50 Accounting Interview Questions That You Should Practice Before Your Interview

Sep 23

35 min read

Most technical interviews in banking are lost on accounting, not on valuation. The valuation questions get all the prep time, and then the interviewer says "depreciation goes up by $10, walk me through the three statements," and the candidate who memorized the DCF formula freezes because they never practiced the plumbing underneath it.

I'm Stephen Turban, founder of WSG. I went to Harvard and through McKinsey's recruiting process, and I now run a company that prepares undergrads for investment banking interviews. Every cycle I watch the same pattern: the students who get offers can move a number through the income statement, the cash flow statement, and the balance sheet without stopping to think. The 50 accounting interview questions below are the ones that come up most, drawn from the two guides bankers themselves used to prep, the Breaking Into Wall Street 400 Questions guide and the Wall Street Prep Red Book, plus what I hear from students coming out of first rounds.

Every answer is worked out step by step with real numbers. Read them once, then close the page and do them out loud.

Accounting questions are usually the warm-up before the valuation round, so once the three statements feel automatic, move on to the 7-step DCF walkthrough here. If you are interviewing for a corporate finance seat rather than banking, the FP&A questions here test the same fundamentals from a budgeting and forecasting angle.

How many accounting questions come up in an investment banking interview?

In a typical 30-minute first round, expect three to six technical questions, and at least half of them will be accounting or "walk me through" questions rather than pure valuation. Superdays go deeper: a technical interviewer will often run a chain of four or five linked accounting questions on one scenario (buy an asset, depreciate it, write it down, pay off the loan). Accounting questions are the most common technical questions in IB interviews because they're the fastest way to tell whether a candidate understands how a business works or memorized a formula.

What accounting do you actually need to know for investment banking interviews?

Four things: what's on each of the three statements, how the three link, how a single change moves through all three, and a handful of concepts (working capital, deferred taxes, goodwill, leases) that come up in real deals. You don't need to know how to record a journal entry or close the books. You do need to know why net income and cash are different numbers and where every dollar goes. One convention for this whole article: the tax rate is 25 percent unless a question says otherwise. If your interviewer uses 40 percent, the steps are identical, only the arithmetic changes.

The three statements

1. Walk me through the three financial statements.

The interviewer is checking that you know what each statement measures and can describe them in under a minute without reading line items off a list.

Give one sentence per statement, then the link.

The income statement shows profitability over a period. It starts with revenue, subtracts costs (cost of goods sold, operating expenses, depreciation and amortization, interest, taxes), and ends at net income.
The balance sheet shows what the company owns and owes at a single moment. Assets on one side (cash, receivables, inventory, property and equipment), liabilities and shareholders' equity on the other (payables, debt, retained earnings). It always balances: assets equal liabilities plus equity.
The cash flow statement shows how cash actually moved over the period. It starts with net income, adjusts for non-cash items and working capital changes to get cash from operations, then shows cash from investing (buying and selling assets) and cash from financing (debt and equity raised or repaid). It ends at the change in cash, which ties to the cash line on the balance sheet.

Say this: "The income statement is profit over a period, the balance sheet is a snapshot of resources and claims, and the cash flow statement reconciles profit to actual cash, with the ending cash tying to the balance sheet."

Don't say: a list of every line item on each statement. The interviewer will cut you off.

A good three-statement answer takes 45 seconds and ends on the word "cash."

2. How do the three statements link together?

Linking the statements means naming the three connections, in order, and every later question in this article depends on them.

Net income from the bottom of the income statement is the first line of the cash flow statement. It also flows into retained earnings within shareholders' equity on the balance sheet (minus any dividends paid).
Non-cash items on the income statement, like depreciation, are added back on the cash flow statement because they reduced net income without reducing cash. The same items also change balance sheet accounts (depreciation reduces property, plant and equipment).
Changes in balance sheet working capital items (receivables, inventory, payables) show up as adjustments in cash from operations. Investing and financing activities (buying equipment, raising debt) change balance sheet assets and liabilities and appear in the investing and financing sections.
The change in cash at the bottom of the cash flow statement, added to last period's cash, equals cash on the new balance sheet.

Three links: net income to retained earnings, non-cash charges to their balance sheet accounts, and ending cash to the cash line.

3. If you could only look at one statement to judge a company, which one would you pick?

The expected answer is the cash flow statement, and the reason matters more than the pick.

The cash flow statement shows how much cash the business actually generates and where it goes. Cash pays employees, suppliers, lenders, and shareholders. Net income can be shaped by accounting choices (depreciation methods, revenue timing, one-time items). Cash is much harder to manipulate than profit, and that's the whole reason to pick the cash flow statement. The cash flow statement also reveals things the other two hide: whether "profit" is being eaten by capital expenditures, whether growth is consuming working capital, whether the company is funding itself by borrowing.

Say this: "The cash flow statement, because it shows the real cash generated and it's the hardest statement to dress up."

Don't say: "The income statement, because it shows profit." Profit isn't cash, and the interviewer's next question will make that painful.

Pick the cash flow statement and say the words "hardest to manipulate."

4. If you could look at two statements, which two?

Picking the income statement and the balance sheet is the answer, because you can build the third from them.

If you have this period's income statement and the balance sheets at the start and end of the period, you can reconstruct the cash flow statement. Net income comes from the income statement. Depreciation is on the income statement (or you can derive it from the change in PP&E). Working capital changes come from comparing the two balance sheets. Capital expenditures are the change in PP&E plus depreciation. Debt raised or repaid is the change in the debt balances. The income statement and two balance sheets contain everything the cash flow statement reports.

Walk that out loud and the interviewer knows you understand the cash flow statement is derived, not independent.

Income statement plus two balance sheets equals a cash flow statement, and saying why proves you understand the links.

5. Why can a profitable company go bankrupt?

Profit and cash are different things, and the answer to this question is a list of specific ways cash leaves without touching net income.

