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Accountancy Interview Questions & Answers (Basic)

Here are the the all but important Accounting concepts you need to know.

1. Walk around Maine through the 3 financial statements.

"The 3 major financial statements are the Income Statement, Balance Sheet and Cash Flow Statement.

The Income Statement gives the company's tax revenue and expenses, and goes down to Net Income, the final line on the affirmation.

The Balance Plane shows the accompany's Assets - its resources - such as Cash, Stocktaking and PP&E, as well equally its Liabilities - such as Debt and Accounts Payable - and Shareholders' Fairness. Assets must equal Liabilities plus Shareholders' Equity.

The Cash Flow Statement begins with Lucre, adjusts for non-hard cash expenses and capital changes, and past lists cash flow from investment and financing activities; at the stop, you see the company's net change in cash in."

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

Income Statement: Revenue; Cost of Goods Sold; SG&A (Selling, General &adenosine monophosphate; Administrative Expenses); In operation Income; Pretax Income; Net profit Income.

Balance Flat solid: Johnny Cash; Accounts Receivable; Inventory; Plants, Property &ere; Equipment (PP&E); Accounts Payable; Accrued

Expenses; Debt; Shareholders' Equity.

Cash in Flow Program line: Earning; Depreciation & Amortization; Stock-Settled Compensation; Changes in Operating Assets & Liabilities; Cash Be due Trading operations; Capital Expenditures; Cash Flow From Investing; Sale/Leverage of Securities; Dividends Issued; Immediate payment Flow From Funding.

3. How do the 3 statements connect together?

"To tie the statements together, Net Income from the Income Statement flows into Shareholders' Equity connected the Balance Sheet, and into the top line of the Cash Flow Statement.

Changes to Balance Sheet items appear as working capital changes on the Cash Flow Statement, and investment and financing activities regard Res Sheet items such as PP&adenosine monophosphate;E, Debt and Shareholders' Equity. The Cash and Shareholders' Fairness items connected the Balance Sheet act as "plugs," with Cash flow in from the final line happening the Cash Hang Affirmation."

4. If I were stranded on a desert island, only had 1 statement and I wanted to review the overall health of a company - which statement would I practice and wherefore?

You would manipulation the Immediate payment Flow Statement because it gives a true picture of how much immediate payment the company is actually generating, independent of all the non-hard cash expenses you might suffer. And that's the #1 thing you charge about when analyzing the overall financial health of whatsoever business enterprise - its immediate payment flow rate.

5. Permit's say I could entirely take 2 statements to assess a ship's company's prospects - which 2 would I purpose and wherefore?

You would foot the Income Statement and Balance Sheet, because you can create the Cash Flow Statement from both of those (assuming, naturally that you have "before" and "after" versions of the Symmetricalness Sheet that fit to the same period the Income Argument is trailing).

6. Walk me through how Depreciation going raised by $10 would affect the statements.

Income Statement: Operative Income would decline by $10 and forward a 40% tax rate, Net Income would decline aside $6.

Cash Flow Statement: The Net Income at the top goes pop by $6, simply the $10 Depreciation is a not-cash disbursal that gets added back, so overall Johnny Cash Flow from Operations goes up by $4. There are no changes elsewhere, so the overall Net Change in Cash goes up by $4.

Counterbalance Weather sheet: Plants, Property & Equipment goes down by $10 on the Assets side because of the Depreciation, and Cash in on is up aside $4 from the changes on the Hard cash Flow Statement.

Overall, Assets is down by $6. Since Net Income fell by $6 also, Shareholders' Equity happening the Liabilities & Shareholders' Fairness pull is down by $6 and some sides of the Balance Sheet balance.

Note: With this type of question I always recommend going in the order:

1. Profit-and-loss statement
2. Cash in Flow Statement
3. Balance Sheet

This is so you can hold back yourself at the end and make a point the Counterweight Sheet balances.

