In Service Blueprinting, Which Line Separates Front Office Activities From Back Office Activities?

Accounting Interview Questions & Answers (Basic)

Here are the the most of import Accounting concepts y'all need to know.

1. Walk me through the 3 fiscal statements.

"The iii major fiscal statements are the Income Statement, Residue Canvas and Cash Flow Argument.

The Income Statement gives the company's revenue and expenses, and goes down to Internet Income, the final line on the statement.

The Rest Sail shows the company's Assets - its resources - such as Cash, Inventory and PP&E, besides as its Liabilities - such as Debt and Accounts Payable - and Shareholders' Disinterestedness. Assets must equal Liabilities plus Shareholders' Disinterestedness.

The Greenbacks Flow Argument begins with Net Income, adjusts for non-cash expenses and working capital changes, and then lists greenbacks menses from investing and financing activities; at the terminate, you lot see the company's internet change in cash."

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 & Authoritative Expenses); Operating Income; Pretax Income; Net Income.

Residue Sheet: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts Payable; Accrued

Expenses; Debt; Shareholders' Disinterestedness.

Cash Menses Statement: Net Income; Depreciation & Acquittal; Stock-Based Compensation; Changes in Operating Avails & Liabilities; Greenbacks Flow From Operations; Majuscule Expenditures; Greenbacks Period From Investing; Auction/Purchase of Securities; Dividends Issued; Greenbacks Flow From Financing.

3. How do the three statements link together?

"To tie the statements together, Net Income from the Income Statement flows into Shareholders' Equity on the Balance Sail, and into the summit line of the Cash Catamenia Argument.

Changes to Rest Sheet items appear as working upper-case letter changes on the Cash Menses Statement, and investing and financing activities bear upon Residual Canvas items such equally PP&E, Debt and Shareholders' Equity. The Cash and Shareholders' Equity items on the Balance Sheet deed as "plugs," with Cash flowing in from the concluding line on the Cash Flow Statement."

4. If I were stranded on a desert island, but had 1 argument and I wanted to review the overall health of a company - which statement would I apply and why?

You would utilize the Cash Period Statement because it gives a true picture of how much cash the visitor is really generating, independent of all the non-greenbacks expenses you might accept. And that's the #1 thing y'all intendance about when analyzing the overall financial health of any business - its greenbacks menstruation.

five. Let's say I could only look at 2 statements to appraise a company'south prospects - which ii would I use and why?

You would pick the Income Argument and Balance Sheet, because you lot can create the Cash Catamenia Statement from both of those (assuming, of course that you lot have "before" and "after" versions of the Balance Sheet that correspond to the same period the Income Argument is tracking).

half dozen. Walk me through how Depreciation going up by $x would impact the statements.

Income Statement: Operating Income would turn down by $10 and assuming a 40% taxation rate, Cyberspace Income would get down by $six.

Cash Flow Statement: The Net Income at the top goes downwards by $six, but the $10 Depreciation is a non-greenbacks expense that gets added dorsum, so overall Cash Flow from Operations goes upward by $4. There are no changes elsewhere, then the overall Net Change in Greenbacks goes up by $4.

Balance Sheet: Plants, Holding & Equipment goes downward past $10 on the Assets side because of the Depreciation, and Cash is upwardly past $iv from the changes on the Cash Period Argument.

Overall, Avails is down by $6. Since Net Income fell past $half dozen as well, Shareholders' Equity on the Liabilities & Shareholders' Equity side is downwardly past $half dozen and both sides of the Balance Sheet balance.

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

1. Income Argument
2. Cash Menstruum Statement
3. Rest Canvas

This is and then y'all tin can check yourself at the cease and make sure the Balance Canvas balances.

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

7. If Depreciation is a non-cash expense, why does it impact the cash balance?

Although Depreciation is a non-cash expense, it is revenue enhancement-deductible. Since taxes are a cash expense, Depreciation affects cash by reducing the amount of taxes you lot pay.

8. Where does Depreciation unremarkably show up on the Income Statement?

It could be in a separate line item, or it could be embedded in Price of Goods Sold or Operating Expenses - every company does it differently. Note that the finish issue for accounting questions is the same: Depreciation always reduces Pre-Tax Income.

9. What happens when Accrued Bounty goes up by $ten?

For this question, confirm that the accrued compensation is now beingness recognized equally an expense (as opposed to just changing not-accrued to accrued bounty).

Assuming that's the example, Operating Expenses on the Income Statement go up by $ten, Pre-Tax Income falls past $10, and Net Income falls by $vi (assuming a forty% tax rate).

On the Cash Flow Argument, Net Income is downwards by $6, and Accrued Compensation will increment Greenbacks Flow past $10, and so overall Cash Flow from Operations is upwardly by $4 and the Internet Modify in Greenbacks at the lesser is upwards by $4.

