Financial interview questions

Q1. Explain ‘financial modelling’.

Financial modeling is a quantitative analysis commonly used for either asset pricing or general corporate finance. It is the process wherein a company’s expenses and earnings are taken into consideration (commonly into spreadsheets) to anticipate the impact of today’s decisions in the future.

The financial model also turns out to be a very impactful tool for the following tasks:

Estimate the valuation of any business
Compare competition
Strategic planning
Testing different scenarios
Budget planning and allocation
Measure the impacts of any changes in economic policies

Since financial modeling is one of the most important primary skills, you can also share your experience through different financial models including the discounted cash flow (DCF) model, initial public offering (IPO) model, leveraged buyout (LBO) model, consolidation model, etc.

Q2. Walk me through a ‘cash flow statement.’

Ans. This is one of the basic finance interview questions.

Being one of the essential financial statements, you’ll have to be well-prepared for this question as day in and day out you have to use cash flow statements to successfully build a three-model statement.

When a recruiter asks this question during your interview, you can start by explaining the three main categories of cash flow statements:

Operating activities
Investing activities
Financing activities

After calculating the total cash from all the above-listed categories, adding an opening cash balance, and further explaining all significant adjustments, you will arrive at the total change in cash. Mention all the necessary parts that are associated with it in the answer to this financial analyst interview question.

However, during the interview, the interviewer will also be looking out for something more beyond the bookish knowledge about cash flow statements. S/he must be interested in how the statement of cash flow is useful to a financial analyst.

Now, this could turn into your bonus point as you can walk through the intent of using the cash flow statement, which is listed below:

Provides data and information about a firm’s liquidity status,
Helps in outlining the firm’s ability to alter cash flows status in future
Highlights the changes in account balances on the balance sheet
Helps in depicting the company’s ability to meet expansion requirements in future
Gives the estimation of available free cash flow

Q3. Is it possible for a company to have a positive cash flow but still be in serious financial trouble?

To answer this Financial Analyst interview question, you can say:

Yes. There are two examples –

A company that is selling off inventory but delaying payables will show positive cash flow for a while even though it is in trouble
A company has strong revenues for the period, but future forecasts show that revenues will decline

When you define such situations, it proves that you are not looking at the cash flow statements; instead, you care about where the cash is coming from or going to and mark all the points highlighting how the company is making or losing money.

Q4. What do you think is the best evaluation metric for analyzing a company’s stock?

There is no specific metric. It depends on how you put the answer and make the interviewers understand the value of the specific parameter that you mention.

The main intention of this question is to check your critical thinking abilities and logical skills. This question also gives you a chance to prove your capabilities in identifying potential pros and cons related to the available investment options. It may also help you score better for the eClerx aptitude test for financial analysts.

Generally, technical analysts use some of the following types of charts to check the stock price, which forms the basics of picking the right one:

Line charts (helps in tracking daily movements)
Bar charts (helps in tracking periodic highs and lows of stock price)
Point chart (helps in determining stock momentums)

Q5. What is working capital, and which are the different types of working capital?

The working capital formula is best defined as current assets minus current liabilities.

The primary function of working capital is to analyze the total amount of money that you have readily available to meet the demand of all the current expenses.

Since financial analysts play a major role in being an information mediator in capital markets, getting a true understanding of working capital needs is very essential. Also, an analyst must stay on their toes to forecast the actual working capital requirements, especially in the case when the company is constantly growing or expanding.

Also, you can highlight a few prior incidents when your existing company felt the need for additional working capital, and you can even back your answer with the ways you used to boost the working capital.

Another example of proving your abilities is to suggest the times when you and your team used the working capital data to operate current and future needs smoothly.

This is one of the important finance analyst interview questions for freshers and even intermediates.

Q6. Explain quarterly forecasting and expense models.

The analysis of expenses and revenue which is predicted to be produced or incurred in the future is called quarterly forecasting.

For this, referring to an income statement along with a complete financial model works well. However, making a realistic model is a challenge, and thus the role of a financial analyst comes here. As an expert, you need to model revenues with high degrees of detail and precision.

An expense model tells what expense categories are allowed on a particular type of work order, which forms the foundation of building a budget. Also, to make this model functional, an expense projection model is created, which helps in identifying variable and fixed costs which forms a basis of accurately forecasting the company’s expected profit or loss.

Q7. What is the difference between a journal and a ledger?

This is one of the most important questions for a finance interview.

The journal is a book where all the financial transactions are recorded for the first time. The ledger is one that has particular accounts taken from the original journal. So in layman’s terms, journals are the raw books that play a pivotal role in preparing the ledger. This gives us a second conclusion that if you wrongly prepare a journal, your ledger will also be faulty.

However, here the question which the recruiter will ask during the financial analyst interview is to understand your foundational knowledge as this, directly or indirectly relates to the Financial Analyst job role, which is mentioned below:

Reviewing journal entries (to ensure the data is correct)
Checking the distribution work area to manage journal entries for ledgers
Ensuring that all accounting standards are met
Verifying set of subsidiaries or management segment values
Managing sub-ledger source transaction
Recurring general ledger journal entries
Reviewing financial statements and other transactions

Q8. Mention one difference between a P&L statement and a balance sheet.

The balance sheet summarises the financial position of a company for a specific point in time. The P&L (profit and loss) statement shows revenues and expenses during a set period.

Q9. What is ‘cost accountancy’?

This is one of the important and most commonly asked financial analyst interview questions. It is asked by many employers to check if the candidate has some basic understanding of cost accounting. This also appears to be one of the most common MBA Finance interview questions and answers.

Cost accountancy is the application of costing and cost accounting principles, methods, and techniques to the science, art, and practice of cost control and the ascertainment of profitability as well as the presentation of information for managerial decision-making.

Q10. What is NPV? Where is it used?

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 analyze the profitability of a projected investment or project.

Q11. How many financial statements are there? Name them

There are four main financial statements –

Balance sheets
Income statements
Cash flow statement
Statements of shareholders’ equity

This is an example of easy financial analyst interview questions and answers.

Q12. What are ‘adjusting entries’?

Adjusting entries are accounting journal entries that convert a company’s accounting records to the accrual basis of accounting. You can further highlight the different types of adjusting entries such as accrued revenue, accrued expenses, depreciation expenses, etc.

Q13. Do you follow the stock market? Which stocks in particular?

You need to be very careful in answering this interview question related to financial markets. As a financial analyst, following the stock market proves to be beneficial. Also, always be up-to-date with the stocks.

Q14. What is a ‘composite cost of capital’?

Also known as the weighted average cost of capital (WACC), a composite cost of capital is a company’s cost to borrow money given the proportional amounts of each type of debt and equity a company has taken on.

WACC= Wd (cost of debt) + Ws (cost of stock/RE) + Wp (cost of pf. Stock)