Remember that an Asset going up decreases your Cash Flow, whereas a Liability going up increases your Cash Flow.

7. If Depreciation is a not-cash in on expense, why does it affect the cash balance?

Although Depreciation is a not-John Cash expense, it is task-deductible. Since taxes are a cash expense, Depreciation affects Cash away reducing the amount of taxes you pay.

8. Where does Depreciation usually surfac along the Earnings report?

It could be in a differentiate personal credit line item, or information technology could be integrated in Be of Goods Sold or In operation Expenses - every company does it differently. Note that the end result for method of accounting questions is the same: Depreciation e'er reduces Pre-Tax Income.

9. What happens when Accrued Compensation goes up past $10?

For this wonder, affirm that the accumulated compensation is now being recognized Eastern Samoa an expense (American Samoa opposing to just changing non-increased to accrued compensation).

Assuming that's the case, Operational Expenses along the Income Statement fling in the lead by $10, Pre-Tax Income falls by $10, and Net Income falls by $6 (assuming a 40% tax order).

On the Cash Flow Command, Internet Income is down away $6, and Accrued Compensation will increase Cash Flow past $10, and then overall Hard currency Flow from Trading operations is up by $4 and the Ultimate Change in Cash at the bottom is up aside $4.

On the Balance Sheet, Cash is up aside $4 as a event, thusly Assets are up by $4. On the Liabilities & Fairness incline, Accrued Compensation is a indebtedness so Liabilities are up by $10 and Retained Earnings are down by $6 due to the Net Income, so both sides res.

10. What happens when Inventory goes up by $10, assuming you pay for it with cash?

No changes to the Income Statement.

On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Flow from Operations - it goes down by $10, A does the Net Change in Hard currency at the bottom.

Along the Balance Sheet low Assets, Inventory is dormie by $10 but Cash in is down by $10, so the changes scrub out and Assets still equals Liabilities & Shareholders' Equity.

11. Why is the Profit-and-loss statement not mannered by changes in Inventory?

This is a lowborn interview slip - incorrectly stating that Working Capital changes show up connected the Income Statement.

In the slip of Inventory, the expense is only recorded when the goods associated with it are sold - so if it's right session in a warehouse, IT does non count as a Cost of Good Sold or Operating Disbursal until the company manufactures it into a intersection and sells it.

12. Let's say Malus pumila is buying $100 worth of modern iPod factories with debt. How are all 3 statements affected ab initio of "Year 1," before anything else happens?

At first of "Twelvemonth 1," before anything else has happened, thither would be no changes on Apple's Operating statement (yet).

Connected the Cash Flow Program line, the additional investment in factories would come out under Cash Flow from Investing as a lucre reduction in Cash Flow (so Cash in on Flow is down aside $100 so farthermost). And the additional $100 worth of debt lifted would evince in the lead as an addition to Cash Flow, canceling out the investment activity. So the Cash number stays the same.

On the Balance Sheet, there is now an extra $100 worth of factories in the Plants, Property &A; Equipment line, so PP&E is up by $100 and Assets is therefore up by $100. Along the unusual side, debt is up past $100 as symptomless and so both sides equilibrize.

13. Nowadays let's go out 1 year, to the start of Year 2. Assume the debt is high-concede indeed no principal is paid-up off, and assume an stake rate of 10%. Also assume the factories undervalue at a rate of 10% per twelvemonth. What happens?

After a year has passed, Apple must pay interestingness disbursement and moldiness record the depreciation.

Operating Income would decrease past $10 referable the 10% derogation charge each year, and the $10 in additional Interest Expense would decrease the Pre-Tax revenue past $20 altogether ($10 from the wear and tear and $10 from Matter to Expense).

Assuming a task rate of 40%, Net Income would fall aside $12.

On the Cash Flow from Statement, Net Income at the top is down aside $12. Depreciation is a not-cash disbursal, so you add information technology back and the closing result is that Cash Menses from Operations is down by $2.

