Accounting Interview Questions

Accounting is where every technical interview starts, and where most candidates get filtered out. These questions cover the three statements, their linkages, and the mechanics behind classics like the depreciation walk-through.

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Superday-level questions with full model answers.

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Walk me through the three financial statements: what does each one measure, and over what time frame?
  • Why is net income not the same as cash flow? Give two specific reasons with examples.
  • State the accounting equation and explain intuitively why it must always hold.
  • How do the three statements link together? Identify all three connections.
  • If accounts receivable increases by $20 during the year, what is the effect on cash flow from operations, and why?
  • If you could only use one financial statement to evaluate the health of a company, which would you choose and why? What are the weaknesses of your choice?
  • You have the income statement for the year plus the beginning and ending balance sheets, but the cash flow statement is missing. Explain, section by section, how you would reconstruct it.
  • A company reports net income of $80, D&A of $25, an increase in accounts receivable of $40, an increase in inventory of $15, an increase in accounts payable of $10, CapEx of $30, a $20 debt issuance, and $12 of dividends. Beginning cash is $35. Calculate CFO, CFI, CFF, and ending cash.
  • A company signs a contract in Year 0, delivers the product in Year 1, and collects cash in Year 2. Walk through the impact on all three statements in each of the three years, including the working capital lines.
  • On the last day of the year, a company buys equipment for $90 funded entirely with new debt at 6% interest, depreciated straight-line over 5 years, with a 25% tax rate. Quantify the impact on all three statements at purchase and at the end of the following year, and prove the balance sheet balances both times.
What is the difference between COGS and SG&A? Give two examples of costs that belong in each for a manufacturing company.
  • Walk me down the income statement from revenue to net income, explaining what each major line represents and who the 'claimant' is at each level.
  • Define EBIT and EBITDA. Why does neither depend on capital structure, and why does that make them useful for valuation?
  • Revenue is $200, COGS is $120, SG&A is $40, D&A is $10, interest expense is $6, and the tax rate is 25%. Compute gross profit, EBIT, EBITDA, net income, and all four margins.
  • Where would you find a company's total D&A if it isn't broken out on the income statement, and why might the income statement not show it?
  • A company's revenue grew 8% but EBIT grew 30%. Explain the mechanics of operating leverage that make this possible, and what would happen to EBIT if revenue instead fell 8%.
  • What is the difference between basic and diluted EPS? Walk through the treasury stock method for 10M options struck at $20 when the stock trades at $50.
  • Net income is $120M on 50M diluted shares. The company borrows $600M at 5% (tax rate 25%) and uses it to repurchase shares at $60. Compute pro forma EPS and state whether the buyback is accretive, and articulate the general rule this illustrates.
  • A company reports EBITDA of $300M, but this includes a $40M add-back of stock-based comp, a $25M 'one-time' restructuring charge that has occurred in each of the last four years, and $20M of capitalized software development that a key competitor expenses. Build the EBITDA you would actually use to compare the two companies, defending each adjustment.
  • Two companies have identical revenue of $1B and identical EBITDA of $250M. Company A reports net income of $150M; Company B reports $60M. Give four distinct drivers that could fully explain the gap, quantify an illustrative version of each, and explain which drivers would and would not affect how you value the enterprise.
Walk me through the balance sheet: what are the major sections and how are line items ordered within each?
  • State the accounting equation and explain why it must always hold, using the concept of double-entry bookkeeping.
  • What is the difference between accounts receivable and deferred revenue? Which side of the balance sheet does each sit on?
  • Explain what retained earnings represents and how it links the income statement to the balance sheet.
  • Is goodwill an asset in the same sense as PP&E? Explain where it comes from and how it's tested going forward.
  • Why is treasury stock recorded as a negative (contra-equity) line rather than simply removing shares from the count?
  • A company buys $30 of inventory entirely on credit. Walk through the immediate impact on the balance sheet and explain why no other statement is affected yet.
  • A company has total assets of $310, accounts payable of $25, short-term debt of $15, long-term debt of $95, and common stock/APIC of $90. Solve for retained earnings.
  • A company begins the year with retained earnings of $150 and no treasury stock. It earns net income of $60, pays dividends of $10, and repurchases $18 of stock for cash. Compute the ending retained earnings, ending treasury stock, and the net change in total equity.
  • A company writes off $120 of goodwill as impaired, at a 25% tax rate where the impairment is not tax-deductible. Quantify the effect on net income, cash flow from operations, and total assets, and confirm the balance sheet still balances.
Walk me through the cash flow statement: what does each of the three sections capture, and what's the overall purpose of the statement?
  • If accounts receivable increases by $15 during the year, what is the effect on cash flow from operations, and why?
  • Why does CapEx appear in investing activities rather than operating activities, even though it's necessary to run the business?