On the Residual Sail, Greenbacks is upwards past $iv as a effect, so Assets are upwardly past $4. On the Liabilities & Equity side, Accrued Bounty is a liability so Liabilities are up past $x and Retained Earnings are down by $6 due to the Net Income, so both sides residuum.

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

No changes to the Income Argument.

On the Cash Menses Argument, Inventory is an nugget so that decreases your Cash Menstruum from Operations - information technology goes down by $10, as does the Cyberspace Change in Cash at the bottom.

On the Balance Sail under Assets, Inventory is up past $10 but Cash is downward by $10, so the changes cancel out and Assets still equals Liabilities & Shareholders' Equity.

11. Why is the Income Statement non affected past changes in Inventory?

This is a common interview fault - incorrectly stating that Working Capital changes evidence upward on the Income Statement.

In the case of Inventory, the expense is only recorded when the goods associated with it are sold - and then if it'southward just sitting in a warehouse, it does not count as a Cost of Good Sold or Operating Expense until the company manufactures it into a product and sells information technology.

12. Permit's say Apple is buying $100 worth of new iPod factories with debt. How are all iii statements affected at the start of "Year one," before annihilation else happens?

At the start of "Yr 1," before anything else has happened, there would be no changes on Apple'south Income Argument (yet).

On the Greenbacks Catamenia Statement, the additional investment in factories would show up nether Cash Flow from Investing equally a net reduction in Cash Period (so Cash Flow is down by $100 then far). And the additional $100 worth of debt raised would show up equally an addition to Cash Menstruation, canceling out the investment activeness. Then the cash number stays the same.

On the Balance Sheet, there is now an additional $100 worth of factories in the Plants, Belongings & Equipment line, and so PP&E is up past $100 and Avails is therefore up by $100. On the other side, debt is upwardly by $100 as well and then both sides balance.

13. At present let'southward leave 1 yr, to the get-go of Year 2. Assume the debt is high-yield so no principal is paid off, and assume an interest rate of 10%. Also assume the factories depreciate at a rate of 10% per yr. What happens?

Subsequently a year has passed, Apple must pay interest expense and must record the depreciation.

Operating Income would subtract by $x due to the 10% depreciation accuse each twelvemonth, and the $10 in additional Interest Expense would decrease the Pre-Tax Income by $20 altogether ($ten from the depreciation and $ten from Interest Expense).

Assuming a tax charge per unit of xl%, Net Income would autumn by $12.

On the Cash Catamenia Argument, Net Income at the top is downward by $12. Depreciation is a non-cash expense, and then you add information technology back and the end issue is that Greenbacks Catamenia from Operations is down by $two.

That'southward the only alter on the Cash Flow Statement, so overall Cash is down past $ii.

On the Balance Sail, under Assets, Cash is downward by $2 and PP&E is down by $10 due to the depreciation, so overall Avails are down by $12.

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

Remember, the debt number under Liabilities does not change since we've assumed none of the debt is really paid back.

xiv. At the offset of Year iii, the factories all break down and the value of the equipment is written downwardly to $0. The loan must also be paid back now. Walk me through the iii statements.

After 2 years, the value of the factories is at present $lxxx if we go with the ten% depreciation per year supposition. Information technology is this $lxxx that nosotros volition write down in the three statements.

Offset, on the Income Argument, the $80 write-down shows upwards in the Pre-Tax Income line. With a 40% tax rate, Internet Income declines by $48.

On the Cash Flow Statement, Net Income is downward past $48 but the write-downward is a not­greenbacks expense, so we add it back - and therefore Greenbacks Catamenia from Operations increases by $32.

There are no changes under Greenbacks Flow from Investing, but under Cash Flow from Financing there is a $100 accuse for the loan payback - so Cash Flow from Investing falls by $100.

Overall, the Net Change in Greenbacks falls past $68.

On the Balance Sheet, Greenbacks is now down by $68 and PP&E is downwards by $80, then Assets take decreased by $148 altogether.

On the other side, Debt is downward $100 since it was paid off, and since Internet Income was down by $48, Shareholders' Disinterestedness is downwardly by $48 as well. Altogether, Liabilities & Shareholders' Equity are downwards by $148 and both sides balance.

xv. Now let's look at a different scenario and assume Apple is ordering $10 of boosted iPod inventory, using cash on mitt. They order the inventory, but they have not manufactured or sold anything yet - what happens to the 3 statements?

No changes to the Income Statement.

Cash Menses Statement - Inventory is up by $10, so Cash Flow from Operations decreases by $ten. At that place are no further changes, so overall Greenbacks is down by $10.

On the Balance Sheet, Inventory is upwards past $ten and Cash is down by $10 so the Assets number stays the same and the Balance Canvass remains in balance.

16. Now permit's say they sell the iPods for revenue of $20, at a cost of $ten. Walk me through the 3 statements under this scenario.