Net income is an accounting measure, and bankruptcy happens when a company can't pay its bills, which is a cash event. Four ways a profitable company runs out of cash:

Working capital. A company that sells on credit books revenue when it ships, but the cash arrives 60 or 90 days later. If sales double, inventory and receivables double, and the cash to fund them has to come from somewhere.
Capital expenditures. Capex doesn't hit the income statement (it becomes an asset and depreciates over years), but the cash leaves immediately. A profitable airline buying planes can be cash negative for years.
Debt maturities. Repaying principal is a financing outflow, not an expense. A company with $50 million of net income and a $500 million loan due next Tuesday is profitable and insolvent.
One-time cash charges that aren't in operating income, like a large litigation settlement paid in cash.

Profit is an opinion about the period; cash is a fact, and companies go bankrupt on facts.

6. What's the difference between cash-basis and accrual accounting?

The interviewer wants to hear that accrual accounting records revenue when earned and expenses when incurred, regardless of when cash moves, and then hear you give an example.

Under cash-basis accounting, you record revenue when the cash arrives and expenses when the cash leaves. Simple, but misleading for any business with timing gaps. Under accrual accounting, which is what US GAAP requires for public companies, you record revenue when you've delivered the product or service and expenses in the period they help generate that revenue.

Example: a company sells $100 of software in December and the customer pays in February. Under accrual accounting, December shows $100 of revenue and $100 of accounts receivable. Under cash accounting, December shows nothing and February shows $100.

Nearly every "walk me through" question is really a question about the gap between accrual accounting on the income statement and cash on the cash flow statement.

Accrual accounting creates the gap between net income and cash, and the cash flow statement exists to close it.

7. What's the difference between cost of goods sold and operating expenses?

Cost of goods sold is the direct cost of producing what the company sold; operating expenses are the costs of running the company that don't attach to a specific unit sold.

COGS includes materials, direct labor, and manufacturing overhead for the goods sold that period. For a retailer, it's what they paid for the inventory they sold. Revenue minus COGS is gross profit, and gross margin (gross profit divided by revenue) tells you how much of each sales dollar survives the direct cost of making the product.

Operating expenses (selling, general and administrative, research and development) are period costs. Rent for headquarters, salaries for the sales team, marketing, R&D. They're expensed in the period they occur whether the company sold one unit or a million.

The split between COGS and operating expenses tells you about the business model. A software company might have 80 percent gross margins and huge sales and marketing expense. A grocery chain has 25 percent gross margins and small operating expenses relative to revenue.

Gross margin describes the product; operating margin describes the company.

8. When do you capitalize a purchase instead of expensing it?

Capitalizing means recording the purchase as an asset and depreciating it over time; you do it when the item provides benefits beyond the current period.

If a company buys a $1 million machine that will run for ten years, expensing the full $1 million in year one would make that year look terrible and the next nine look artificially good. So the company capitalizes it: the balance sheet shows a $1 million asset, and the income statement shows $100,000 of depreciation each year for ten years. The cash leaves in year one as an investing outflow, but the expense is spread across the asset's life.

Items expensed immediately: anything consumed within the period, like wages, rent, utilities, and most R&D under US GAAP.

Walk the statements for the capitalized purchase in year one: no income statement impact (other than the first year's depreciation), a $1 million outflow in cash from investing, PP&E up $1 million and cash down $1 million on the balance sheet.

Capitalize what lasts beyond the year, expense what doesn't, and know that the choice moves cost from the income statement to the balance sheet.

9. What's the difference between EBIT and EBITDA, and when would you use each?

EBITDA is EBIT with depreciation and amortization added back, and the choice between them depends on how much the company has to spend to maintain its assets.

EBIT is operating income: revenue minus all operating costs including D&A. EBITDA adds D&A back because they're non-cash charges that reflect past spending on assets rather than current cash costs.

Use EBITDA to compare companies with different asset ages and financing. Use EBIT when the depreciation is a real signal of the capital spending required to keep the business running. For an airline or a telecom, depreciation is a rough stand-in for the planes and towers that have to be replaced, so EBIT (or EBITDA minus capital expenditures) tells you more.

Quick example: two companies each have $100 of EBITDA. Company A has $5 of D&A because it's a software business. Company B has $60 because it runs a fleet of trucks. EBIT of $95 versus $40 tells you which one actually keeps its earnings.

Use EBITDA to compare operations, EBIT when capital intensity is the story.

10. What's the difference between basic and diluted EPS?

Basic EPS divides net income by the shares currently outstanding; diluted EPS divides by the shares that would exist if every option, warrant, and convertible turned into stock.

Basic EPS: net income divided by weighted average basic shares. Diluted EPS: net income divided by basic shares plus the extra shares from dilutive securities, calculated with the treasury stock method for options (assume the options are exercised, the company uses the cash proceeds to buy back shares at the current price, and the net new shares are what gets added).

Example: net income $100 million, 100 million basic shares, so basic EPS is $1.00. There are 10 million options with a $20 strike and the stock trades at $50. Exercise brings in $200 million; the company buys back $200 million / $50 = 4 million shares. Net new shares: 10 million minus 4 million equals 6 million. Diluted shares are 106 million, diluted EPS is $0.94.

Bankers use diluted shares for equity value because that's the real claim on the company.

Diluted EPS is the one that matters for valuation because it counts every share that could exist.

11. Where does depreciation show up on the income statement?

Depreciation is often not its own line, and knowing where to find it separates candidates who've read a 10-K from those who haven't.

Some companies present D&A as a separate operating expense line. Many embed it inside cost of goods sold (for manufacturing equipment) and SG&A (for office assets) and never break it out on the income statement. When that happens, the cash flow statement is the source: D&A is always shown as an add-back in cash from operations. The footnotes to the financial statements also disclose it.

