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