Finance Interview Questions and Answers

“Financing means asking any financial institution (bank, credit union, finance company) or another person to lend you money that you promise to repay at some point in the future.”

“Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals and others on the terms that are most favorable to achieve their economic objectives.”

“Finance is concerned with cash. It is so, since, every business transaction involves cash directly or indirectly.”

“Finance is the study of money and assets coupled with the management and use of those assets to build wealth. The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their financial affairs.”

The finance function encompasses a variety of functions, activities and processes. It compasses financing functions, budgetary functions, risk and return management, cash flow management, cash management, financial management, risk and governance and many more associated functions.”

Features of Finance:

• Acquisition, Allocation & Utilization of Funds:
• Financial Management
• Channelizing Funds
• Maximization of Shareholder’s Wealth

Working capital is a common measure of a company’s liquidity, efficiency, and overall health. Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short-term accounts, a company’s working capital reflects the results of a host of company activities, including inventory management, debt management, revenue collection, and payments to suppliers.

It is also referred to as net sales to working capital. It indicates a company’s effectiveness in using its working capital. The working capital turnover ratio is calculated as follows: net annual sales divided by the average amount of working capital during the same 12 month period.

In finance or business, Solvency is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. It can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth.

This is best measured using the net liquid balance (NLB) formula. In this formula solvency is calculated by adding cash and cash equivalents to short-term investments, then subtracting notes payable.

It is also known as weighted average cost of capital which is a measurable unit for it. It also tells about the component costs of common stock, preferred stock, and debt. Each of these components is given weightage on the basis of the associated interest rate and other gains and losses with it.

It shows the cost of each additional capital as against the average cost of total capital raised. A high composite cost of capital, indicates that a company has high borrowing costs; a low composite cost of capital signifies low borrowing costs.

Strategic financial management mention to specific planning of the usage and management of a company’s financial resources to attain its objectives as a business concern and return maximum value to shareholders.

It involves precisely defining a company’s business objectives, identifying and quantifying its resources, devising a plan for utilizing finances and other resources to achieve its goals, and establishing procedures for collecting and analyzing data, making financial decisions, and tracking and analyzing variance between budgeted and actual results to identify problems and take appropriate corrective actions.

Financial accounting (financial accountancy) is field of accounting that treats money as a means of measuring economic performance instead of as a factor of production. It encompasses the entire system of monitoring and control of money as it flows in and out of an organization as assets and liabilities, and revenues and expenses.

Financial accountancy is governed by both local and international accounting standards. Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting used in any given jurisdiction. It includes the standards, conventions and rules that accountants follow in recording and summarizing and in the preparation of financial statements.

Definition: Reporting of the financial position and performance of a firm through financial statements issued to external users on a periodic basis.

Financial Management is a vital activity in any organization. It is the process of planning, organizing, controlling and monitoring financial resources with a view to achieve organizational goals and objectives. It is an ideal practice for controlling the financial activities of an organization such as procurement of funds, utilization of funds, accounting, payments, risk assessment and every other thing related to money.

Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as:

• Are assets being used efficiently?
• Are the businesses assets secure?
• Do management act in the best interest of shareholders and in accordance with business rules?

Public Finance is a part of study of Economics. It borders on the fields of government and political science. Public finance is the study of the financial activities of governments and public authorities. Public finance describes finance as related to sovereign states and sub-national entities (like states/provinces) and related public entities (e.g. municipal corporations) or agencies.

It describes and analyses the expenditures of governments and the techniques used by governments to finance these expenditures. It is concerned with the identification of required expenditure of a public-sector entity and sources of revenue and the budgeting process. Public finance analysis helps us to understand why certain services have come to be supplied by government, and why governments have come to rely on particular types of taxes.

Corporate finance is the task of providing the funds for a corporation’s activities by raising and administering funds. Corporate finance aims at studying the funding of assets from various sources like market, general public, or various financial institutions. In this process corporate finance aims to balance risk and profitability, while attempting to maximize an entity’s wealth and the value of its stock.

The importance of corporate finance is underlined by economic and social significance in terms of increase in public responsibility as the organization grows and wide distribution of the corporate ownership in the process separating ownership from management.