The trap: a candidate calculates EBITDA as operating income plus "the depreciation line," finds no such line, and concludes D&A is zero. It's never zero for a company with fixed assets.

When D&A isn't on the income statement, take it from the cash flow statement.

12. What are the three sections of the cash flow statement and what goes in each?

Each section answers a different question: did the operations generate cash, what did the company invest in, and how did it fund itself.

Cash from operations starts with net income, adds back non-cash charges (D&A, stock-based compensation, write-downs), and adjusts for changes in working capital (an increase in receivables or inventory reduces cash; an increase in payables or deferred revenue increases cash).
Cash from investing covers purchases and sales of long-term assets: capital expenditures, acquisitions, purchases and sales of investments.
Cash from financing covers debt issued and repaid, equity issued and repurchased, and dividends paid.

Two items students get wrong: interest expense is in operating (it's already in net income), while debt repayment is in financing. Dividends paid are financing; dividends received are usually operating.

Operations, investing, financing: the three sections tell you whether a company earns its cash, spends it on the future, or borrows it.

Walk me through the change (the $10 questions)

The core skill. For every walk-through, the order is the same: income statement first, cash flow statement second, balance sheet third, and confirm it balances at the end. Tax rate 25 percent.

13. Depreciation goes up by $10. Walk me through the three statements.

The $10 depreciation walk is the single most-asked accounting question in banking interviews, and the answer has to be automatic.

Income statement: depreciation is an expense, so operating income falls by $10. Pre-tax income falls by $10. At 25 percent tax, taxes fall by $2.50, so net income falls by $7.50.
Cash flow statement: net income at the top is down $7.50. Depreciation is a non-cash expense, so you add the $10 back. Cash from operations is up $2.50. No changes in investing or financing, so cash is up $2.50.
Balance sheet: on the assets side, cash is up $2.50 and PP&E is down $10 (the depreciation reduced the asset's value), so total assets are down $7.50. On the other side, net income was down $7.50, so retained earnings and shareholders' equity are down $7.50. Both sides down $7.50. It balances.

Cash went up because the extra depreciation reduced taxable income, so the company paid $2.50 less in taxes, and that's the only real cash effect.

Extra depreciation lowers net income, raises cash by the tax savings, and lowers PP&E and equity by the same amount.

14. If depreciation is a non-cash expense, why does it affect the cash balance?

The follow-up to question 13 checks whether you understood your own answer.

Depreciation itself doesn't move cash. But it's tax-deductible. Reducing pre-tax income by $10 reduces the tax bill by $2.50 at a 25 percent rate, and taxes are paid in cash. So the cash effect of depreciation is entirely the tax shield. If the tax rate were zero, depreciation would have no cash effect at all.

Depreciation moves cash only through taxes.

15. Inventory goes up by $10, paid with cash. Walk me through the statements.

Buying inventory is a balance sheet event with no income statement effect until the inventory is sold.

Income statement: no change. Inventory is an asset, not an expense, until it's sold (then it becomes cost of goods sold).
Cash flow statement: net income is unchanged. Inventory increased by $10, which is a use of cash in working capital, so cash from operations falls by $10. Cash is down $10.
Balance sheet: inventory up $10, cash down $10. Total assets unchanged. Nothing changes on the liabilities and equity side. It balances.

Inventory purchases hit cash and the balance sheet, never the income statement, until the goods are sold.

16. Now the company sells that inventory for $20. Walk me through the statements.

Selling the inventory converts an asset into revenue and cost, and the cash effect is larger than net income because the asset comes back out.

Income statement: revenue up $20, cost of goods sold up $10, so pre-tax income up $10. Taxes up $2.50. Net income up $7.50.
Cash flow statement: net income up $7.50. Inventory decreased by $10, which is a source of cash in working capital, so add $10. Cash from operations is up $17.50. Cash is up $17.50.
Balance sheet: cash up $17.50, inventory down $10, so assets up $7.50. Retained earnings up $7.50. It balances.

Questions 15 and 16 together net to cash up $7.50, which is the after-tax profit on the sale.

Selling inventory raises cash by the sale price less taxes, because the inventory cost already left in the prior period.

17. Accrued compensation goes up by $10. Walk me through the statements.

Accrued compensation is an expense the company has recorded but not yet paid in cash, so net income falls while cash rises.

Income statement: the $10 is an operating expense (wages earned by employees this period). Pre-tax income down $10, net income down $7.50.
Cash flow statement: net income down $7.50. Accrued compensation is a liability that increased by $10. The company didn't pay that cash yet, so add back $10. Cash from operations up $2.50. Cash up $2.50.
Balance sheet: cash up $2.50, so assets up $2.50. Accrued compensation (a liability) up $10, retained earnings down $7.50, so liabilities and equity up $2.50. It balances.

Cash went up because the company took the tax deduction for wages it hasn't paid yet.

An accrued expense lowers profit now and cash later, so cash rises by the tax savings in the period it's accrued.

18. Accounts receivable goes up by $10 because the company made a sale on credit. Walk me through the statements.

A credit sale creates profit without cash, and the interviewer wants to see you handle the taxes on cash you haven't collected.

Assume a $10 service sale with no associated cost.

Income statement: revenue up $10, pre-tax income up $10, taxes up $2.50, net income up $7.50.
Cash flow statement: net income up $7.50. Accounts receivable increased by $10, a use of cash, so subtract $10. Cash from operations down $2.50. Cash down $2.50.
Balance sheet: cash down $2.50, receivables up $10, so assets up $7.50. Retained earnings up $7.50. It balances.

The company paid $2.50 of tax in cash on a sale it hasn't collected yet, and that's the mechanism behind "profitable but cash-negative."

Revenue booked before cash is collected means paying taxes on cash you don't have.

19. A customer pays $100 upfront for a one-year subscription. Walk me through the statements now and over the year.

Deferred revenue is the mirror image of receivables: cash arrives before the revenue is earned, and the company records a liability for the obligation to deliver.

