400 IB Interview Questions - Basic Accounting Questions

What are the 3 financial statements?

Income Statement, Balence Sheet, and Cash Flow Statement

What does a Income Statement show?

Give the company’s revenue and expenses and goes down to net income in the final line on the statement.

Balance Sheet

Shows the company’s assets such as resources, liabilities, and Shareholders Equity

Example of Company Resources

Cash, Inventory and Property, Plant and Equipment

What should Assets amount to in the balence sheet?

Assets = Liabilities + Shareholders’ Equity

Cash Flow Statement

Starts with Net Income, then lists cash flow from investing and financing activities, lastly the companies net change in cash.

In a Cash Flow Statement what adjustments are made when creating this statement?

Adjusted for non-cash expenses and working capital changes

Walk me through the 3 financial statements

The Income Statement shows revenue and net income. The Balance Sheet shows assets, liabilities, and equity. The Cash Flow Statement tracks cash from operations, investing, and financing, ending with net cash change.

Can you give examples of the major line items on the Income Statement?

Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating Income; Pretax Income; Net Income.

Can you give examples of the major line items on the Balance Sheet?

Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt; Shareholders’ Equity.

Can you give examples of the major line items on the Cash Flow Statement?

Net Income; Depreciation & Amortization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations; Capital Expenditures; Cash Flow From Investing; Sale/Purchase of Securities; Dividends Issued; Cash Flow From Financing.

Break down the three financial statements

The three key financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement. The Income Statement shows a company’s revenue, expenses, and net income. The Balance Sheet presents assets, liabilities, and shareholders’ equity—where assets equal liabilities plus equity. The Cash Flow Statement starts with net income, adjusts for non-cash items and changes in working capital, and shows cash from operating, investing, and financing activities, ending with the net change in cash.”

How do the 3 statements link together?

Net income links the Income Statement to both the Balance Sheet and Cash Flow Statement. Changes in balance sheet items show up as working capital changes, while investing and financing activities affect assets, liabilities, and equity. Cash and equity act as balancing plugs, with cash flowing in from the Cash Flow Statement.

If you were stranded on a desert island, only had 1 statement and I wanted to review the overall health of a company – which statement would I use and why?

The Cash Flow Statement shows how much cash a company actually generates, which is key to understanding its true financial health.

Let’s say I could only look at 2 statements to assess a company’s prospects – which 2 would I use and why?

Choose the Income Statement and Balance Sheet, as you can derive the Cash Flow Statement from both (with matching 'before' and 'after' Balance Sheets for the Income Statement's period).

If Depreciation is a non-cash expense, why does it affect the cash balance?

Although Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash expense, Depreciation affects cash by reducing the amount of taxes you pay.

Why is the Income Statement not affected by changes in Inventory?

A common mistake is assuming working capital changes (like inventory) hit the Income Statement. Inventory only affects COGS or expenses when sold—not while sitting in storage.

Is it possible to end up with negative shareholder equity? If so, give me the first method of how this can happen.

Yes; one example is during a leveraged buyout with dividend recapitialization. This means that the owner of the company has taken out a large portion of equity.

Is it possible to end up with negative shareholder equity? If so, give me the second method of how this can happen.

Yes; If a cmopany has been losing money consistently and therefore has a declining retained earning balence.

What is working capital?

working capital = current assets - current liabilities

Explain a positive working capital?

If working capital is positive that means a company can pay off its short-term liabilities with its short term assets

What is operating working capital?

Operating working capital = (current assets - cash & cash equivalents) - (current liabilities - debt)

Give me the first example of how a company can have negative working capital.

Some companies with subscription or longer-term contracts often have negative working capital because of high deferred revenue balances.

Give me the second example of how a company can have negative working capital.

Retail and restaurant companies like Amazon, Wal-Mart, and McDonald’s often have negative Working Capital because customers pay upfront – so they can use the cash generated to pay off their Accounts Payable rather than keeping a large cash balance on-hand. This can be a sign of business efficiency.

Give me the third example of how a company can have negative working capital.

