Top finance interview questions | Finance Internship

Finance interview questions

The field of finance possesses great potential and buzz in terms of job opportunities and lucrative pay.


BY KAUSHIK

16th April 2020

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For one to become an expert in the field of finance, he/she has to possess knowledge in the different processes and terms related to finance, and must also possess some sort of practical exposure in the domain.

The skills that one acquires through such measures keeps them in good stead when the time comes for them to get employed, the most prominent entry role in the field of finance is that of a Financial Analyst or as a Chartered Financial Analyst (CFA) which contain many challenges for one to become and none are bigger than cracking the all-important interview.

As if the thought itself wasn’t unnerving, the interviewer will work earnestly towards maintaining the difficulty during the interview and will look to keep you on the edge and away from your comfort zone by incessantly testing your knowledge, both basics and advanced, and will try his/her hardest to make you feel unsettled.

But with the proper knowledge of attending to these questions you can easily clear the interviews and deliver very well. To make your job easier, I have compiled a collection of the most common interview questions in finance, which will keep you well-prepared and a step ahead when the crunch time rolls around.

Q. Explain Cash Flow Statements in detail?

A cash flow statement is an important piece of information that tracks the influx and exfiltration of money within a business or a company. A cash flow statement is prepared either using Direct or Indirect Method. The Direct method involves calculating the collective amount gained through sales, management and other dividends from which the various expenses are deducted. Indirect Method uses Net income and then deducts other expenses like amortization expenses and depreciation etc to arrive at the final income value. Cash Flow statements are of three types:-

  1. Cash Flow from Operations
  2. Cash Flow from Investing
  3. Cash Flow from Finance

Q. Explain “financial modelling”?

Financial Modelling is explained as a quantitative analysis especially used for assessing asset pricing or corporate financing.

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Q.What are the three sources of short-term financing?

The three main sources of short term financing are:

  • Trade Credit - Trade credit is based on an agreement between the two parties involved i.e Buyer and seller. The buyer does not pay the seller the amount for the goods while purchasing, rather promising to pay the credit at a later date. Trade credit is contingent on the mutual trust between the buyer and the seller.
  • Bank Overdraft - A bank overdraft is when the person or party in need of money can withdraw more money than what they contain in their bank account. This is subject to the account being under bank regulation. An interest amount is charged on the fee taken from the bank as credit.
  • Unsecured Bank Loans - Unsecured bank loans are provided by the bank to an individual which is to be repaid within 12 months. This loan is unsecured because the entity requiring the loan doesn’t need to show up any collateral for availing the loan.

Q. What is Debt?

Debt is defined as the situation in which an individual or a company is coerced into or is spending more money that it can generate. In this case, the entity doesn’t have surplus and is required to either sell off commodities or avail money from other sources, this in turn adds up over time.

Q. What is Equity?

Financially speaking, Equity is defined as the difference between the cost of the liabilities and the asset value. It is based on the value that the asset generates and the level to which the liabilities add up in making the asset usable and saleable.

Q. What is meant by corporate finance?l

Corporate Finance simply means the management of the finances and cash flows of an organization or company.

Q. Define Working Capital

Working Capital is basically Current Assets minus Current Liabilities. Working capital tells us about the amount of capital tied up to its business (daily activities) such as account receivables, payables, inventory in hand and many more. Working capital can also tell us the amount of cash needed to pay off the company’s obligations which have to be paid off within 12 months.

Q. What is EPS?

EPS stands for Earnings-Per-Share which is a financial metric calculated by dividing the total income or earning generated by the total amount of outstanding shares present with the stakeholders in the company. It helps an organization to assess the profitability of the company, the higher the EPS, the profitability of the company is higher and better.

Q. What is a balance sheet?

A balance sheet is a financial recording statement that keeps track of assets (what the organization contains as its funds), and liabilities (the sources of the funds).

Q.What are the components of a balance sheet? Why should they be analyzed?

The major components of a balance sheet include information about the assets and liabilities handled by the company. Assets are the tangible funds that the company possesses and can be current, non-current and intangible assets as well like cash and property are tangible assets and product rights are intangible assets.

Liabilities of an organization are also supposed to be documented to keep track of the sources and the duration of which they are liable for cashing in or out.

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

A journal is used for keeping track of new accounts and transactions in detail. A ledger is a collection of accounts contained within the journal.

Q. What is meant by the term “Share Capital”?

Share capital can be defined as the capital that an organization houses from the structure and management of shares as well as ascertaining the types of shares and their value as well.

Q. What is the difference between a Futures Contract and a Forwards Contract?

A futures contract is a standardized contract where the buyer or seller of the contract can buy or sell in lot sizes that are already specified by and traded through exchanges. Future markets have clearing houses that manage the market and therefore, there is no counterparty risk.

Forwards Contract is a customizable contract which means that the buyer or seller can buy or sell any amount of contract they wish to. These contracts are OTC (over the counter) contracts i.e. no exchange is required for trading. These contracts do not have a clearing house and therefore, the buyer or the seller of the contract is exposed to the counterparty risk.