At the moment of payment:

Income statement: nothing. No service delivered yet, so no revenue.
Cash flow statement: deferred revenue (a liability) increased by $100, a source of cash. Cash from operations up $100. Cash up $100.
Balance sheet: cash up $100. Deferred revenue liability up $100. It balances.

Over the year, each quarter the company delivers a quarter of the service and recognizes $25:

Income statement: revenue up $25, taxes up $6.25, net income up $18.75.
Cash flow statement: net income up $18.75. Deferred revenue decreased by $25 (the company worked off part of the liability), a use of cash, so subtract $25. Cash from operations down $6.25, which is the tax paid.
Balance sheet: cash down $6.25, deferred revenue down $25, retained earnings up $18.75. Assets down $6.25; liabilities and equity down $25 plus $18.75, which is down $6.25. It balances.

Deferred revenue is a liability because the company owes the customer a service, and it becomes revenue only as that service is delivered.

20. The company buys a $100 factory with $100 of debt. Walk me through the statements at the moment of purchase.

The first step in the classic four-part chain has no income statement effect, and the cash effects in investing and financing cancel.

Income statement: nothing yet. No depreciation has been recorded and no interest has accrued.
Cash flow statement: the factory purchase is a $100 outflow in cash from investing. The debt raised is a $100 inflow in cash from financing. Net change in cash: zero.
Balance sheet: PP&E up $100, so assets up $100. Debt up $100, so liabilities up $100. It balances.

Buying an asset with debt changes the size of the balance sheet and nothing else on day one.

21. One year later: the debt carries 10 percent interest and the factory depreciates 10 percent a year. Walk me through the statements.

Now both costs of the purchase show up, and the interviewer is watching whether you add back the depreciation but not the interest.

Income statement: depreciation of $10 (10 percent of $100) reduces operating income by $10. Interest expense of $10 (10 percent of $100 of debt) reduces pre-tax income by another $10. Pre-tax income down $20. Taxes down $5. Net income down $15.
Cash flow statement: net income down $15. Add back depreciation of $10 because it's non-cash. Do not add back interest, because interest was paid in cash. Cash from operations down $5. No investing or financing changes (the debt is interest-only, so no principal repaid). Cash down $5.
Balance sheet: cash down $5, PP&E down $10, so assets down $15. Debt unchanged. Retained earnings down $15. It balances.

After a year, cash falls by the after-tax interest cost less the depreciation tax shield, and the asset and equity both shrink.

22. At the start of year three, the factory breaks and is written down to zero, and the loan is repaid. Walk me through the statements.

The write-down is a non-cash expense that gets added back, and the debt repayment is a financing outflow that never touches the income statement.

After two years of $10 depreciation, the factory's book value is $80, and $80 is the number that gets written down.

Income statement: an $80 write-down (impairment) hits pre-tax income. Taxes fall by $20. Net income down $60.
Cash flow statement: net income down $60. Add back the $80 write-down, since no cash left. Cash from operations up $20 (the tax saving). Cash from financing: $100 outflow to repay the loan. Net change in cash: down $80.
Balance sheet: cash down $80, PP&E down $80, so assets down $160. Debt down $100, retained earnings down $60, so liabilities and equity down $160. It balances.

Write-downs reduce profit and raise cash by the tax shield; repaying debt reduces cash and never appears on the income statement.

23. The company issues $100 of new stock. Walk me through the statements.

Raising equity is purely a financing and balance sheet event.

Income statement: no change. Issuing shares isn't revenue.
Cash flow statement: $100 inflow in cash from financing. Cash up $100.
Balance sheet: cash up $100. Common stock and additional paid-in capital up $100 within shareholders' equity. It balances.

The follow-up is usually about earnings per share: net income is unchanged but the share count rose, so EPS falls. That's why issuing stock to fund a low-return project is dilutive.

Equity raises cash and equity, and the cost shows up later as more shares splitting the same earnings.

24. The company pays a $50 cash dividend. Walk me through the statements.

Dividends are a distribution of profit, not an expense, so they skip the income statement entirely.

Income statement: no change. Dividends are not tax-deductible and don't reduce net income.
Cash flow statement: $50 outflow in cash from financing. Cash down $50.
Balance sheet: cash down $50. Retained earnings down $50. It balances.

Say this: "Dividends come out of retained earnings, not out of net income."

Don't say: "Dividends are an expense that reduces net income." That one ends interviews.

Dividends reduce cash and retained earnings and never touch profit.

25. The company repurchases $100 of its own shares. Walk me through the statements.

A buyback is the mirror of a stock issuance, and the interviewer wants to hear the EPS point at the end.

Income statement: no change.
Cash flow statement: $100 outflow in cash from financing. Cash down $100.
Balance sheet: cash down $100. Treasury stock (a negative line within shareholders' equity) increases by $100, so equity falls by $100. It balances.

A buyback leaves net income unchanged and cuts the share count, so EPS rises. If the company borrowed to fund the buyback, interest expense would reduce net income slightly, so the EPS effect depends on whether the earnings yield on the stock exceeds the after-tax cost of debt.

Buybacks reduce cash and equity and raise EPS by shrinking the share count.

26. The company writes down $100 of inventory. Walk me through the statements.

An inventory write-down is a non-cash charge through cost of goods sold, and the mechanics match the PP&E write-down in question 22.

Income statement: the $100 write-down is recorded in COGS (or as a separate charge). Pre-tax income down $100. Taxes down $25. Net income down $75.
Cash flow statement: net income down $75. Add back the $100 write-down since no cash left. Cash from operations up $25. Cash up $25.
Balance sheet: cash up $25, inventory down $100, so assets down $75. Retained earnings down $75. It balances.

Inventory write-downs cut profit by the after-tax charge and raise cash by the tax saving.

27. The company incurs $100 of PIK interest. Walk me through the statements.

Paid-in-kind interest is interest the company owes but pays by adding to the loan balance instead of paying cash, and it's a favorite at credit-focused groups.