In other cases, negative Working Capital could point to financial trouble or possible bankruptcy (for example, when customers don’t pay quickly and upfront and the company is carrying a high debt balance).

Give me the first example of how a company would collect cash from a customer and not record it as revenue.

Web-based subscription software

Give me the second example of how a company would collect cash from a customer and not record it as revenue.

Cell phone carriers that sell annual contracts

Give me the third example of how a company would collect cash from a customer and not record it as revenue.

Magazine publishers that sell annual contracts

If cash collected is not recorded as revenue, what happens to it?

It goes into the Deferred Revenue balence on the Balence sheet under Liabilities

What the difference between accounts recievable and deffered revenue?

Account recievable has not yet been collected in cash from customers, whereas deferred revenue has been collected.

How long does it usually take for a company to collect its accounts recievable balance?

Generally the accounts recievable days are in the 30-60 day range.

What is cash-based accounting?

Cash-based accounting recognizes revenue and expenses when cash is actually recieved or paid out.

What is accrual accounting?

Accrual accounting recognizes revenue when collection is reasonably certain and recognizes expenses when they are incurred rather than when they are paid out in cash.

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

Cash-based accounting records revenue and expenses when cash is received or paid, while accrual accounting records them when earned or incurred, regardless of cash flow.

Let’s say a customer pays for a TV with a credit card. What would this look like under cash-based accounting?

In cash-based accounting, revenue appears only after the customer is charged, payment is authorized, and funds are deposited then it's recorded as Revenue and Cash.

Let’s say a customer pays for a TV with a credit card. What would this look like under accrual accounting?

In accrual accounting, revenue is recorded immediately as Accounts Receivable, then converted to Cash once the payment is received.

Give me an example when a company would want to capital rather than expense a purchase. Explain how it would impact the Income Statement.

Employee salaries and the cost of manufacturing products (COGS) only cover a short period of operations and therefore show up on the Income Statement as normal expenses instead.

Give me an example when a company would want to capital rather than expense a purchase. Explain how it would impact the Balance Sheet.

Purchases like factories, equipment and land all last longer than a year and therefore show up on the Balance Sheet.

How do you decide when to capitalize rather than expense a purchase?

Assets with a useful life over one year are capitalized on the Balance Sheet, then depreciated or amortized over time.

Why do companies report both GAAP and non-GAAP (“or Pro Forma”) earnings?

Many companies have non-cash charges like amortization, stock comp, and deferred revenue write-downs. So, GAAP earnings may understate true profit—non-GAAP earnings are usually higher.

A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. What’s the first way this can happen?

High CapEx isn’t in EBITDA, so a company can show strong EBITDA but still be cash-flow negative.

A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. What’s the second way this can happen?

The company’s interest is too high, and it can’t afford its debt.

A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. What’s the third way this can happen?

All the debt matures at once, and in a credit crunch, the company can’t refinance so it runs out of cash.

A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. What’s the fourth way this can happen?

One-time charges (like litigation) are so high they could bankrupt the company.

Normally Goodwill remains constant on the Balance Sheet – What the first way why would it be impaired and what does Goodwill Impairment mean?

After acquisition, the buyer may cut the value of intangible assets if they’re worth less than expected.

Normally Goodwill remains constant on the Balance Sheet – What the second way why would it be impaired and what does Goodwill Impairment mean?

Often in acquisitions, the buyer overpays, causing a big net loss on the Income Statement

Normally Goodwill remains constant on the Balance Sheet – What the third way why would it be impaired and what does Goodwill Impairment mean?

Goodwill impairment can happen when a company stops part of its operations

What is the first circumstances would Goodwill increase?

Goodwill can rarely increase if revalued but usually changes after acquisition as an accounting plug.

What is the second circumstances would Goodwill increase?

Goodwill usually rises when a company buys another for more than its asset value but this is rare.

What is LIFO?

Last-In, First Out

What is FIFO?

First-In, First Out

What is the differennce between FIFO and LIFO?

LIFO uses the newest inventory costs for COGS; FIFO uses the oldest