Q. What is a bond? What are the different types of bonds?

A bond is a fixed-income security that has a coupon payment attached to it which is paid by the bond issuer annually or as per the conditions set at the time of issuance. These are the types of bonds:

  • Corporate bonds, issued by corporations
  • Supra-National Bond issued for inter-governmental organizations like IMF and World Bank
  • Sovereign National Bond which is issued by the government of the country.

Q. What is the difference between a P&L statement and a balance sheet?

A balance sheet shows the financial workings of a company at a particular point in time, whereas a P & L (Profit & Loss) statement shows the financial details of a company of a particular period of time in focus.

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Q. What are the various types of financial statements?

There are four main types of financial statements:

  • Cash-flow statements
  • Income statements
  • Balance sheets
  • Shareholder equity statements

Q.What are Stock Options?

Stock Options are the options to convert into common shares at a predetermined price. These options are given to the employees of the company in order to attract them and make them stay longer. The options are generally provided by the company to its upper management to align management’s interests with that of its shareholders. Stock Options generally have a venting period i.e. a waiting period before the employee can actually exercise his or her option to convert into common shares.

Q.What is the difference between Current Account and Capital Account?

Current account is the financial account of the economy or any individual entity which shows results of various revenue income and expenditure and calculates revenue profits. The capital account indicates various capital income and expenditure like purchase and sale of fixed assets, capital repairs, sale of investments etc.

Q. What are adjustment entries? .

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

Q. What is goodwill?

Goodwill is an asset that captures excess of the purchase price over the fair market value of an acquired business.

Q. What is free cash flow?

Free cash flow is defined as the mathematical difference between cash from operations and capital expenditures.

Q. What are some of the common credit metrics that banks use?

Some of the common credit metrics used by banks are debt/equity, debt/capital, debt/EBITDA, interest coverage, fixed charge coverage, and tangible net worth.

Q. What is cost accountancy?

Cost accountancy is the application of costing and accounting principles, and also the techniques involved in maintaining the accounting structures to take informed decisions in terms of costing and accounting practices.

Q. What is NPV and where is it used?

NPV stands for Net Present Value which is the mathematical difference between the total amount of cash inflows and cash outflows. It is used to ascertain the profitability of undertaking any financial model or project at a certain time.

Q. What is ‘capital structure’?

The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

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Q.What is WACC?

WACC stands for Weighted Average Cost of Capital is defined as a company’s cost incurred to borrow money when the proportional amounts of each type of debt and equity a company has taken on is given. Mathematically, it can be represented as:-

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

-> WACC is also referred to as Composite Cost of Capital

Q. How do you forecast costs?

Forecasting costs can be done by using various approaches such as percentage of revenues, variable costs based on revenues, fixed cost based on historical trends and depreciation from the separate schedules, cost other than depreciation as a percent of revenues and depreciation from a separate.

Q. How would you define an expense model?

An expense model is a budget record which is used to foresee potential profits or losses. It provides insight in all the costs of a business and is a common tool for responsible management of a company.

Q. What is the function of fundamental analysis?

Fundamental Analysis is the method by which an organization finds out the value of a business by looking at the data from financial statements and using ratio analysis. Through fundamental analysis one can look through a company’s economic situation and arrive at an intrinsic valuation based on its observations.

Q.What is Horizontal Analysis?

Horizontal analysis is a useful analytical tool that measures the changes to corresponding financial items or assets over a period of time. Horizontal analysis assesses two separate records to analyze and gauge trends in financial performance.

Q. What is ROI? Why is it important?

ROI stands for Return on Investment. It is a method which assesses the profitability of doing an investment. ROI is calculated by dividing the profit on investment by the cost of investment. If the ratio is positive then the process for investment can be carried forward, if the ratio is negative then we need to take a step back and analyze the cause for the negative ratio. ROI determines whether the operation that is to be undertaken has potential in terms of reaping rewards and is an important part of companies undertaking such business ventures.

Q.What is ROE? What is it used for?

ROE stands for Return on Equity Ratio and is used to evaluate a company’s profitability levels. It gauges how much the company has in equity investment and works as a metric for comparison with the industry standards and competition. It is also known as Net Income/Owner’s Equity.

Q. What is debt to equity ratio?

The debt to equity ratio is an essential metric used in corporate finance. It measures the degree to which a company’s operations are funded through debt as compared to its own funds. It also indicates the company’s ability to cover all outstanding debts using shareholder equity in case of a downturn. The debt to equity ratio is calculated by dividing total liabilities by its total shareholder equity.

Q. What is an earnings announcement?

An earnings announcement is the official statement of a company’s profitability for a specified time period, which is shared with the public. It is usually preceded by estimates issued by analysts. If the company has experienced profits, it is likely that the share price will increase after the announcement has been made.

Q. What is technical analysis?

Technical analysis focuses on using statistics to track trends in prices and markets. Instead of analysing security values like fundamental analysis does, technical analysis looks at patterns and phenomena to derive information about the market.

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I hope these questions help you to understand the basics and advanced concepts of financial analysis and modelling and help you to perform better in your interviews and competitive examinations. For more detailed knowledge on these terms and procedures, look no further, enroll today in Verzeo’s Finance Internship Course and build your skills and credentials to carve a successful career in the field of finance.



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