Income statement: $100 of interest expense. Pre-tax income down $100. Taxes down $25 (assuming it's deductible). Net income down $75.
Cash flow statement: net income down $75. Add back the $100 of PIK interest because no cash was paid. Cash from operations up $25. Cash up $25.
Balance sheet: cash up $25, so assets up $25. Debt up $100 (the unpaid interest was added to principal). Retained earnings down $75. Liabilities and equity up $25. It balances.

PIK interest lowers profit, raises debt, and raises cash slightly through the tax shield, which is why distressed companies like it and lenders price it high.

28. The company records $100 of stock-based compensation. Walk me through the statements.

Stock-based compensation is a real expense paid in shares rather than cash, and the balance sheet effect lands in equity rather than in a liability.

Income statement: $100 of compensation expense (inside SG&A or COGS). Pre-tax income down $100. Taxes down $25. Net income down $75.
Cash flow statement: net income down $75. Add back $100 of stock-based compensation since no cash was paid. Cash from operations up $25. Cash up $25.
Balance sheet: cash up $25. Within equity, additional paid-in capital up $100 (the value of the shares granted) and retained earnings down $75, so equity is up $25 net. It balances.

The follow-up: is it fair to add it back to EBITDA? Companies do, because it's non-cash. Many investors don't, because the shares dilute existing holders and the company would otherwise have paid cash. Give both sides.

Stock-based compensation reduces profit, dilutes shareholders, and raises cash only through the tax deduction.

Working capital and the balance sheet

29. What is working capital, and what does negative working capital mean?

Working capital is the cash a business needs to fund its day-to-day operations, and negative working capital can be a sign of strength or a sign of trouble depending on the business.

Net working capital, as bankers define it, is current operating assets (receivables, inventory, prepaid expenses) minus current operating liabilities (payables, accrued expenses, deferred revenue). Cash and debt are excluded (question 30).

Positive working capital means the company has money tied up in inventory and unpaid customer invoices that exceeds what it owes suppliers. As the business grows, that gap grows, and the company has to fund it.

Negative working capital means the company collects from customers before it pays suppliers. Subscription software businesses (customers pay upfront) and restaurants and grocers (customers pay cash today, suppliers get paid in 30 days) often run negative working capital, and it's a sign of a strong business model: growth generates cash instead of consuming it.

Negative working capital is a warning sign when it comes from a company that can't pay its bills: payables piling up because there's no cash to pay them.

Negative working capital from customers paying early is a strength; negative working capital from suppliers going unpaid is a red flag.

30. Why are cash and debt excluded from net working capital?

Cash and debt are financing items, and working capital is meant to measure the operating needs of the business.

The purpose of the working capital calculation in a valuation or a deal is to figure out how much cash the operations tie up. Cash itself isn't an operating need; it's the result. Debt, including the current portion of long-term debt, is a financing decision, not an operating one. If cash and debt were included, a company that raised $100 million of debt and parked it in cash would show a huge jump in working capital with no change in its operations.

In a DCF, changes in operating working capital are what you subtract to get from EBITDA to free cash flow. In an M&A deal, the working capital target in the purchase agreement is defined the same way.

Working capital excludes cash and debt so that it measures operations, not financing.

31. How does an increase in accounts payable affect cash flow?

An increase in payables is a source of cash because the company received something and hasn't paid for it yet.

If a company buys $50 of supplies on credit, it has the supplies (or the expense) but still has the cash. On the cash flow statement, the $50 increase in payables is added back in cash from operations. When the company eventually pays, payables fall and the payment shows as a use of cash.

Stretching payables (paying suppliers more slowly) is a common way to generate cash in the short term. It also strains supplier relationships and can't go on forever, which is why analysts look at days payable outstanding over time.

Owing suppliers more means holding more cash, at least until the invoices come due.

32. What's the difference between accounts receivable and deferred revenue?

Both come from the timing gap between delivering and getting paid, and they sit on opposite sides of the balance sheet.

Accounts receivable: the company delivered first and will collect later. Revenue has been recognized, cash hasn't arrived. It's an asset because the customer owes the company money.

Deferred revenue: the customer paid first and the company will deliver later. Cash has arrived, revenue hasn't been recognized. It's a liability because the company owes the customer a product or service.

An increase in receivables uses cash (question 18). An increase in deferred revenue provides cash (question 19). A business that runs on deferred revenue, like subscription software, is self-funding. A business that runs on receivables, like a government contractor, needs financing to grow.

Receivables mean you're owed; deferred revenue means you owe.

33. What's the difference between LIFO and FIFO, and what happens to net income when prices are rising?

Inventory costing determines which purchase costs flow into cost of goods sold, and in an inflationary environment the choice changes profit, taxes, and the balance sheet.

FIFO (first in, first out) assumes the oldest inventory is sold first, so COGS reflects older, cheaper costs when prices are rising. LIFO (last in, first out) assumes the newest inventory is sold first, so COGS reflects the most recent, more expensive costs.

Work an example with rising prices. A company bought 100 units at $10 in January and 100 units at $12 in June, then sold 100 units at $20 in December.

Under FIFO: COGS is 100 times $10, which is $1,000. Gross profit is $2,000 minus $1,000, which is $1,000. Ending inventory on the balance sheet is 100 units at $12, which is $1,200.
Under LIFO: COGS is 100 times $12, which is $1,200. Gross profit is $800. Ending inventory is 100 units at $10, which is $1,000.

When prices rise, LIFO shows lower net income and lower taxes, and the balance sheet inventory is understated relative to current cost. FIFO shows higher profit and a more current balance sheet. Companies using LIFO for tax reasons (it's permitted under US GAAP but not under IFRS) disclose a "LIFO reserve" so analysts can adjust.

With rising prices, LIFO lowers profit and taxes and understates inventory; FIFO does the opposite.