  • Explain why dividends paid never appear on the income statement, and where they do appear.
  • Is negative cash flow from investing always a bad sign? Explain with an example of when it isn't.
  • What's the difference between levered and unlevered free cash flow, and why does a DCF use one over the other?
  • Name three ways a company could artificially inflate its reported cash flow from operations in a single period, and explain why each is unsustainable.
  • A company reports net income of $70, D&A of $18, an increase in accounts receivable of $22, a decrease in inventory of $6, and an increase in accounts payable of $14. Compute CFO.
  • A company has EBIT of $200, a 30% tax rate, D&A of $35, an increase in net working capital of $12, CapEx of $50, and $300 of debt at 5% interest. Compute both levered free cash flow (via net income) and unlevered free cash flow (via EBIT), and show that the difference equals after-tax interest expense.
  • A company's CFO grew from $80 to $130 year over year while net income grew only from $75 to $85. The CFO build shows accounts payable contributed $45 of the increase versus $5 the prior year, with no other major changes. Assess whether this cash flow growth is sustainable and explain what you'd expect in the following year if it isn't.
Explain the three hard linkages between the three financial statements.
  • A company pays down $15 of an existing accounts payable balance in cash. Walk through the effect on all three statements.
  • Why do some transactions skip the income statement entirely? Give two examples.
  • Explain why, after tracing any transaction through all three statements, you should always check that assets and liabilities-plus-equity moved by the same amount.
  • A company writes down $40 of impaired goodwill (non-tax-deductible, so there is no tax benefit from this specific write-down). Walk through the effect on all three statements, and explain why the tax treatment differs from a normal deductible expense.
  • A company issues $150 of new equity for cash with no other changes. Walk through the effect on all three statements, and explain why this transaction, unlike a debt issuance, never creates a future income statement effect.
  • A company recognizes $25 of bad debt expense by increasing its allowance for doubtful accounts (a contra-asset), with a 25% tax rate. Walk through the effect on all three statements at the time the allowance is recorded, and then when the specific receivable is later written off against that allowance (no further income statement or tax effect at write-off).
  • At the start of the year, a company borrows $250 at 4% interest (interest paid annually, principal at maturity) and spends the full amount on equipment depreciated straight-line over 5 years with a full-year convention. Tax rate 25%. Trace the impact on net income, cash, and the balance sheet at the end of Year 1 and Year 2, and confirm the balance sheet balances both years.
  • Midway through the fiscal year, a company issues $180 of debt at 5% annual interest and immediately uses the cash to repurchase $180 of its own stock. Tax rate 25%. Trace the full-year impact of both the interest expense (pro-rated for half a year) and the buyback on all three statements, and prove the balance sheet balances.
  • A company receives a $60 cash prepayment for a service contract at the start of Year 1. It delivers half the service in Year 1 (no further cash changes hands) and the remaining half in Year 2 (also no further cash). Ignore taxes. Trace the effect on all three statements in Year 1 and Year 2, and confirm the balance sheet balances at the end of each year.
Why does cash increase, not decrease, when depreciation increases, assuming a positive tax rate?
  • Depreciation increases by $10 with a 25% tax rate. Walk through the impact on the income statement, cash flow statement, and balance sheet, and confirm the balance sheet balances.
  • By how much does net PP&E fall when depreciation increases by $10: the full $10 or the after-tax amount? Explain why.
  • What happens to EBITDA when depreciation increases? Explain why, referencing the definition of EBITDA.
  • If a company has no current cash tax liability (e.g., due to net operating loss carryforwards), what is the cash flow statement effect of a $10 increase in depreciation?
  • Explain why companies often use different depreciation methods for book purposes versus tax purposes, and what balance sheet item captures the difference.
  • A company's depreciation increases by $10 for the year with a 25% tax rate, and this is a recurring annual charge from an asset with 4 years of remaining useful life. Describe how the net income, cash, and balance sheet effects evolve over those 4 years and what happens in year 5.
  • A company's net income fell by exactly $9 year-over-year, and the only change was an increase in depreciation expense, with a 25% tax rate. Determine the pre-tax increase in depreciation, then walk through the full impact on all three statements.
  • A company buys $80 of equipment at the start of the year, funding $50 with cash and $30 with new debt at 6% interest, depreciated straight-line over 8 years. Tax rate 25%. Walk through the full first-year impact on all three statements and confirm the balance sheet balances.
  • A company's tax depreciation exceeds its book depreciation by $12 this year due to accelerated tax depreciation, with a 25% tax rate applying to both book and taxable income. Explain what balance sheet account absorbs this difference, in which direction it moves, and how the cash flow statement effect differs from the simple book-depreciation tax shield calculation used elsewhere in this lesson.
What is the cash conversion cycle, and how is it calculated from DSO, DIO, and DPO?
