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Financial Statement Analysis Interview Question With Answers Part 1

Q1- Explain Me about what is equity in Balance Sheet?

Suggested Answer: The word "equity" can mean either the stockholders' equity or the owner's equity. It means a share of ownership in a company.

"Equity" can also mean the sum of a company's debts and the value of its owners' shares. Take the equation used in basic accounting as an example.

The equation assets = liabilities + owner's equity can be rewritten as assets = equity.


Q2- Explain me what is the cost of sales and what should be include in COS and what should not be include in COS?

Suggested Answer: Cost of sales is often listed instead of cost of goods sold on a manufacturer's or retailer's income statement.

A manufacturer's cost of sales is the cost of finished goods in inventory at the beginning of the accounting period plus the cost of goods made during the period minus the cost of finished goods in inventory at the end of the period.

The cost of sales for a retailer is the cost of the items in its inventory at the beginning of the accounting period plus the net cost of the items bought during the period minus the cost of the items in its inventory at the end of the period.

Selling, general, and administrative (SG&A) costs and interest costs are not included in the cost of sales.



Q3- Tell me what is difference between an expense and an expenditure?

Suggested Answer: On the income statement, an expense is recorded in the period in which the cost corresponds to the related sales, has passed its expiration date, has been used up, or had no value going forward.

An expenditure is a payment or disbursement. The expenditure may be for the purchase of an asset, the reduction of a liability, a distribution to the owners, or it may be a payment made in the same as accounting period the amount becomes an expense. All of these are possible uses for the expenditure.


Q4- Tell me what is difference between liability and debt and tell me the examples of Liablities?

Suggested Answer: A liability is an obligation that a company has because of a past transaction.

Examples of Liabilities

A common types of liabilities include:

  • Accounts payable

  • Loans or notes payable

  • Accrued expenses payable

  • Deferred revenues

  • Bonds payable

  • Income tax payable

  • Deferred income tax


Q5- Tell me what is the difference between a cost and an expense?

Suggested Answer: There are those who use the terms cost and expense interchangeably. On the other hand, when we talk about the cost of something, we are referring to the amount of money that was paid to acquire a product, service, etc. There are costs that are not expenses, such as the cost of land, costs that will become expenses in the future, such as the cost of a new delivery truck, and costs that become expenses right now (televison advertisement).


Q6- Explain me about what is the meaning of going concern?

Suggested Answer: The going concern assumption is one of the most important accounting assumptions. For a business to be a going concern, it must be able to keep running long enough to meet its obligations, goals, and other commitments. In other words, the company won't have to go out of business or have to be liquidated. If a company isn't sure if it can meet the "going concern" assumption, the facts and circumstances must be shown in its financial statements.


Q7- Tell me what is the meaning of interest expense?

Suggested Answer: Interest expense is how much it costs to borrow money for a certain amount of time. Interest costs happen every day, but the interest is likely to be paid monthly, quarterly, semiannually, or annually.


Q8- Explain the difference between assets and fixed assets?

Suggested Answer: Assets are things that a business owns because of transactions. Cash, accounts receivable, inventory, prepaid insurance, land, buildings, equipment, trademarks and customer lists bought from another business, and some deferred charges are all examples of assets.

Most of the time, the term "fixed assets" refers to a business's property, plant, and equipment, which are long-term assets that can be seen and touched. Land, buildings, manufacturing equipment, office equipment, furniture, fixtures, and cars are all examples of fixed assets. Except for land, fixed assets are written down over the time they are used.


Q9- Tell me why the Cost of Goods Sold is an Expense

Suggested Answer: Expenses are usually things like salaries, advertising, rent, commissions, interest, etc. The cost of goods sold, on the other hand, is an expense that must be matched to the sales of those goods. So, a company's operating income is its operating revenues minus the cost of goods sold and its sales, general, and administrative expenses.


Q10- Explain me about what is inventory and what are the examples of Inventories?