34. What is goodwill, how is it created, and when is it written down?

Goodwill is the premium an acquirer pays over the fair value of the target's identifiable net assets, and it stays on the balance sheet until it's impaired.

When Company A buys Company B for $500 million and B's identifiable net assets (after marking them to fair value and recording intangibles like customer relationships) are worth $300 million, the extra $200 million is recorded as goodwill on A's balance sheet. It represents things that can't be separately valued: brand, workforce, synergies the buyer expects.

Under US GAAP, goodwill isn't amortized; the company tests it for impairment at least annually. If the business acquired is now worth less than its carrying value, goodwill is written down (impaired). The impairment is a non-cash expense: net income falls, the write-down is added back on the cash flow statement, and goodwill falls on the balance sheet. Big impairments usually mean the acquirer overpaid.

Goodwill increases only through acquisitions. It never goes up on its own.

Goodwill is the acquisition premium, it's tested rather than amortized, and an impairment is the accounting admission that the deal didn't work.

35. Can shareholders' equity be negative, and what does it mean?

Negative equity means liabilities exceed assets on the books, and whether that's a problem depends on how it got there.

Two common causes:

Years of losses. Retained earnings turn into an accumulated deficit large enough to wipe out the capital shareholders contributed. This usually is a sign of trouble.
Buybacks and dividends funded with debt. A company borrows to repurchase huge amounts of stock, treasury stock grows, and equity goes negative even though the business is highly profitable. Companies with strong cash flows sometimes run this way on purpose, and leveraged buyouts with dividend recapitalizations produce it routinely.

Negative book equity does not mean the company's shares are worthless. Equity value in the market is based on future cash flows, not on the historical accounting balance.

Negative equity is a warning if it came from losses and a capital structure choice if it came from buybacks.

36. What are the main items in shareholders' equity, and what flows into retained earnings?

Shareholders' equity has four moving parts, and retained earnings is the one that links the income statement to the balance sheet.

Common stock and additional paid-in capital: what shareholders paid the company for its shares when they were issued (plus stock-based compensation, which is added to APIC).
Retained earnings: cumulative net income since the company started, minus cumulative dividends paid. Each period, retained earnings increases by net income and decreases by dividends. Buybacks don't reduce retained earnings; they go to treasury stock.
Treasury stock: the cost of shares the company has repurchased, shown as a negative.
Accumulated other comprehensive income: gains and losses that bypass the income statement, like foreign currency translation and unrealized gains on certain securities.

Retained earnings equals every dollar of profit the company ever earned that it didn't pay out as a dividend.

37. How would you forecast receivables, inventory, and payables?

Working capital items are forecast as a number of days tied to revenue or cost of goods sold, because that's how they behave in a real business.

Receivables: days sales outstanding (DSO) equals receivables divided by revenue, times 365. If DSO has been 45 days and revenue next year is $730 million, receivables are $730 million divided by 365 times 45, which is $90 million.
Inventory: days inventory outstanding (DIO) equals inventory divided by COGS, times 365. Forecast the same way off COGS.
Payables: days payable outstanding (DPO) equals payables divided by COGS, times 365.

Hold the days constant unless you have a reason to change them, like a new payment policy or a shift in mix. Then the change in each balance sheet item flows into the cash flow forecast: an increase in receivables is a use of cash, an increase in payables is a source.

Forecast working capital as days of sales or cost, hold the days steady, and let the balance sheet changes drive the cash flow.

38. What is the cash conversion cycle?

The cash conversion cycle measures how many days a company's cash is tied up between paying for inventory and collecting from customers.

Cash conversion cycle equals days inventory outstanding plus days sales outstanding minus days payable outstanding. Using round numbers: a company holds inventory for 60 days, collects from customers 45 days after the sale, and pays its suppliers 30 days after purchase. Cash conversion cycle is 60 plus 45 minus 30, which is 75 days. The company funds 75 days of its cost of sales out of its own pocket.

A negative cycle means the company collects before it pays. A large retailer that sells goods for cash and pays suppliers in 60 days can run a negative cycle and generate cash as it grows. A shorter cycle is almost always better, and the levers are the three days metrics from question 37.

A shorter cash conversion cycle means the business needs less money to grow.

Depreciation, capex, leases, and intangibles

39. Why would a company use straight-line depreciation for its books and accelerated depreciation for taxes?

Companies want smooth, higher reported earnings for investors and larger, earlier deductions for the tax authorities, and US rules let them do both.

Straight-line depreciation spreads the cost of an asset evenly: a $100 asset over ten years is $10 a year. Accelerated methods front-load the expense, so more depreciation hits in the early years and less later. Total depreciation is the same over the asset's life under either method; only the timing differs.

For financial reporting, straight-line makes earnings look steadier and higher early on. For taxes, accelerated depreciation means larger deductions sooner, so lower taxes sooner, and a tax dollar saved today is worth more than one saved in year eight. The gap between book depreciation and tax depreciation creates a deferred tax liability (question 43).

Straight-line for investors, accelerated for the IRS, and the difference becomes a deferred tax liability.

40. What's the difference between maintenance capex and growth capex, and how does the relationship between capex and depreciation change as a company matures?

Maintenance capex keeps the current business running; growth capex expands it; and depreciation tends to catch up with capex over time.

Maintenance capex replaces worn-out assets: new trucks for old trucks. Growth capex adds capacity: a new factory. Companies rarely split the two in their filings, so analysts estimate maintenance capex by looking at depreciation (a rough proxy for what's wearing out) and management commentary.

For a young, growing company, capex is usually far above depreciation, because it's building assets faster than the old ones wear out. As a company matures, growth spending slows, and capex converges toward depreciation. A mature company with capex well below depreciation may be underinvesting and living off its old assets, which shows up as higher free cash flow now and problems later.

Capex above depreciation means the company is growing its asset base; capex below depreciation for years means it's shrinking it.

