Top Finance Interview Questions and Answers

Categories of Finance Interview Questions

Finance interviews typically include two main categories of questions:

• Behavioral/Fit Questions: Assess soft skills (teamwork, leadership, problem-solving).
• Technical Questions: Evaluate knowledge of accounting and finance principles.

Three Main Financial Statements

• Balance Sheet: Shows assets, liabilities, and equity at a specific point in time.
• Income Statement: Shows revenues, expenses, and net income over a period.
• Cash Flow Statement: Shows cash inflows and outflows from operating, investing, and financing activities over a period.

Choosing One Statement to Assess Company Health

The cash flow statement is often preferred because it directly reflects the company's cash generation ability. However, a strong justification for choosing the balance sheet (showing asset values) or income statement (showing profitability) is also acceptable.

Ideal Company Budgeting Process

An ideal budgeting process is:

• Realistic and achievable.
• Risk-adjusted.
• Aligned with the company's strategic plan.
• Iterative and collaborative.
• Based on a clear timeline.

WACC (Weighted Average Cost of Capital)

WACC is the average rate a company expects to pay to finance its assets. It's calculated by weighting the cost of each capital source (debt and equity) by its proportion in the company's capital structure.

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
        

Where:

• E = Market value of equity
• D = Market value of debt
• V = E + D (Total value)
• Re = Cost of equity
• Rd = Cost of debt
• Tc = Corporate tax rate

Audit vs. Review

Debt vs. Equity Financing

Companies choose between debt and equity financing based on their financial situation and goals. Debt is cheaper (due to tax deductibility of interest) but carries higher risk (interest payments are mandatory). Equity financing dilutes ownership but doesn't require repayment.

Which is Cheaper: Debt or Equity?

Debt is generally cheaper than equity because interest payments are tax-deductible, and debt holders have a higher claim on assets in case of liquidation.

Working Capital

Working capital is the difference between a company's current assets and current liabilities. It represents the funds available for day-to-day operations.

Goodwill

Goodwill is an intangible asset representing the excess of a company's purchase price over its net asset value. It reflects factors like brand reputation, customer relationships, and other non-physical assets.

Negative Working Capital

Negative working capital (current liabilities exceeding current assets) is common in some industries (like grocery retail) where inventory turns over quickly and suppliers extend credit. However, it can also indicate financial distress.

Capitalizing vs. Expensing Purchases

Purchases of assets used for more than one year are capitalized (added to the balance sheet as assets and depreciated over time), while shorter-lived purchases are expensed (immediately deducted from revenue).

Positive Cash Flow and Financial Trouble

A company can have positive cash flow while facing financial difficulties if it's, for example, selling assets or delaying payments to suppliers (not sustainable practices).

Positive Net Income and Bankruptcy

A company can report positive net income and still go bankrupt due to factors like poor cash flow management (e.g., high accounts receivable, low accounts payable).

Debentures

Debentures are long-term debt instruments issued by companies; they represent a loan agreement.

Hedging and Preference Capital

Hedging involves using financial instruments to reduce risk. Preference capital is a type of capital that receives priority in dividend payments and asset distribution upon liquidation.

Deferred Tax Liability

A deferred tax liability is a tax expense that will be paid in the future.

Composite Cost of Capital (WACC)

WACC (Weighted Average Cost of Capital) is the average cost a company pays for its financing (debt and equity).

Cash Flow Statement

The cash flow statement shows cash inflows and outflows from operating, investing, and financing activities. It's prepared using either the direct method or the indirect method.

Cash Flow Statement Activities

• Operating Activities: Cash flows from the company's core business operations.
• Investing Activities: Cash flows related to investments (e.g., buying or selling assets).
• Financing Activities: Cash flows related to financing (e.g., debt, equity).

Prioritizing Concerns as a CFO

This question assesses your strategic thinking and understanding of a company's financial health. A strong response would address key metrics across the three core financial statements (income statement, balance sheet, and cash flow statement), as well as considering non-financial factors. Prioritize your concerns based on the company's unique situation and potential risks.

Example Response:

“As CFO, my top priority would be ensuring the company's long-term financial health and sustainability. This involves monitoring key performance indicators (KPIs) across all three financial statements: On the income statement, I'd focus on revenue growth, margins, and profitability trends. For the balance sheet, I'd be looking at liquidity ratios, debt levels, capital structure, and the overall health of assets. The cash flow statement would be under constant review to understand the company's ability to generate and manage cash flows. In addition, I'd closely watch non-financial aspects like regulatory compliance, industry trends, and market conditions. My primary concern would be identifying and mitigating potential risks that could threaten the company’s financial stability.”

Adjustment Entries in Accounting

Adjustment entries are made at the end of an accounting period to update accounts and ensure that the financial statements accurately reflect the company's financial position. These entries typically adjust items like accrued expenses, prepaid expenses, and depreciation. They are essential for ensuring that financial reports conform to accounting principles.

