We’ve compiled the most frequently asked accounting interview questions along with what we believe are the best answers. The key to acing an interview is practice, so be sure to check out our interview guides for finance, FP&A, equity research, and more.
List of commonly asked accounting interview questions:
#1 Walk me through the three financial statements.
The balance sheet shows, at a point in time, what a company owns (assets), what it owes (liabilities), and what is left over (shareholders’ equity). The income statement illustrates the company’s revenues and expenses over a period, usually a quarter or year. The cash flow statement shows the cash flows generated or used in operating, investing and financing activities.
#2 If I had only one statement and wanted to review the overall health of a company, which statement would I use and why?
“Cash is king” is a common true saying in the finance and accounting world. Therefore, the cash flow statement would be the best answer. It gives a true picture of how much cash a company is generating. That being said, it’s important to note that all three statements are required to get a full picture of the health of a company. Learn more about how the three financial statements are linked.
#3 What immediately happens on the income statement if inventory goes up by $10?
Nothing. This is a trick question. The only immediate impact will be on the balance sheet and cash flow statement.
#4 What is working capital?
Working capital is typically defined as current assets less current liabilities. In banking, working capital is normally defined more narrowly as current assets (excluding cash) less current liabilities (excluding interest-bearing debt).
#5 What does having 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 industries, negative working capital may signal a company is facing financial trouble. In this case, negative working capital implies a company may be unable to meet its near-term obligations.
#6 If cash collected from customers is not yet recorded as revenue, what happens to it?
It usually goes into “Deferred Revenue” on the balance sheet as a liability if the revenue has not been earned yet.
#7 What’s the difference between deferred revenue and accounts receivable?
Deferred revenue represents cash received from customers for services or goods not yet provided. Accounts receivable represents cash due from customers for goods/services already provided.
#8 When do you capitalize rather than expense a purchase?
If the purchase will be used in the ongoing operations of the business (generally for greater than one year), it is capitalized and depreciated/amortized. However, there are some exceptions: land is not depreciated and goodwill is not usually amortized.
#9 Under what circumstances does goodwill increase or decrease?
When a company buys another business for more than the fair value of its net assets (its equity), goodwill is created. Therefore, if goodwill increased, it’s because the company acquired another company. Since goodwill is not usually amortized, it must be tested for impairment. If goodwill is impaired it must be written down. However, please note that IFRS allows for an upward revaluation of previously impaired goodwill; US GAAP does not allow for this.
#10 How do you record PP&E and why is this important?
There are essentially four areas to consider when accounting for PP&E on the balance sheet: 1) the initial purchase, 2) depreciation, 3) additions (capital expenditures) and 4) dispositions. In addition to these four, you may also have to consider revaluation (IFRS only, not US GAAP). For many industries, PP&E is the main capital asset that generates revenue, profitability and cash flow.
#11 How does an inventory write-down affect the three statements?
On the balance sheet, the asset account of inventory is reduced by the amount of the write-down, and so is shareholders’ equity. The income statement recognizes an expense in either 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 operating cash flows as it’s a non-cash expense, but it must not be double-counted when calculating the changes in non-cash working capital.
#12 What are three examples of common budgeting methods?
#13 Please explain the Revenue Recognition and Matching principles of accounting
The revenue recognition principle dictates the process and timing by which revenue is recorded and recognized as an item in the financial statements based on certain criteria (e.g., transfer of ownership). The matching principle dictates the timing of expenses be matched to the period in which the associated revenue is incurred, as opposed to when the expenses are actually paid.
#14 If you were CFO of our company, what would keep you up at night?
Step back and give a high-level overview of the company’s current financial position, or companies in that industry in general. Highlight something on each of the three statements. Income statement: growth, margins, profitability. Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios. Cash flow statement: short-term and long-term cash flow profile, any need to raise money or return capital to shareholders.
More Interview Prep
Thank you for reading CFI’s guide to accounting interview questions. If you want to land the accounting job of your dreams then interview prep is key. That’s why we’ve designed special guides to help you prepare with practice questions and answers.
More interview guides you will find helpful include:
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