  • Define net working capital and explain why cash and debt are excluded from the calculation.
  • If net working capital increases year over year, is that a source or use of cash? Explain the intuition.
  • Define DSO, DIO, and DPO, and explain what each measures.
  • Explain why a company might have negative working capital, and why that can be a competitive advantage rather than a warning sign.
  • How would you forecast a company's accounts receivable balance for next year using DSO, rather than growing the dollar balance by a flat percentage?
  • Explain what a working-capital peg is in an M&A purchase agreement and why buyers and sellers negotiate over its definition.
  • A company's Year 1 working capital lines are AR $55, Inventory $80, Prepaid expenses $6, AP $40, Accrued expenses $14, Deferred revenue $9. In Year 2: AR $62, Inventory $70, Prepaid expenses $7, AP $48, Accrued expenses $16, Deferred revenue $14. Calculate NWC in each year and the change, and identify which single line item most drove the result.
  • A company has current-year revenue of $800 and DSO of 65 days. Next year, revenue is forecast to grow to $860 and management plans to reduce DSO to 55 days. Compute current-year AR, next-year AR, the total change, and decompose the change into the portion caused by revenue growth versus the portion caused by the DSO improvement.
  • A target's trailing average NWC peg is $150. At the proposed closing date, reported balances are AR $110, Inventory $160, Prepaid expenses $8, AP $90, Accrued expenses $20, Deferred revenue $18. You learn the seller delayed $30 of normal supplier payments (understating true AP by $30) specifically to inflate the reported NWC before closing. Compute the reported closing NWC, the normalized closing NWC, and the purchase price adjustment implied by each versus the peg.
What is deferred revenue, which side of the balance sheet does it sit on, and why?
  • State the core revenue recognition principle under ASC 606/IFRS 15. How does it differ from cash-basis accounting?
  • Contrast accounts receivable and deferred revenue -- what timing mismatch does each represent?
  • A company collects $1,200 upfront for a 12-month service contract. Describe the balance sheet and income statement impact at signing and in month 2.
  • Why is rising deferred revenue generally considered a positive signal for a subscription business, and how does it affect cash flow from operations?
  • Explain the difference between bookings, billings, and revenue for a contract-based business, and why revenue growth typically lags bookings growth.
  • What is percentage-of-completion accounting, and why is it used instead of waiting until a long-term contract is fully delivered?
  • A company begins the year with $200 of deferred revenue and ends with $310. It recognized $4,500 of revenue during the year, had net income of $600, and D&A of $80, with no other working capital changes. Calculate cash flow from operations.
  • A construction contract is priced at $150M with an original total estimated cost of $100M. At the end of Year 1, $30M of costs have been incurred. At the end of Year 2, cumulative costs are $80M and total estimated costs have been revised to $170M. Calculate revenue and gross profit/(loss) recognized in each of Year 1 and Year 2.
  • A retailer sells $2,000 of goods with a historical 8% return rate under a 30-day refund policy. How much revenue is recognized at the point of sale, what liability is booked, and how would your answer change if the product were brand new with no return history?
Explain FIFO and LIFO. In a period of rising prices, which method produces higher reported net income, and why?
  • Define COGS and gross margin. What does gross margin tell you about a business that operating margin does not?
  • State the inventory roll-forward identity and explain how it's used to solve for COGS.
  • Why would a company ever choose LIFO if it results in lower reported net income?
  • Does IFRS permit LIFO? What must a US company using LIFO disclose to allow comparison with FIFO or IFRS peers?
  • What is a LIFO liquidation, and why does it produce a misleading, one-time boost to gross margin?
  • Explain the lower-of-cost-or-net-realizable-value principle and whether an inventory write-down is a cash or non-cash charge.
  • A company has beginning inventory of 500 units at $8/unit and purchases 800 units at $9.50/unit during the year. It sells 1,000 units. Calculate COGS and ending inventory under both FIFO and LIFO.
  • A company's LIFO inventory is $180M with a LIFO reserve of $30M at the start of the year, growing to $42M by year-end. LIFO COGS for the year is $700M. Calculate FIFO-equivalent ending inventory and FIFO-equivalent COGS.
  • A LIFO company's gross margin rises from 32% to 41% year over year with flat input prices, while its LIFO reserve falls from $90M to $55M and inventory unit volume drops sharply. Explain what likely happened, and describe how you would adjust reported COGS to normalize the margin for a valuation model.
What is PP&E, and why must its cost be spread over time via depreciation rather than expensed immediately?
  • State the PP&E roll-forward identity. If beginning net PP&E is $200, CapEx is $50, and depreciation is $35 with no disposals, what is ending net PP&E?
  • Distinguish maintenance CapEx from growth CapEx, and explain why the distinction matters for estimating sustainable free cash flow.
