Financial Analyst Interview Questions and Answers
Q1. What is ‘financial modelling’.
Financial modelling is a quantitative analysis commonly used for either asset pricing or general corporate finance.
Q2. What is ‘working capital’?
Working capital is the best defined as current assets minus current liabilities.
Q3. What is ‘cost accountancy’?
Cost accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making.
Q4. What is NPV? Where is it used?
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project
Q5. What is the difference between a journal and a ledger?
The journal is a book where all the financial transactions are recorded for the first time. The ledger is one which has particular accounts taken from the original journal.
Q6. Walk me through a ‘cash flow statement.’
You’ll have to be well-prepared for this question. Start with the net income and go line by line explaining all major adjustments to arrive at cash flow from operating activities. Mention all the necessary parts that are associated with it.
Q7. What are ‘adjustment entries’?
Adjustment entries are accounting journal entries that convert a company’s accounting records to the accrual basis of accounting.
Q8. Mention one difference between a P&L statement and a balance sheet?
The balance sheet summarises the financial position of a company for a specific point in time. The P&L (profit and loss) statement shows revenues and expenses during a set period of time.
Q9. Which statements (income, balance, cash flow) would you reference to assess the company’s liabilities and assets and why?
This question evaluates a candidate’s analytical and decision-making skills. The answer shows a candidate’s understanding of financial statements and thought process. It is important to know this information because a financial analyst should understand the ideal statement to reference when analyzing a company’s financial health. Answers to look for include:
- Balance sheet
- Income statement
- Reasons for selections
“The balance sheet and income statement explain how much assets and liabilities the company has. Alternatively, the cash flow statement will only tell me the inflow of money.”
Q10. What do you think is the best evaluation metric for analysing a company’s stock?
There is no specific metric. It depends on how you put the answer and make the interviewers understand value of the specific metric that you mention.
Q11. Explain quarterly forecasting and expense models?
The analysis of expenses and revenue which is predicted to be produced or incurred in future is called quarterly forecasting.
An expense model tells what expense categories are allowed on a particular type of work order.
Q12. What is ‘capital structure’?
The capital structure is how a firm finances its overall operations and growth by using different sources of funds
Q13. What is a ‘goodwill’?
Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business.
The above questions and answers will help you in your preparation for the next interview for a position of financial analyst. It will provide you with an idea of the type of questions that are generally asked. However, you need to be prepared to answer all types of questions — technical skills, interpersonal, leadership or methodology.
Q14. What are key factors financial analysts should consider when evaluating prospective investments?
This question assesses the candidate’s financial analysis skills. The applicant’s answer will indicate their financial analysis knowledge and decision-making process. This information is vital because financial analysts must be able to assess the value of investments. Answers can include:
- Return on Investment
- Experience of achievement
- Desire to grow
“It is crucial to calculate an asset’s return on investment, consider the company’s current portfolio and how the investment fits before recommending a new investment to a client.”
Q15. What is a ‘composite cost of capital’?
Also known as the weighted average cost of capital (WACC), a composite cost of capital is a company’s cost to borrow money given the proportional amounts of each type of debt and equity a company has taken on.
WACC= Wd (cost of debt) + Ws (cost of stock/RE) + Wp (cost of pf. Stock)
Q16. Is it possible for a company to have positive cash flow but still be in serious financial trouble?
Yes. There are two examples –
(i) a company that is selling off inventory but delaying payables will show positive cash flow for a while even though it is in trouble.
(ii) A company has strong revenues for the period but future forecasts show that revenues will decline.
Q17. What do you do when you do not have all the information you need?
This question evaluates the candidate’s research skills. The answer will show the applicant’s approach to finding missing information. It is vital to know this because sometimes information is unknown but needed for creating accurate financial analysis. Look for answers that reveal:
- Strategic research approaches
- Software platform use
- Technical approaches
“I use SAP to scour information from the client’s transactional history and use the sorting filter to gather the data quickly. I will also contact the customer, if necessary, and use the appropriate information that will help me finish my analysis.”
Q18. How many financial statements are there? Name them
There are four main financial statements – 1) balance sheets, 2) income statements, 3) cash flow statements, and 4) statements of shareholders’ equity.
Q19. Do you follow the stock market? Which stocks in particular?
You need to be very careful in answering this question. As a financial analyst, following the stock market proves to be beneficial. Also, always be up-to-date with the stocks.
Q20. What does your financial analysis reporting process involve?
Producing reports are an essential part of financial analysts’ jobs because financial analysts provide clients with recommendations based on data from these reports. The question demonstrates the candidate’s critical thinking and organizational skills. A candidate’s answer shows their financial analysis reporting methods, including techniques and tools they use. Look for answers that include information about:
- Reporting platforms and tools
- Financial Analysis Report Components
- Analysis Techniques
“I like using SAS to produce and thoroughly assess financial reports quickly. The platform ensures I include significant parts of the report, including key risks and the valuation.”
Q21. How does increasing accounts receivables impact the company’s balance sheet?
This question tests the candidate’s analytical skills. The answer demonstrates knowledge of how different line items on the balance sheet relate to one another. This information is important to know because it impacts the decisions financial analysts must make. Look for answers, such as:
- Negative impact on cash flow
- Lowers company’s net worth
- Reduces the value of assets
“If the company’s account receivables continue to increase it can adversely affect the cash flow, which means the company will not have enough money to operate.”
Q22. What is the best metric to use to analyze a company’s stock?
This question assesses the candidate’s risk assessment skills. The candidate’s answers show strategy for measuring the stock’s performance, confidence level and ability to present findings using examples and reasoning. It is important to understand this because financial analysts must be able to evaluate risk and reward of various financial investment opportunities. Look for answers such as:
- Specific metrics
- Details about the metrics
- Indications of confidence, such as tone and body language
“I believe PEG (Price Earnings to Growth Ratio) is an ideal key performance indicator of a company’s stock. In my years of experience in this field, I find it to be the most important metric to assess a business’ financial health. This metric factors in the projected earnings growth for the company and is better than only using the price-earnings ratio.”
Q23. Can you explain why financial reports do not list dividends on the income statement?
The reason for this question is to determine the candidate’s fundamental knowledge of financial information. The answer explains the candidate’s basic understanding of the income statement and financial analysis skills. It is important to know this because financial analysts need an understanding of accounting information, such as the income statement’s line items, to properly evaluate the company’s finances. Answers to look for include:
- Not firm income
- Listed under shareholder equity
- Income statement only contains strong income
“The income statement does not contain dividends because it shows only the company’s income. If you want to look at the dividends, you will need to look at the shareholder equity section.”
This course is designed to enable you to analyze and critically evaluate financial choices using investment appraisal techniques, taking into account the cost and sources of capital and the necessity of managing the balance sheet.Learn management accounting techniques for effective management decision making and control to improve business performance and profitability.
April 6, 2018
September 20, 2019