Income Statement: Acquirement is up past $20 and COGS is up by $10, so Gross Profit is upwardly by $10 and Operating Income is up by $ten too. Assuming a 40% revenue enhancement rate, Net Income is up past $half dozen.

Cash Flow Statement: Net Income at the top is up by $6 and Inventory has decreased by $ten (since we simply manufactured the inventory into real iPods), which is a net addition to cash flow - so Cash Flow from Operations is upwardly past $xvi overall.

These are the only changes on the Cash Flow Statement, so Net Change in Cash is up past $sixteen.

On the Remainder Sheet, Cash is up by $xvi and Inventory is down past $10, and then Assets is up by $half dozen overall.

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

17. Could yous ever end up with negative shareholders' equity? What does it mean?

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

1. Leveraged Buyouts with dividend recapitalizations - it means that the owner of the company has taken out a large portion of its disinterestedness (usually in the form of cash), which can sometimes plow the number negative.
2. Information technology can also happen if the visitor has been losing money consistently and therefore has a declining Retained Earnings balance, which is a portion of Shareholders' Disinterestedness.

It doesn't "mean" anything in particular, only it tin be a cause for concern and perchance demonstrate that the company is struggling (in the second scenario).

Note: Shareholders' equity never turns negative immediately after an LBO - it would merely happen following a dividend recap or continued net losses.

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

Working Capital = Electric current Assets - Electric current Liabilities.

If information technology'south positive, it means a company can pay off its short-term liabilities with its brusque-term assets. It is often presented as a financial metric and its magnitude and sign (negative or positive) tells you whether or not the company is "sound."

Bankers look at Operating Working Upper-case letter more unremarkably in models, and that is defined every bit (Current Assets - Cash & Greenbacks Equivalents) - (Electric current Liabilities - Debt).

xix. What does negative Working Capital mean? Is that a bad sign?

Non necessarily. It depends on the type of company and the specific situation - hither are a few different things it could mean:

1. Some companies with subscriptions or longer-term contracts frequently take negative Working Uppercase considering of loftier Deferred Revenue balances.
2. Retail and restaurant companies like Amazon, Wal-Mart, and McDonald's oftentimes have negative Working Capital considering customers pay upfront - so they can apply the cash generated to pay off their Accounts Payable rather than keeping a large cash balance on-hand. This tin be a sign of concern efficiency.
3. In other cases, negative Working Capital could betoken to financial trouble or possible bankruptcy (for instance, when customers don't pay quickly and upfront and the company is carrying a loftier debt balance).

20. Recently, banks have been writing down their assets and taking huge quarterly losses. Walk me through what happens on the 3 statements when at that place's a write­down of $100.

Starting time, on the Income Statement, the $100 write-downward shows up in the Pre-Tax Income line. With a 40% tax rate, Internet Income declines by $60.

On the Greenbacks Period Statement, Net Income is down by $60 but the write-down is a non­cash expense, so nosotros add information technology back - and therefore Greenbacks Flow from Operations increases past $40.

Overall, the Net Change in Greenbacks rises by $forty.

On the Remainder Sail, Cash is now up by $40 and an asset is down by $100 (information technology's not clear which asset since the question never stated the specific asset to write-down). Overall, the Assets side is down by $60.

On the other side, since Net Income was down past $threescore, Shareholders' Equity is as well downwards by $60 - and both sides residual.

21. Walk me through a $100 "bailout" of a visitor and how it affects the iii statements.

Outset, confirm what type of "bailout" this is - Debt? Equity? A combination? The most common scenario hither is an equity investment from the government, so here's what happens:

No changes to the Income Argument. On the Cash Menses Statement, Cash Flow from Financing goes up by $100 to reflect the authorities's investment, and so the Net Change in Cash is up by $100.

On the Balance Sheet, Greenbacks is up by $100 and so Assets are upwards by $100; on the other side, Shareholders' Equity would go upwardly by $100 to make it residue.

22. Walk me through a $100 write-down of debt - every bit in OWED debt, a liability - on a company'due south remainder canvass and how it affects the 3 statements.

This is counter-intuitive. When a liability is written down you record it as a proceeds on the Income Statement (with an asset write-down, it'southward a loss) - so Pre-Tax Income goes up by $100 due to this write-down. Assuming a 40% tax rate, Internet Income is up by $lx.

On the Greenbacks Flow Statement, Net Income is up by $lx, only we need to subtract that debt write-downwards - so Cash Menstruation from Operations is down by $40, and Net Modify in Greenbacks is downwardly past $40.