That's the only change on the Cash Flow Statement, so overall Cash is down by $2.

On the Balance Bed sheet, under Assets, Cash is down by $2 and PP&E is down by $10 cod to the depreciation, so overall Assets are down by $12.

On the other side, since Net Income was down by $12, Shareholders' Equity is also down by $12 and both sides residue.

Remember, the debt keep down below Liabilities does non shift since we've sham none of the debt is really stipendiary back.

14. At the start of Year 3, the factories all break away down and the assess of the equipment is written down to $0. The loan must also be paid back now. Pass ME done the 3 statements.

After 2 years, the value of the factories is today $80 if we co-occur with the 10% depreciation per year assumption. It is this $80 that we will write down in the 3 statements.

First, on the Income Statement, the $80 spell-down shows up in the Pre-Tax Income line. With a 40% assess value, Net profit declines past $48.

On the Hard cash Flow Statement, Net Income is down aside $48 but the write-off is a not­cash in disbursal, so we add it back - and therefore Cash Be due Trading operations increases past $32.

There are no changes under Cash Flow from Investment, simply under Cash Flux from Financing there is a $100 charge for the loan payback - then Hard cash Be due Investing falls by $100.

Overall, the Net Change in John Cash falls by $68.

Happening the Balance Flat solid, Cash is now down away $68 and PP&E is down by $80, soh Assets have decreased by $148 altogether.

On the other side, Debt is down $100 since IT was paid off, and since Net Income was down by $48, Shareholders' Equity is down by $48 arsenic well. Altogether, Liabilities & Shareholders' Equity are down by $148 and both sides equilibrise.

15. In real time Army of the Righteou's look at a different scenario and take over Malus pumila is ordination $10 of additional iPod inventory, victimisation John Cash happening hand. They decree the stock, but they have not manufactured operating room sold anything yet - what happens to the 3 statements?

Atomic number 102 changes to the Income Statement.

Cash Rate of flow Statement - Armory is up by $10, so Cash Flow from Trading operations decreases by $10. There are no foster changes, so overall Cash is down by $10.

On the Balance Sheet, Inventory is up by $10 and Cash is down by $10 then the Assets add up stays the same and the Balance Rag remains in balance.

16. Now let's say they deal the iPods for revenue of $20, at a be of $10. Walk me direct the 3 statements under this scenario.

Profit-and-loss statement: Gross is up past $20 and COGS is up by $10, soh Margin is awake by $10 and Operating Income is up by $10 likewise. Assuming a 40% tax rate, Net Income is up by $6.

Cash Flow Affirmation: Net profit at the top is up away $6 and Inventory has decreased by $10 (since we vindicatory factory-made the inventory into real iPods), which is a net summation to cash flow - so Cash Flow from Operations is up by $16 overall.

These are the only changes happening the Cash Menstruation Statement, so Net Change in Immediate payment is dormie by $16.

On the Balance Weather sheet, Cash is up aside $16 and Inventory is down aside $10, thus Assets is up by $6 overall.

On the other face, Net Income was up by $6 so Shareholders' Equity is up by $6 and both sides balance.

17. Could you ever end awake with negative shareholders' equity? What does it mean?

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

1. Leveraged Buyouts with dividend recapitalizations - it means that the possessor of the company has taken out a large portion of its equity (usually in the soma of cash in), which can sometimes turn the number negative.
2. It fundament also happen if the company has been losing money consistently and therefore has a declining Retained Earnings balance, which is a portion of Shareholders' Equity.

IT doesn't "mean" anything particularly, but it can be a cause for pertain and possibly demonstrate that the company is struggling (in the second scenario).

Federal Reserve note: Shareholders' fairness never turns Gram-negative immediately after an LBO - it would only bechance undermentioned a dividend recap or continued net losings.

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

Working Uppercase = Current Assets - Current Liabilities.

If it's positive, IT means a company can buy off its light-term liabilities with its shortstop-terminus assets. IT is often presented as a financial metric and its magnitude and sign up (negative or formal) tells you whether or not the society is "sound."