  • Walk through the impact on all three statements if depreciation increases by $10 with a 25% tax rate and no other changes.
  • A company sells equipment with a net book value of $40 for cash proceeds of $55. Explain the income statement effect and how it is treated on the cash flow statement.
  • Why do companies often use straight-line depreciation for financial reporting but an accelerated method for tax purposes, and what balance sheet item does this create?
  • Explain capitalized interest during a construction period. Why does it understate reported interest expense while construction is ongoing?
  • A company has beginning net PP&E of $600, CapEx of $95, depreciation of $70, and disposes of an asset with a net book value of $20 for cash proceeds of $12. Calculate ending net PP&E and the income statement and cash flow treatment of the disposal.
  • A company's depreciation rises by $22 this year with no other changes and a 32% tax rate. Quantify the exact impact on EBIT, net income, CFO, ending cash, and ending PP&E, and confirm the balance sheet still balances.
  • A company funds a two-year, $200/year construction project entirely with debt at 4% interest, capitalizing all construction-period interest. The completed asset (10-year useful life, straight-line, no salvage) is placed into service at the start of Year 3. In Year 5, it suffers an $15 impairment. Calculate the asset's total capitalized cost, its annual depreciation once in service, and its net book value at the end of Year 5.
Is goodwill amortized under current US GAAP/IFRS? How is it tested and adjusted over time?
  • What creates a deferred tax liability versus a deferred tax asset? Give one common example driver of each.
  • Distinguish goodwill from other acquired intangible assets, and explain how each is treated on an ongoing basis.
  • Is an impairment charge a cash or non-cash event? Walk through its effect on the income statement, cash flow statement, and balance sheet.
  • What is a valuation allowance, and why might a company not be able to record the full value of a deferred tax asset from its NOL carryforwards?
  • Explain the difference between the legacy two-step and the current simplified one-step goodwill impairment test under US GAAP.
  • Why might an acquirer prefer an asset purchase (or a stock purchase with a basis step-up election) over a straight stock purchase, from a tax perspective?
  • A company has book depreciation of $55 and tax depreciation of $90 this year due to accelerated tax methods, with a 21% tax rate. Calculate the deferred tax liability created this year.
  • An acquirer pays $1,200 for a target. Fair value of identifiable net assets is: PP&E $400, intangibles $200, net working capital $70, less assumed debt of $90. Calculate goodwill. Two years later, a $150 goodwill impairment is required with no tax benefit -- walk through the three-statement impact.
  • A sponsor structures an acquisition as an asset purchase, creating $180 of tax-deductible goodwill amortizable over 15 years, at a 26% tax rate. Calculate the annual cash tax benefit, and explain why this benefit does not appear in reported GAAP net income.
Explain the three general mechanics that every Module 1 topic reduces to: timing differences, asset consumption, and valuation write-downs. Give one example of each from this module.
  • State the general accrual-to-cash bridge formula and explain, in words, why each term is added or subtracted.
  • Walk through what happens to all three financial statements when a customer prepays $600 for a two-year contract, recognized ratably.
  • Why must the balance sheet always balance, no matter how many of this module's mechanics are combined in a single scenario?
  • A company reports net income of $150, D&A of $40, an increase in receivables of $20, an increase in deferred revenue of $30, and a decrease in accounts payable of $10. Compute cash flow from operations.
  • A LIFO company takes a $25 inventory write-down and also experiences a $40 LIFO liquidation benefit in the same year. How would you normalize reported gross profit, and are both adjustments the same type of item (cash vs. non-cash)?
  • A company has an existing deferred tax liability from accelerated depreciation and separately takes a non-deductible goodwill impairment in the same year. Explain why these two items should be modeled completely independently of one another.
  • A company collects a $900 two-year prepayment on January 1 and spends $200 of that cash on equipment depreciated over 4 years straight-line, tax rate 25%. Compute Year 1 net income, the Year 1 cash flow from operations, and the deferred revenue balance at year-end.
  • In one year, a company recognizes $180 of revenue from an existing deferred revenue balance, records $55 depreciation, sells equipment with a $35 net book value for $50 cash, and takes a $40 non-deductible goodwill impairment. Base operating pre-tax income before these items is $350, tax rate 25% (except the impairment). Compute final net income and cash flow from operations.
  • A company has beginning net PP&E of $500, buys $150 of new equipment, records $40 of depreciation, and sells old equipment with a $20 net book value for $32 cash. Separately, its deferred revenue balance goes from $400 to $250 as it recognizes revenue, and it takes a $15 non-deductible goodwill impairment. Base operating pre-tax income before all these items is $300, tax rate 25% except the impairment. Compute ending net PP&E, final net income, and verify your PP&E roll-forward and deferred revenue roll-forward are each internally consistent.