Suggested Answer: Inventory is a very important asset that retailers, wholesalers, and manufacturers have right now. Inventory acts as a buffer between 1) how many goods a company sells and 2) how many goods it buys or makes. Companies try to find the right amount of inventory so they can meet the changing needs of their customers, keep production from stopping, and keep holding costs as low as possible. Inventories: Some Examples Most likely, retailers and distributors will have merchandise in their stock. There will be three or four types of inventory for manufacturers:

Raw-materials, Work In Progress(WIP) and Finished goods

Manufacturers are required to report the amount of each inventory category on its balance sheet or in the notes to the financial statements.





Q11- What are the long-term asset and can you give some examples with explanation?

Suggested Answer: A long-term asset is something that is not expected to be turned into cash or used up within a year of the date in the balance sheet's heading. If a company's operating cycle is longer than a year, it's not likely that a long-term asset will turn into cash during that time. Another way to say this is that a long-term asset is an asset that does not meet the requirements to be reported as a current asset. So, long-term assets are also called noncurrent assets or assets with a long life.


Long-term assets include:

  • Investments for the long term. Some of these are investments in the stocks and bonds of other companies, the bond sinking fund of a company, the cash surrender value of life insurance policies that the company owns, real estate that is waiting to be sold, and so on.

  • Land, buildings, and tools. This group includes land, buildings, machinery, equipment, vehicles, fixtures, and other things that a business uses. The cost of these assets is reported, and the amount of depreciation that has been added to the opposite asset is also included.

  • Immaterial assets. These are things like trademarks, patents, customer lists, goodwill, and other things that were bought in a deal.


Q12- Is it possible for owner's equity or common equity can be a negative amount?

Suggested Answer: When a company has negative owner's equity, its debts are greater than its assets.


Q13- Explain me what is a financial statement and Examples of financial statement?

Suggested Answer: Most of the time, the term "financial statement" refers to: General-purpose financial reports that a company sends to people outside of the company. A more detailed financial report that stays inside the company and is used by the company's management.

Examples of Financial Statements

The external financial statements issued by company should include all of the following:

  • Income statement

  • Statement of comprehensive income

  • Balance sheet

  • Statement of cash flows

  • Statement of stockholders' equity


Q14- Tell me weather advertising is an asset or expense?

Suggested Answer: Advertising is how much a company spends to promote its products, brands, and image through TV, radio, magazines, the Internet, etc. Since accountants can't predict how well advertising will work in the future, the costs of advertising must be reported as a "advertising expense" at the time the ads run.

A current asset account like "Prepaid Advertising" should be used to keep track of the cost of ads that have already been paid for but won't be shown until later. When the ad airs, the money must be moved from the Prepaid Advertising account to the Advertising Expense account.


Q15- Explain me what is the difference between par and no par value stock?

Suggested Answer: Some state laws require or may have required that corporations based in those states give their common stock a par value. If a par value is required, the company will likely give each share of common stock a very small amount. The par value is also called the legal capital of the company.

On the other hand, if a company gives out preferred stock, the par value of this stock is important because dividends are expressed as a percentage of the par value of the preferred stock.


Q16- What is accrued revenues and where they are recorded?

Suggested Answer: Accrued revenues are things like fees for services, interest income, sales of goods, etc. that a business has made but hasn't fully processed yet, so they aren't in the company's general ledger accounts.

Under the accrual method of accounting, these amounts must be written down at the end of the accounting period. By putting these amounts on an adjusting entry for the last day of the accounting period, they will show up on the financial statements for that period.


Q17- What is the difference between stockholder and shareholder?

Suggested Answer: A person who owns shares of a company's common stock is usually called a stockholder or a shareholder.

Most of the time, a person who owns a company's preferred stock is called a preferred stockholder or a preferred shareholder.

Dividends may be given to stockholders based on how many shares of stock they own. Stockholders also want the value of their shares to go up on the market.

In short, a stockholder and a shareholder are the same thing.


Q18- What is meaning of statement of cash flows and what are the examples of Cash flow?

Suggested Answer: One of the external financial statements that must be made is the statement of cash flows (SCF). The cash flow statement is another name for the SCF.

The following is shown on statement of cash flows:

  • A reconciliation of the change in a company cash & cash equivalents from the beginning of the accounting period to the end of the accounting period. Additional information, such as the amount of income taxes paid, the amount of interest paid, and the most important noncash investing and financing activities (such as issuing common stock in exchange for land).