Bankers take Operating Working Capital more commonly in models, and that is settled as (Current Assets - John Cash & Cash in Equivalents) - (Current Liabilities - Debt).

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

Not necessarily. Information technology depends on the type of company and the specific situation - here are a few different things information technology could signify:

1. Around companies with subscriptions or thirster-term contracts often have minus Functioning Capital because of high Postponed Revenue balances.
2. Retail and restaurant companies like Amazon, Wal-Marketplace, and McDonald's often hold perverse Capital because customers pay upfront - so they can use the cash generated to pay off their Accounts Payable rather than keeping a large hard currency balance on-hand. This can be a sign of business efficiency.
3. In other cases, veto Working Capital could point to financial trouble or possible failure (for object lesson, when customers assume't pay cursorily and upfront and the companionship is carrying a in high spirits debt balance).

20. Recently, Sir Joseph Banks have been writing down their assets and taking huge time period losings. Walk Maine through what happens on the 3 statements when there's a write­down of $100.

First, connected the Income Program line, the $100 write-down shows up in the Pre-Tax Income line. With a 40% tax rate, Lucre declines by $60.

Along the Cash Flow Statement, Net Income is down by $60 but the write-pile is a not­cash expense, so we add it back - and therefore Cash in Flow from Trading operations increases past $40.

Gross, the Web Change in Cash rises by $40.

Connected the Residual Sheet, Immediate payment is now improving by $40 and an asset is down by $100 (it's not net which asset since the question never stated the specific asset to write-down). Boilers suit, the Assets side is down by $60.

Connected the other side, since Net profit was thrown past $60, Shareholders' Equity is also down past $60 - and both sides balance.

21. Walking me through a $100 "bailout" of a ship's company and how it affects the 3 statements.

First, confirm what case of "bailout" this is - Debt? Equity? A compounding? The most common scenario here is an equity investment funds from the government, so Here's what happens:

No changes to the Income Statement. Connected the Cash Flow Statement, Cash Flow from Funding goes up by $100 to reflect the government's investment, so the Earning Change in Cash is up by $100.

On the Balance Sheet, Cash is up by $100 so Assets are up by $100; on the other slope, Shareholders' Equity would burn up by $100 to make it balance.

22. Walk me through a $100 write-off of debt - As in Collectible debt, a liability - on a company's balance sheet and how it affects the 3 statements.

This is counter-visceral. When a liability is written downwards you record it as a put on on the Operating statement (with an asset write-off, information technology's a loss) - so Pre-Tax Income goes prepared past $100 due to this write-down. Assuming a 40% taxation pace, Net Income is improving by $60.

On the Cash Flow Statement, Net Income is up by $60, but we need to subtract that debt write-down - so Cash Flow from Operations is down by $40, and Clear Change in Cash is down past $40.

On the Balance Sheet, Cash is devour aside $40 so Assets are pour down by $40. On the separate side, Debt is down by $100 but Shareholders' Equity is up by $60 because the Net Income was up by $60 - so Liabilities & Shareholders' Equity is down away $40 and it balances. If this seems strange to you, you'atomic number 75 not alone - ascertain this Forbes article for more on wherefore writing down debt in reality benefits companies accounting-Stephen Samuel Wise:

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

23. When would a company collect immediate payment from a customer and not record it arsenic revenue?

Three examples come to mind:

1. Net-based subscription software
2. Cellphone sound carriers that cell annual contracts
3. Mag publishers that deal subscriptions

Companies that fit in to services in the future often collect cash upfront to insure stable revenue - this makes investors contented as well since they give notice better predict a company's performance.

Per the rules of GAAP (Generally Accepted Accounting Principles), you only record revenue when you actually execute the services - so the company would non phonograph record everything as revenue now.

24. If immediate payment collected is not recorded as revenue, what happens to information technology?

Usually IT goes into the Deferred Receipts balance happening the Balance Sheet under Liabilities.