41. What's the difference between an operating lease and a finance lease?

Since the 2019 lease accounting change, both types of lease put an asset and a liability on the balance sheet, but the income statement treatment still differs.

Under the current standard (ASC 842 in the US), a lessee records a right-of-use asset and a lease liability for almost every lease longer than a year. The difference is how the cost hits the income statement:

Finance lease (the company effectively owns the asset by the end): the cost is split into depreciation of the right-of-use asset and interest on the lease liability. Depreciation sits in operating expenses; interest sits below. EBITDA excludes both.
Operating lease (the company is renting): a single straight-line lease expense sits in operating expenses. EBITDA includes the full rent cost.

A company with heavy operating leases, like an airline or a retailer, shows lower EBITDA than an identical company that owns its assets or uses finance leases. Analysts sometimes add back operating lease expense (EBITDAR) or treat lease liabilities as debt to compare companies properly.

Both leases are now on the balance sheet, but only finance leases keep the cost out of EBITDA.

42. Which intangible assets are amortized, and which aren't?

Intangibles with a definite useful life are amortized; goodwill and indefinite-lived intangibles are tested for impairment instead.

Patents, customer relationships, licenses, and developed technology acquired in a deal have finite lives. The company amortizes them over that life, and the amortization runs through the income statement as a non-cash charge, added back on the cash flow statement. Trademarks and brand names with no expiration date, and goodwill, aren't amortized; they're tested for impairment.

Internally generated intangibles (a brand the company built itself, its own R&D) generally aren't on the balance sheet at all under US GAAP, because R&D is expensed as incurred. That's why an acquisition can create a big intangible asset that the target itself never showed.

Finite-life intangibles amortize; goodwill and indefinite-life intangibles get impairment tests; self-built intangibles mostly never appear.

Taxes, debt, and equity

43. What are deferred tax liabilities and deferred tax assets, and how do they arise?

Deferred taxes come from timing differences between what a company reports to investors and what it reports to the tax authority.

A deferred tax liability arises when the company has paid less tax so far than its book income implies, and will pay more later. The classic source is depreciation (question 39): accelerated tax depreciation means a lower tax bill now, so the company records a liability for the tax it will owe when book depreciation catches up.

A deferred tax asset arises when the company has paid more tax than book income implies, or has a future deduction it can use. Sources include net operating losses (question 44), which can offset future taxable income, and expenses recorded for books before they're deductible for tax (like certain accruals).

On the statements: when a DTL increases, cash taxes paid are lower than the book tax expense, so the increase is added back in cash from operations. When a DTA is used, cash taxes are lower than book tax, which is also a source of cash.

A deferred tax liability means taxes are owed later; a deferred tax asset means taxes will be saved later; both are timing, not permanent differences.

44. How do net operating losses affect the three statements?

A net operating loss lets a company use past losses to reduce future taxable income, and it shows up as a deferred tax asset that is drawn down as it's used.

Say a company lost $100 last year and earns $100 of pre-tax income this year. Without the NOL, it would pay $25 of tax. With the NOL, it can offset the $100 of income (subject to limits; under current U.S. rules, NOLs generated after 2017 can generally offset up to 80% of taxable income in a given year and carry forward indefinitely), so cash taxes fall.

On the statements in the year the NOL is used: the income statement still shows a book tax expense at the normal rate. The cash flow statement adds back the difference between book tax and cash tax (the reduction in the deferred tax asset). The balance sheet shows the DTA falling and cash higher than it otherwise would be.

In M&A, NOLs are valuable to an acquirer, but their use is restricted after a change of ownership under Section 382, which is a detail that impresses interviewers.

NOLs reduce cash taxes, not book taxes, and the benefit sits on the balance sheet as a deferred tax asset until it's used.

45. What's the difference between the effective tax rate and the marginal tax rate?

The marginal rate is the statutory rate on the next dollar of income; the effective rate is what the company actually paid as a percentage of its book pre-tax income.

The US federal corporate rate is 21 percent, and with state taxes the marginal rate for a US company is typically in the mid-20s. The effective rate can be higher or lower because of tax credits, foreign income taxed at different rates, non-deductible expenses, and the timing differences behind deferred taxes.

In a DCF, use the marginal rate when computing the after-tax cost of debt and the tax on operating income for a going-concern company, because that's the rate applied to incremental dollars. Use the effective rate if you're modeling actual cash taxes in the near term for a company with known credits or NOLs. Say which one you're using and why.

Marginal is the rate on the next dollar; effective is the rate on the last year; models generally use the marginal rate unless there's a reason not to.

46. Why do companies report both GAAP and non-GAAP earnings?

Companies report non-GAAP figures to show what they believe recurring earnings look like, and analysts read them with suspicion for exactly that reason.

GAAP earnings follow the accounting rules. Non-GAAP (or "adjusted") earnings remove items management considers non-recurring or non-cash: restructuring charges, acquisition costs, litigation settlements, amortization of acquired intangibles, and stock-based compensation.

The legitimate case: a one-time $40 million settlement really does distort a single year, and removing it gives a clearer view of the run rate. The adjustments only go one direction, they almost always raise earnings, and "one-time" restructuring charges have a way of showing up every year.

Public companies must reconcile non-GAAP figures back to GAAP, and a good analyst reads that reconciliation line by line. In a leveraged buyout or a loan agreement, the adjusted EBITDA definition is negotiated because it determines how much the company can borrow.

Non-GAAP earnings are management's argument about what's recurring, and the reconciliation to GAAP is where you check the argument.

47. Why is interest expense in cash from operations while debt repayment is in cash from financing?

Interest is a cost of doing business already included in net income; principal repayment is returning borrowed money, which was never income in the first place.

Interest expense reduces net income on the income statement. Since the cash flow statement starts with net income, the cash paid for interest is already reflected in cash from operations. Under US GAAP, it stays there.