Personal finance refers to the financial decisions which an individual must make to plan for his future. These decisions include obtaining monetary resources, planning application of income, budgeting, deciding on amounts and mode of saving, and decisions around spending monetary resources over time. During this process one is expected to take into account various financial risks and future life events that may impact current income levels or projected incomes and must plan for them

Yes, it is. A company that is selling off inventory but delaying payables will show positive cash flow for a while–even though they’re in trouble. Another example would be where a company has strong revenues for the period but future forecasts show that revenues will decline. This would happen when a company hasn’t focused on making sure there were new prospects/sales in the pipeline.

The current ratio is the proportion (or quotient or fraction) of the amount of current assets divided by the amount of current liabilities.

Working capital is not a ratio, proportion or quotient, but rather it is an amount. Working capital is the amount remaining after current liabilities are subtracted from current assets.

Absolutely. A company that’s experiencing a deterioration of working capital (i.e. decrease in accounts payable, increase in accounts receivable) can show positive net income but be in financial trouble in the future. It’s also possible to show positive net income while in financial trouble by manipulating financial statements (e.g. revenue recognition, expense recognition, etc.)

Financial modelling is a quantitative analysis commonly used for either asset pricing or general corporate finance. It is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio of a business, project, or any other investment.

Financial modeling is a general term that means different things to different users; the reference usually relates either to accounting and corporate finance applications, or to quantitative finance applications.

A deferred tax liability is just the opposite of a deferred tax asset. The deferred tax liability occurs when a tax expense reported on the income statement is not paid to the IRS during the same period it is recognized–it’s paid at a future date.

Deferred tax liabilities can result when there are differences in depreciation expense between book reporting (GAAP) and IRS reporting which lead to differences income as reflected on a company’s income statement versus what’s reported to the IRS–and which

A liquidity ratio is an indicator of whether a company’s current assets will be sufficient to meet the company’s obligations when they become due. The liquidity ratios include the current ratio and the acid test or quick ratio. The current ratio and quick ratio are also referred to as solvency ratios. Working capital is an important indicator of liquidity or solvency, even though it is not technically a ratio.

A deferred tax asset (as its name suggests) is when a company pays more in taxes to the IRS than they actually owe (as shown as an expense on their income statement). This is an asset because it can be used to offset future tax expense in the future. Deferred tax assets can result from differences in revenue recognition, expense recognition, and net operating losses.

The balance sheet reports a company’s assets, liabilities, and owner’s equity as of the last instant of an accounting year. Generally, the amount of the owner’s equity will have changed from the previous balance sheet amount due to

The company’s net income

The owner’s additional investments in the business

The owner’s withdrawals of business assets

If the owner did not invest or withdraw, the change in owner’s equity is likely to be the amount of net income earned by the business. The revenues, expenses, gains, and losses that make up the net income are reported on the company’s income statement.

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project.

Adjustment entries are accounting journal entries that convert a company’s accounting records to the accrual basis of accounting.

In accounting, goodwill is an intangible asset associated with a business combination. Goodwill is recorded when a company acquires (purchases) another company and the purchase price is greater than the combination or net of the fair value of the identifiable tangible and intangible assets acquired, and the liabilities that were assumed. Goodwill is an intangible asset, and so is listed within the long-term assets section of the acquirer’s balance sheet.

Cash flow statement (CFS) or statement of cash flows is a mandatory part of a company’s financial reports since 1987 – records the amount of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how it is being spent. Here you will learn how the CFS is structured, and how to use it as part of your analysis of a company.

WACC (weighted average cost of capital) is calculated by taking the percentage of debt to total capital, multiplied by the debt interest rate, multiplied by one minus the effective tax rate, plus the percentage of equity to capital, multiplied by the required return on equity.

Cost Accounting is of utmost importance for the top management of any business. It  is basically the next step to costing. It involves analyzing relevant costing data, interpret it and present various management problems to management.

The scope of cost accounting involves preparation of various budgets for an organization, determining standard costs based on technical estimates, finding and comparing with actual costs, ascertaining the reasons of by variance analysis etc.

It is basically a profession where you work for corporate houses to help them work efficiently in terms of financial matters. A cost and management accountant would collect data and financial facts of the organization and would analyze them to help reduce the cost to the company. A cost reduction and maintain efficiency in operations, going on is the main work and the area of expertise for any Cost and Management Accountant.

(Source: Wiki and Accounting coach and Finance related)