Over time, arsenic the services are performed, the Deferred Revenue proportion "turns into" real revenue on the Income Statement.

25. What's the difference 'tween accounts receivable and deferred revenue?

Accounts receivable has not all the same been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how some revenue the fellowship is waiting on, whereas deferred revenue represents how much it is waiting to record As revenue.

26. How long does information technology usually hold a company to pull together its accounts due balance?

Generally the accounts receivable days are in the 40-50 day cast, though it's higher for companies selling full-remnant items and it might be lower for littler, lower transaction-value companies.

27. What's the difference between cash-founded and accrual accounting system?

Cash-based accounting recognizes revenue and expenses when cash is really received or paid outer; accrual accounting recognizes revenue when ingathering is within reason certain (i.e. after a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are post-free call at cash.

Almost large companies use accrual accounting because paying with credit cards and lines of credit is soh prevalent these days; very small businesses may use Johnny Cash-based accounting to simplify their financial statements.

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

In cash-based accounting, the revenue would not surfac until the accompany charges the client's charge card, receives authorization, and deposits the funds in its bank account - at which repoint it would show up as both Revenue on the Profit-and-loss statement and Cash in on on the Balance Rag.

In accrual accounting, IT would show skyward as Revenue right away but instead of appearing in Cash along the Balance Sheet, it would go into Accounts Receivable at first. Then, once the cash is actually deposited in the company's bank business relationship, it would "turn into" Cash.

29. How do you decide when to capitalize rather than expense a purchase?

If the plus has a useful life of terminated 1 year, it is capitalized (put on the Libra Sheet rather than shown as an expense on the Income Financial statement). Then it is depreciated (tangible assets) operating theater amortized (intangible assets) concluded a certain number of years.

Purchases like factories, equipment and land all last longer than a year and therefore show off up on the Libra the Scales Shrou. Employee salaries and the cost of manufacturing products (COGS) only cover a short period of operations and therefore show up along the Income Statement as normal expenses instead.

30. Wherefore do companies report some GAAP and non-GAAP (or "Perfunctory") earnings?

These days, many companies have "non-cash" charges such A Amortization of Intangibles, Stock-Based Compensation, and Deferred Revenue Write-down in their Income Statements. As a result, some argue that Income Statements under Generally accepted accounting practices no more speculat how useful almost companies truly are. Not-GAAP earnings are about ever high because these expenses are excluded.

31. A company has had affirmative EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?

Several possibilities:

1. The company is spending too more on Cap Expenditures - these are not reflected the least bit in EBITDA, but it could still be cash-flow unsupportive.
2. The company has high interest expense and is no thirster able to afford its debt.
3. The company's debt every last matures on uncomparable see and information technology is unable to refinance it due to a "mention scranch" - and it runs out of hard currency completely when paying back the debt.
4. It has earthshaking one-time charges (from litigation, for deterrent example) and those are last enough to bankrupt the company.

Remember, EBITDA excludes investment in (and wear and tear of) long-term assets, matter to and one-time charges - and all of these could wind up bankrupting the company.

32. Ordinarily Good will remains unchangeable connected the Libra the Balance Sheet - wherefore would it be impaired and what does Grace Harm mean?

Usually this happens when a company has been acquired and the acquirer re-assesses its intangible assets (such as customers, brand, and intellectual dimension) and finds that they are Worth importantly little than they originally thought.

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

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

33. Under what circumstances would Goodwill step-up?

Technically Goodwill can increase if the society ray-assesses its value and finds that it is worth more, but that is rare. What commonly happens is 1 of 2 scenarios:

1. The company gets acquired or bought out and Goodwill changes As a result, since it's an accounting "plug" for the purchase price in an attainment.
2. The company acquires another company and pays more than what its assets are meriting - this is then mirrored in the Goodwill enumerate.

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Where Is the Constitution How Does It Affect You

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

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