On the Residual Sheet, Cash is down by $forty and then Assets are downwards past $40. On the other side, Debt is down by $100 only Shareholders' Equity is up by $sixty considering the Net Income was upwards past $lx - then Liabilities & Shareholders' Equity is down past $40 and information technology balances. If this seems strange to y'all, you're not alone - come across this Forbes article for more than on why writing down debt actually benefits companies bookkeeping-wise:

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

23. When would a company collect greenbacks from a customer and not record it as acquirement?

Iii examples come to mind:

1. Web-based subscription software
2. Cell phone carriers that jail cell annual contracts
3. Mag publishers that sell subscriptions

Companies that hold to services in the futurity oftentimes collect cash upfront to ensure stable acquirement - this makes investors happy as well since they can amend predict a company's performance.

Per the rules of GAAP (Generally Accepted Accounting Principles), yous only tape revenue when you really perform the services - and so the company would not record everything as acquirement correct away.

24. If cash collected is not recorded as acquirement, what happens to it?

Usually it goes into the Deferred Revenue remainder on the Residuum Canvas under Liabilities.

Over time, as the services are performed, the Deferred Revenue balance "turns into" real revenue on the Income Argument.

25. What's the difference between accounts receivable and deferred acquirement?

Accounts receivable has not yet been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how much revenue the visitor is waiting on, whereas deferred revenue represents how much it is waiting to record equally revenue.

26. How long does it usually take for a company to collect its accounts receivable residual?

Generally the accounts receivable days are in the xl-50 mean solar day range, though it's college for companies selling high-finish items and it might be lower for smaller, lower transaction-value companies.

27. What'south the deviation between cash-based and accrual accounting?

Cash-based bookkeeping recognizes acquirement and expenses when cash is actually received or paid out; accrual accounting recognizes revenue when collection is reasonably certain (i.e. after a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are paid out in cash.

Most large companies use accrual accounting considering paying with credit cards and lines of credit is so prevalent these days; very small businesses may apply cash-based accounting to simplify their financial statements.

28. Let's say a customer pays for a TV with a credit carte du jour. What would this look similar nether cash-based vs. accrual accounting?

In cash-based bookkeeping, the revenue would not show up until the company charges the customer's credit card, receives authorization, and deposits the funds in its banking concern account - at which point information technology would show up as both Revenue on the Income Statement and Greenbacks on the Residue Canvass.

In accrual accounting, information technology would show up every bit Revenue correct abroad but instead of appearing in Cash on the Residue Canvas, it would go into Accounts Receivable at first. And so, in one case the cash is actually deposited in the company's banking concern account, information technology would "turn into" Cash.

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

If the asset has a useful life of over 1 year, it is capitalized (put on the Balance Sheet rather than shown as an expense on the Income Statement). Then information technology is depreciated (tangible assets) or amortized (intangible assets) over a certain number of years.

Purchases like factories, equipment and country all last longer than a year and therefore show up on the Rest Sheet. Employee salaries and the cost of manufacturing products (COGS) merely cover a brusk period of operations and therefore show up on the Income Argument as normal expenses instead.

30. Why exercise companies report both GAAP and non-GAAP (or "Pro Forma") earnings?

These days, many companies have "non-cash" charges such equally Amortization of Intangibles, Stock-Based Bounty, and Deferred Acquirement Write-down in their Income Statements. As a issue, some argue that Income Statements under GAAP no longer reflect how assisting most companies truly are. Non-GAAP earnings are almost always higher because these expenses are excluded.

31. A visitor has had positive EBITDA for the past 10 years, only it recently went broke. How could this happen?

Several possibilities:

1. The visitor is spending besides much on Capital Expenditures - these are non reflected at all in EBITDA, but it could yet be cash-menstruum negative.
2. The visitor has high interest expense and is no longer able to afford its debt.
3. The company's debt all matures on one engagement and information technology is unable to refinance information technology due to a "credit crunch" - and it runs out of cash completely when paying dorsum the debt.
4. Information technology has significant one-fourth dimension charges (from litigation, for example) and those are high enough to bankrupt the company.

Remember, EBITDA excludes investment in (and depreciation of) long-term assets, involvement and i-time charges - and all of these could terminate upward bankrupting the company.

32. Normally Goodwill remains constant on the Rest Sheet - why would it be impaired and what does Goodwill Impairment mean?

Commonly this happens when a company has been caused and the acquirer re-assesses its intangible avails (such as customers, brand, and intellectual holding) and finds that they are worth significantly less than they originally thought.

It often happens in acquisitions where the buyer "overpaid" for the seller and can consequence in a large internet loss on the Income Statement (see: eBay/Skype).

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

33. Under what circumstances would Goodwill increase?

Technically Goodwill can increase if the company re-assesses its value and finds that information technology is worth more, but that is rare. What ordinarily happens is 1 of ii scenarios:

1. The company gets acquired or bought out and Goodwill changes as a result, since it's an accounting "plug" for the purchase cost in an conquering.
2. The company acquires another company and pays more than what its assets are worth - this is then reflected in the Goodwill number.

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

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