Cost Accountancy

Cost accountancy is a specialized area of accounting that focuses on tracking, analyzing, and controlling costs within an organization. It helps provide insights into cost drivers and profitability, aiding in informed decision-making.

Impact of Equipment Purchase on Financial Statements

Purchasing equipment affects all three financial statements:

• Balance Sheet: Increases property, plant, and equipment (PP&E) and reduces cash.
• Income Statement: Depreciation expense reduces net income over the asset's useful life.
• Cash Flow Statement: Initial purchase shows as a cash outflow (investing activities); depreciation is added back (operating activities) because it's a non-cash expense.

Reasons for Mergers and Acquisitions (M&A)

Companies merge or acquire others for various reasons:

• Synergies (cost savings, increased revenue).
• Market expansion.
• Acquiring technology or intellectual property.
• Eliminating competition.
• Improving financial performance.

PP&E (Property, Plant, and Equipment) Accounting

Accounting for PP&E involves tracking its cost over time, including initial purchase, depreciation, additions (capital expenditures), and disposals. This ensures the assets are accurately reflected on the balance sheet.

Increase in Accounts Receivable and Cash Flow

An increase in accounts receivable (money owed to the company by customers) reduces cash flow from operations because it represents sales that haven't yet resulted in cash collections.

Inventory Write-Down on Financial Statements

An inventory write-down (reducing the value of inventory on the balance sheet) affects all three statements:

• Balance Sheet: Inventory and retained earnings decrease.
• Income Statement: Cost of goods sold (COGS) increases, reducing net income.
• Cash Flow Statement: The write-down is added back to cash flow from operations (it's a non-cash expense).

Income Statement and Balance Sheet Linkage

Net income from the income statement flows into retained earnings on the balance sheet, impacting the company's equity.

Deferred Tax Assets

Deferred tax assets represent taxes paid in excess of the amount recognized on the income statement, creating a future tax benefit.

Real vs. Nominal Money

Treasury Bills

Treasury bills (T-bills) are short-term debt securities issued by governments.

Short-Term Financing

Short-term financing provides funds for less than a year. Sources include:

• Trade Credit: Credit extended by suppliers.
• Unsecured Bank Loans: Short-term loans without collateral.
• Bank Overdrafts: Borrowing beyond account balance.

Clean vs. Dirty Bond Prices

Discounted Cash Flow (DCF) Analysis

DCF analysis values an investment based on its projected future cash flows, discounted back to their present value using a discount rate.

Key Features of DCF Analysis

• Values investments based on future cash flows.
• Uses a discount rate to determine present value.
• Can be used for various investment types.
• Relies on projections that may be uncertain.

Why Choose a Finance Career?

A good response highlights the aspects of finance you find engaging and how your skills and interests align with a career in finance.

Financial Strengths and Weaknesses

Be honest and self-aware. Choose strengths relevant to the role and weaknesses you're actively addressing. Use the STAR method (Situation, Task, Action, Result).

Discussing Financial Strengths and Weaknesses

When discussing your strengths and weaknesses, be honest and self-aware. Highlight strengths relevant to the finance role, providing specific examples. For weaknesses, choose something you're actively working to improve, demonstrating self-reflection and a growth mindset.

Example Response:

“My greatest strength is my ability to effectively manage budgets. I'm proficient in various budgeting techniques and can adapt my approach depending on the specific business needs. A weakness I'm actively addressing is my tendency to be overly detail-oriented. While this ensures accuracy, it can sometimes slow down my overall workflow. To improve, I'm focusing on time management strategies and prioritizing tasks more effectively.”

Greatest Financial Achievement

Use the STAR method (Situation, Task, Action, Result) to describe a significant accomplishment. Highlight the context, the actions you took, the positive outcome, and what you learned from the experience.

Example Response:

“In my previous role, I was tasked with improving the financial forecasting process. We were relying on outdated methods, resulting in inaccurate projections. I researched and implemented a new forecasting model using [mention specific techniques or tools]. This improved the accuracy of our forecasts and improved decision making. We subsequently saw a [quantifiable result, e.g., 15%] reduction in forecast errors and a [quantifiable result, e.g., 10%] increase in the accuracy of sales forecasts. This experience showed me the impact of utilizing the right tools to collect and apply data to achieve positive business outcomes.”

Suggesting Short-Term Financing Solutions

This question assesses your understanding of short-term financing options. Demonstrate your knowledge and ability to provide solutions for immediate cash needs. Remember to also suggest long-term solutions for sustainability.

Example Response:

“For immediate cash needs, I would recommend exploring options like trade credit (negotiating extended payment terms with suppliers), short-term bank loans, or bank overdrafts. However, a long-term solution should focus on improving cash flow management, potentially involving a review of pricing strategies, accounts receivable, and inventory management.”