  • The statement of cash flows is important because investors, lenders, financial analysts, and other people are interested in an organization's cash flows, which can't be found on the income statement because it uses the accrual method of accounting.

Example of a Cash Flow Statement

You can find an example of a SCF by looking on the internet for any publicly traded company. You will see that the cash inflows to the company are listed without parentheses, while the cash outflows are listed in parentheses. The financial statement shows how the major cash flows are set up: Operating activities, Investing activities, Financing activities


Q19- What is organic growth mean?

Suggested Answer: Organic growth is often used to describe a company's sales growth that didn't come from buying another company. Organic growth is the growth that comes from the company's existing businesses, not from the businesses it bought during the time period.

For instance, a company's sales may have gone up by 25% over the last year. But the only reason sales went up was because they bought a competitor. So, it couldn't grow on its own.


Q20- Explain me what is a capital expenditure vs. a revenue expenditure?

Suggested Answer: A capital expenditure is the amount of money spent to buy or significantly improve a long-term asset, like a building or piece of equipment. Most of the time, the cost is written down in a balance sheet account called "Property, Plant, and Equipment." The cost of the asset (except for the cost of the land) will then be spread out over the useful life of the asset as a depreciation expense. Each period's depreciation costs are also added to the Accumulated Depreciation account, which is a contra-asset account.


Examples of Capital Expenditures

Some examples of capital expenditures are the amounts spent to buy or significantly improve assets like land, buildings, equipment, furniture, fixtures, and vehicles. On the statement of cash flows, the total amount spent on capital expenditures during an accounting year is listed under "investment activities."

A revenue expenditure is the amount spent on an expense that will be immediately matched with the income reported on the income statement for the current period.


Examples of Revenue Expenditures

Repairs and maintenance, selling, and general and administrative costs are all examples of revenue expenditures.


Q21-Explain me about goodwill?

Suggested Answer: Goodwill is an intangible asset that comes with a merger or acquisition of a business. Goodwill is recorded when a company buys another company and the purchase price is more than the fair value of the identifiable tangible and intangible assets acquired, minus the liabilities that were assumed.





Q22- What is a long-term liability and what are the examples of long term Liability?

Suggested Answer: Long-term liabilities are obligations that are not due within one year of the date of the balance sheet (or not due within the company's operational cycle if the liability is for a period of time that longer than one year). These liabilities are the outcome of an earlier occurrence. Noncurrent liabilities are another phrase that can be used to refer to long-term liabilities.

Examples of Long-term Liabilities

  • bonds payable

  • long-term loans

  • pension liabilities

  • postretirement healthcare liabilities

  • deferred compensation

  • deferred revenues

  • deferred income taxes

  • customer deposits


Q23-What is comprehensive income and what are the example of Comprehensive Income?

Suggested Answer: Comprehensive income for a company is the sum of the following amounts that happened over a certain amount of time, like a year, quarter, month, etc.:

1. Net income or net loss (details of which are shown on the company's income statement),

2. Other comprehensive income (if any)

Examples of other comprehensive income include:

  • Unrealized gains/losses on hedging derivatives

  • Foreign currency translation adjustments

  • Unrealized gains/losses on postretirement benefit plans

Comprehensive income is basically made up of all of the income, gains, expenses, and losses that changed the stockholders' equity during the accounting period.

The amount of net income for the period is added to retained earnings, and the amount of other comprehensive income is added to accumulated other comprehensive income. On the balance sheet for the end of the period, retained earnings and accumulated other comprehensive income are shown on separate lines.


Q24- What are the notes to the financial statements and explain me the examples of Notes of Financial statement?

Suggested Answer: The notes to the financial statements are an obligatory component that must always be included in the external financial statements of a corporation. They are necessary because it is not possible to convey all of the pertinent financial information through the amounts that are presented (or not shown) on the face of the financial statements. This is the reason why are important Footnote disclosures is another term that can be used to refer to the notes.

In most cases, the notes are the primary mechanism by which a corporation can demonstrate compliance with the concept of full disclosure.