Debt principal was never revenue and its repayment is never an expense. When the company borrowed $100, the inflow was in financing. When it repays the $100, the outflow is in financing. The income statement never sees either.

Interest lives in operations because it's in net income; principal lives in financing because it was never earnings.

48. The company needs $100. Compare raising it with debt versus equity across the three statements and EPS.

Debt is cheaper and dilutes nobody but adds fixed obligations; equity is permanent capital that dilutes every existing shareholder.

At the moment of raising the $100, both routes look the same on the cash flow statement (a $100 financing inflow) and both raise cash by $100 on the balance sheet. The other side differs: debt up $100 versus equity up $100.

Over the following year, assume 8 percent interest on the debt and that the $100 earns the company $12 of extra pre-tax profit either way.

Debt: extra pre-tax profit $12, minus interest $8, equals $4 of extra pre-tax income. Net income up $3 after 25 percent tax. Share count unchanged. EPS rises.
Equity: extra pre-tax profit $12, no interest, net income up $9. But the share count rose. If the company had 100 shares earning $100 (EPS $1.00) and issued 10 new shares at $10 each, net income is now $109 across 110 shares, EPS $0.99. EPS fell slightly even though net income rose more.

Equity is dilutive to EPS when the earnings yield on the new shares is below the return the company earns on the money. Debt is accretive as long as the after-tax cost of the debt is below that return. Debt also adds risk: interest is owed whether or not the project works.

Debt raises EPS when the project earns more than the after-tax interest; equity dilutes unless the project earns more than the company's earnings yield.

Ratios and analysis

49. What's the difference between the current ratio and the quick ratio, and when does the current ratio mislead?

Both measure whether a company can cover its short-term obligations, and the quick ratio strips out the assets that might not turn into cash in time.

Current ratio equals current assets divided by current liabilities. Quick ratio equals current assets minus inventory (and sometimes prepaid expenses) divided by current liabilities. The quick ratio is stricter because inventory has to be sold before it becomes cash, and in a crisis it often can't be sold at book value.

Example: current assets of $200 (cash $50, receivables $50, inventory $100), current liabilities of $100. Current ratio is 2.0. Quick ratio is ($200 minus $100) divided by $100, which is 1.0. The company looks comfortable on the first and merely adequate on the second.

When the current ratio misleads: a company with obsolete inventory it can't sell shows a healthy current ratio while heading for a cash crunch. On the other side, a grocery chain or a subscription business with negative working capital can show a current ratio below 1.0 and be in excellent shape, because its customers pay before its suppliers get paid.

The quick ratio is the honest one, and a low current ratio is only a problem if the business model doesn't explain it.

50. What do ROA and ROE measure, and how does leverage connect them?

Return on assets measures how well the company uses everything it controls; return on equity measures the return to shareholders alone; and the difference between them is leverage.

ROA equals net income divided by average total assets. ROE equals net income divided by average shareholders' equity. Since assets equal liabilities plus equity, ROE equals ROA multiplied by assets over equity (the equity multiplier). More debt means a bigger multiplier and a higher ROE for the same ROA.

Example: a company earns $10 on $100 of assets, so ROA is 10 percent. If it's funded half with debt and half with equity, equity is $50 and ROE is $10 divided by $50, which is 20 percent. If it were funded entirely with equity, ROE would equal ROA at 10 percent. (In practice interest expense would reduce net income a bit in the leveraged case, so ROE would land slightly under 20 percent, but the mechanism is the point.)

The DuPont decomposition breaks ROE into three parts: profit margin (net income over sales) times asset turnover (sales over assets) times the equity multiplier (assets over equity). It tells you whether a company's ROE comes from pricing, from efficiency, or from borrowing. High ROE from leverage alone is fragile.

Leverage turns a modest ROA into a high ROE, and the DuPont breakdown tells you how much of the return is real and how much is borrowed.

Say this, not that

Some pairs I hear in mock interviews every week.

Walk me through $10 of depreciation.

Don't say: "Net income goes down by $10, and cash goes down by $10." (Two mistakes in one sentence: the tax effect and the add-back.)

Say: "Net income falls $7.50 at a 25 percent tax rate. On the cash flow statement I add back the $10 of depreciation, so cash is up $2.50. On the balance sheet, cash is up $2.50, PP&E is down $10, and retained earnings is down $7.50."

Which statement would you pick?

Don't say: "The balance sheet, because it shows everything the company has."

Say: "The cash flow statement, because it shows the cash the business actually generates and it's the hardest to dress up."

Are dividends an expense?

Don't say: "Yes, they reduce net income."

Say: "No. They come out of retained earnings and show up as a financing outflow."

Is negative working capital bad?

Don't say: "Yes, it means the company can't pay its bills."

Say: "It depends on the source. Customers paying upfront is a strength; unpaid suppliers piling up is a problem."

What about the accounting questions not on this list?

Fifty questions cover what shows up in first rounds and superdays at bulge brackets and elite boutiques. Three areas are deliberately left out and deserve their own preparation if you're interviewing with a group that cares about them.

Bank and insurance accounting is its own world (net interest income, loan loss reserves, regulatory capital), and FIG groups will ask about it. Restructuring groups push harder on debt accounting: original issue discount, fresh-start accounting, and how a write-down of debt flows through. And merger accounting (purchase price allocation, how goodwill and intangibles are created in a deal) sits on the border between accounting and M&A, and it's better learned alongside the merger model.

If an interviewer asks something you don't recognize, the right move is to reason from the three statements out loud rather than guess. Start with "let me think about which statement this hits first," and work it through. Interviewers reward the method even when the final number is off.

The 50 questions above are the accounting an IB interviewer expects from an undergrad, and the ones left out are the ones a specific group will teach you to care about.

Do them out loud, in order, with the numbers, until question 22 comes out as easily as question 13. Then move on to valuation, because at that point the plumbing is done.