of cash generated by the regular operating activities of a business in a specific time period., as it’s a non-cash expenseNon-Cash ExpensesNon cash expenses appear on an income statement because accounting principles require them to be recorded despite not actually being paid for with cash. (but must not be double-counted in the changes of non-cash working capital). Read more about an inventory write-downInventory Write DownAn inventory write down is an accounting process used to record the reduction of an inventory’s value, and is required when the inventory’s.
Why would two companies merge? What major factors drive mergers and acquisitions?
There are many reasons companies go through the M&A processMergers Acquisitions M&A ProcessThis guide takes you through all the steps in the M&A process. Learn how mergers and acquisitions and deals are completed. In this guide, we’ll outline the acquisition process from start to finish, the various types of acquirers (strategic vs. financial buys), the importance of synergies, and transaction costs: to achieve synergiesM&A SynergiesM&A Synergies occur when the value of a merged company is higher than the sum of the two individual companies. 10 ways to estimate operational synergies in M&A deals are: 1) analyze headcount, 2) look at ways to consolidate vendors, 3) evaluate any head office or rent savings 4) estimate the value saved by sharing (cost savings), enter new markets, gain new technology, eliminate a competitor, and because it’s “accretive” to financial metrics. Learn more about accretion/dilution in M&AAccretion DilutionAccretion Dilution Analysis is a simple test used to determine whether a proposed merger or acquisition will increase or decrease post-transaction EPS..
[Note: Social reasons are important too, but you have to be careful about mentioning them, depending on who you’re interviewing with. These include ego, empire-building, and to justify higher executive compensation.]
If you were CFO of our company, what would keep you up at night?
This is one of the great finance interview questions. Step back and give a high-level overview of the company’s current financial position or the position of companies in that industry in general. Highlight something on each of the three financial statements.
- Income statement: growth rates, margins, and profitabilityProfitability RatiosProfitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time. They show how well a company utilizes its assets to produce profit.
- Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios, leverageLeverageIn finance, leverage is a strategy that companies use to increase assets, cash flows, and returns, though it can also magnify losses. There are two main types of leverage: financial and operating. To increase financial leverage, a firm may borrow capital through issuing fixed-income securities or by borrowing money directly from a lender. Operating leverage can, return on assets (ROAReturn on Assets & ROA FormulaROA Formula. Return on Assets (ROA) is a type of return on investment (ROI) metric that measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing by comparing the profit (net income) it’s generating to the capital it’s invested in assets.), and return on equity (ROEReturn on Equity (ROE)Return on Equity (ROE) is a measure of a company’s profitability that takes a company’s annual return (net income) divided by the value of its total shareholders’ equity (i.e. 12%). ROE combines the income statement and the balance sheet as the net income or profit is compared to the shareholders’ equity.).
- Cash flow statement: short-term and long-term cash flow profile, any need to raise money or return capital to shareholders.
- Non-financial statement: company culture, government regulation, conditions in the capital marketsCapital MarketsCapital markets are the exchange system platform that transfers capital from investors who want to employ their excess capital to businesses.
More interview questions and answers
This has been CFI’s guide to finance interview questions and answers. We’ve also published numerous other types of interview guides. The best way to be good at interviews is to practice, so we recommend reading the most common questions and answers below to be sure you’re prepared for anything!
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