Example of a note to the financial statements:

The first note that is attached to the financial statements is typically a summary of the significant accounting policies that have been implemented by the company. This summary may include information regarding the use of estimates, revenue recognition, inventories, property and equipment, goodwill and other intangible assets, fair value measurement, discontinued operations, foreign currency translation, recently issued accounting pronouncements, and other topics.

Items such as inventories, accrued liabilities, income taxes, employee benefit plans, leases, business segment information, fair value measurements, derivative instruments and hedging, stock options, commitments and contingencies, and more are discussed in the remaining notes, which also include schedules of amounts.

Additionally, a reference to the notes, such as the following, should be included in each external financial statement: The notes that are appended to the financial statements are an essential component of such statements.


Q25-What are interim financial statements and when it get reported?

Suggested Answer: The sums that are disclosed on the annual financial statements of a firm and on the interim financial statements of that company correspond to time intervals that are shorter than one another. The interim financial statements offer management, investors, and other users some updated information on the company's activities and financial status. This information can be used for a various of purposes. This information has a wide range of applications and can be used for a variety of reasons. The interim financial statements, in contrast to the annual financial statements, are almost always going to be unaudited, in contrast to the annual financial statements. In addition, the distribution will determine whether or not they are shortened or lengthened in terms of the details they include.

The external financial statements that are issued to stockholders on a quarterly basis are known as interim financial statements. The annual financial statements, on the other hand, will often contain more information than the interim financial statements. In the interim financial statements that will be prepared for the company's management, the notes to the financial statements will not be included (internal financial statements). These assertions will cover a greater amount of ground.


Examples of Financial Statements during the Interim Period

A few examples of interim financial statements (other than the balance sheet) for a firm with an accounting year that ends on each December 31 will include the following in their headers. These statements are for a company with an accounting year that ends on each December 31.For the three months ended March 31

  • For three months ended June-30

  • For the six months ended June-30

  • For the nine months ended September-30


Q26- What is long-term debt and where its reported?

Suggested Answer: Long-term debt is a term used in accounting for loans and other debts that won't be due within a year of the date of the balance sheet. (The amount that will be due in the next year is called a "current liability" on the balance sheet.)


Q27- What is straight-line depreciation?

Suggested Answer: Straight-line depreciation is the most common way to turn the cost of a plant asset into an expense during the accounting periods in which the asset is used. With the straight-line method of depreciation, the same amount of depreciation will be reported for each full accounting year. The cost of the asset minus any expected or assumed salvage value will be the total amount of depreciation over the asset's useful life.


Q28- What is the difference between the capitalize and depreciate?

Suggested Answer: Capitalize means to add a number to the balance sheet as an asset (as opposed to immediately reporting the amount as an expense on the income statement).

Depreciate means to move a portion of the cost of a plant asset from the balance sheet to the depreciation expense on the income statement in a planned way.


Q29- What is the difference between a note payable and a bond payable?

Suggested Answer: A note payable and a bond payable are the same in the following ways:

Promises in writing to pay interest and pay back the principal amount or maturity amount on certain dates in the future


Reported as a liability


Interest is a current liability that keeps adding up.


A current liability is a debt that is due within a year of the date of the balance sheet (unless there is a bond sinking fund or a formal agreement for refinancing debt with the new long term debt or stock.)

Long-term liabilities are things that are due more than a year from now.


Q30- What is the effect on financial ratios when using LIFO instead of FIFO?

Suggested Answer: Using the LIFO cost flow assumption instead of the FIFO cost flow assumption during times when costs are going up a lot has the following effects:


LIFO means that the cost of inventory on the balance sheet is lower because the most recent, higher costs were taken out of stock before the older, lower costs.


LIFO means that the cost of goods sold on a company's income statement will be the most recent, highest cost.


LIFO means that the higher cost of goods sold will lower the gross profit, operating income, taxable income, income taxes paid, and retained earnings.

When costs are going up by a lot, the following profit ratios will be lower with LIFO than with FIFO:

  • Gross profit

  • Profit margin

  • Return on assets

  • Return on stockholders' equity

  • If LIFO is used when costs are going up, the inventory turnover rate will be higher. The reason is that if you use LIFO instead of FIFO, the cost of goods sold will be higher and the cost of goods in stock will be lower.




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