Must Know Finance Interview Questions

You’ve sent the application, passed the resume screening, and now you’ve been invited to an interview. Everyone has been telling you about EBITDA, NPV, DCF, Triple A, but what does it all mean?

This article will go over the most common finance interview questions, to help you prepare. The 3 main sections it will cover are:

1. Accounting questions
2. Finance questions
3. Brainteasers

Now, let’s get into the different types of questions that come up in each category.

Accounting Interview Questions

For accounting questions, we will go over 3 of the most common ones, from easiest to hardest.

Question: “What is the difference between cash and accrual-based accounting?”

Answer: Cash accounting shows a transaction when cash has gone in or out of a company, while accrual accounting records a transaction when the revenue has been earned or the expense has been incurred, even if the money is received a few months later.

For example, if you sell 100 books to a university in January, and they pay 30 days later in February, under cash basis the sale would only be recognized in February, when the cash is received. However, under accrual-based accounting the bookstore would recognize the sale in January when it was made.

Question: “How do the 3 financial statements connect?”

Answer: There’s multiple linking points. First, we’ve got net income on the income statement. That links to retained earnings on the balance sheet, as retained earnings is calculated as beginning retained earnings plus net income minus dividends. Then on the cash flow statement it connects as net income under cash flow from operations.

Another link has to do with depreciation on the income statement, which connects to the non-current assets side on the balance sheet. That’s because property plant and equipment under non-current assets are calculated as gross PPE plus cash expenditures minus accumulated depreciation. In addition to that, depreciation also links to the cash flow statement under operating cash flow, and PPE from the balance sheet links to investment in PPE on cash flow statement.

There are a few other links like cash, but these should be enough to prove your understanding.

Question: “How would a $10 increase in inventory affect the 3 financial statements?”

Answer: Inventory is an asset intended to be sold. For a bookstore, that would be their books, and assuming the inventory was paid with cash, on the income statement it would have no effect. The reason why there’s no effect on the income statement is because the expense would only be recorded when the inventory is sold. So, if it’s just in the warehouse, it’s still not sold.

On the cashflow statement, cash goes down by $10. Then, on the balance sheet inventory is up by $10, while cash is down by $10, so everything is still balancing.

For this question there’s several variations, and you should know this one in reverse –so if there is a $10 decrease in inventory, and also for other line items like depreciation.

Finance Interview Questions

Next up, we have finance questions, and as with above, we will cover 3 common examples.

Question: “What are the 3 main valuation techniques?”

Answer: One valuation technique is the discounted cash flow (DCF), and the others are the comparable companies and precedent transactions analysis. For the DCF, it’s an internal valuation method, meaning that you look at the company’s internal cash flow to derive a valuation range. Whilst the other two are market-based, meaning that you derive a valuation by comparing with other similar companies, or similar transactions.

Question: “How would you assess a capital investment?”

Answer: This is a common question in financial planning, where you might need to assess whether it’s worth investing in a new factory, new machinery etc. For this, there are 3 main methods. First, there is the NPV, which is the net present value of the project, where if it’s greater than zero you typically accept the project. Then, there’s the IRR, which is the internal rate of return, where if the percentage is greater than the discount rate, you accept the project. Finally, there is the pay-back period, which is the number of years its takes to pay back for the investment. The last one doesn’t have a set rule when it comes to accepting or rejecting a project.

Question: “What is EBITDA?”

Answer: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and it’s a measure of profitability.

The formula here is just EBITDA = Net income + Taxes + Interest Expense + Depreciation & Amortization. The reason it’s quite popular is because it eliminates the effects of financing and capital expenditures, so companies in the same industry can be compared fairly in terms of their operating profitability. It’s also very common to use for valuing a company using multiples such as EV/EBITDA (Enterprise Value/ EBITDA).

Brainteaser Interview Questions

Generally, brainteasers can be split into 2 areas: mental math and market sizing questions.

Mental Math

For mental math, this is usually just a calculation. For example, what is 32*28? Generally, you won’t be able to know the answer off the top of your head. But there’s a few tricks to solve this equation.

It’ll often be possible to identify a pattern. In this scenario, 32 and 28 are both 2numbers away from 30. One is plus 2, the other is minus 2. So first we’ll do 30*30=900,then we’ll minus 4, and that gives us 896.  

This is an easy trick to use for all similar calculations. To practice this one, you just have to come up with random numbers in your head and multiply them.

Market Sizing

Then there are market sizing questions. These are random questions like “how many gas stations are in the USA?”, or “how much revenue does your hairdresser make?”.

These can be pretty tough to answer, since there’s no right answer. Let’s try the hairdresser one. Suppose they charge $20 a haircut, and they take 30 minutes per haircut. They’re open for 10 hours, so that’s 600 minutes, which means they can take 20 haircuts, which is $400. However, we know that hairdressers are not always busy, so we will reduce the occupancy to 75% which would be 300 per day in revenue.

As you can see, we went with fairly easy, round numbers in the example, and that’s what you generally want to try do. If you had said they charge $18.90, or that the haircut time is 23 minutes, then your calculations would have become so much harder.

For these types of questions, they’re just trying to test how you think, your logic, and how you work-out problems.  

Final Remarks

If you don’t know the answer to some of the questions you’re given, it’s best to just be honest and say so. It’s a common response for candidates to give, and they are ultimately better off doing that than lying and getting it wrong.

Good luck with your interviews!

Additional Resources  

If you want to further develop your skills to become a stronger interview candidate, take a look at our Excel for Business & Finance Course, our Complete Finance & Valuation Course and more using the get started button below.

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