MUST-KNOW Finance Interview Question & Answers

Summary

This video provides a comprehensive guide to common finance interview questions, covering three key areas: accounting, finance, and brain teasers. It explains concepts such as cash vs. accrual accounting, how the three financial statements connect, and how inventory impacts them. The video also dives into valuation methods, capital investment assessment, and the importance of EBITDA. Lastly, it tackles brain teasers, including mental math tricks and guesstimates like estimating the revenue of a hairdresser. This content is perfect for those preparing for finance-related interviews or looking to enhance their financial knowledge.

Takeaways

• 😀 Cash accounting records transactions when cash is exchanged, while accrual accounting records them when revenue is earned or expenses are incurred, regardless of cash flow timing.
• 😀 The three main financial statements (Income Statement, Balance Sheet, and Cash Flow Statement) are interconnected, with net income linking the Income Statement to the Balance Sheet and Cash Flow Statement.
• 😀 Depreciation on the Income Statement affects both the Balance Sheet (through property, plant, and equipment) and the Cash Flow Statement (under operating cash flow).
• 😀 An increase in inventory by $10 would affect the Balance Sheet by increasing inventory and decreasing cash, but the Income Statement remains unaffected until the inventory is sold.
• 😀 The three main valuation methods are Discounted Cash Flow (DCF), Comparable Companies Analysis (CCA), and Precedent Transactions Analysis (PTA). Each provides a different perspective on company valuation.
• 😀 DCF is an internal method based on projected future cash flows, while CCA and PTA use external data (market peers and past transactions) to estimate a company's value.
• 😀 When assessing capital investments, key metrics include Net Present Value (NPV), Internal Rate of Return (IRR), and the Payback Period, with each focusing on different financial aspects of the investment.
• 😀 EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a profitability measure that excludes financing and capital expenditures, making cross-company comparisons easier.
• 😀 Brain teasers in interviews often test mental math and market sizing. Mental math can be simplified by identifying patterns, like using numbers close to a round figure to simplify calculations.
• 😀 Guesstimates, such as estimating the income of a hairdresser, require making reasonable assumptions and walking through the logic of the answer, rather than finding a precise figure.
• 😀 For mental math questions, it's often helpful to break numbers down into manageable parts (e.g., calculating 32 times 28 by using 30 times 30 and adjusting for the differences).

Q & A

What is the main difference between cash and accrual-based accounting?

Cash accounting records transactions only when cash is received or paid, while accrual accounting records transactions when the revenue is earned or the expense is incurred, even if cash hasn't been exchanged yet.

How do the three financial statements connect?

Net income from the income statement links to retained earnings on the balance sheet and to operating cash flow on the cash flow statement. Depreciation on the income statement connects to non-current assets on the balance sheet, and property, plant, and equipment (PPE) links to cash flow from investments in the cash flow statement.

What happens when inventory increases by $10?

On the income statement, there is no effect until the inventory is sold. On the balance sheet, inventory increases by $10, while cash decreases by $10 (if paid in cash). On the cash flow statement, cash decreases by $10 due to the purchase.

What are the three main valuation methods used in finance?

The three main valuation methods are the Discounted Cash Flow (DCF), Comparable Companies Analysis, and Precedent Transactions Analysis. DCF is an internal method based on projected cash flows, while the other two methods rely on comparing the company to peers or past transactions.

What is the Net Present Value (NPV) and how is it used in capital investment assessments?

NPV calculates the value of a project by discounting future cash flows to the present. If the NPV is greater than zero, the project is typically considered viable. It's a common method for assessing capital investments.

How does the Internal Rate of Return (IRR) relate to the discount rate when evaluating a project?

The IRR is the discount rate that makes the NPV of a project equal to zero. If the IRR is greater than the required discount rate, the project is typically accepted as a good investment.

What is EBITDA, and why is it commonly used in finance?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is used as a measure of profitability that excludes the effects of financing and capital expenditures, making it easier to compare companies within the same industry based purely on their operating performance.

What are the main methods to assess a capital investment project?

The main methods are NPV (Net Present Value), IRR (Internal Rate of Return), and Payback Period. NPV determines if the project's value is positive, IRR compares the project's return to the required rate, and Payback Period calculates how long it takes to recover the investment.

How should you approach mental math questions in finance interviews?

For mental math questions, it's useful to break the numbers into smaller components that are easier to calculate. For example, if multiplying 32 by 28, recognize both numbers are close to 30, then use that to simplify the math and arrive at the correct answer.

How should you tackle guesstimates or market sizing questions in an interview?

In guesstimates, it's important to outline your assumptions and steps clearly. For example, estimating how much a hairdresser makes involves assumptions like pricing, time spent, and occupancy rates. The process matters more than the exact number, so stay logical and transparent.