17 Most Asked Finance Interview Questions & Answers [For Freshers & Experienced]

If you're wondering how to prepare for a financial interview, this article will walk you through the most often asked finance interview questions. To provide you with a complete picture of the finance domain, we've covered all levels of finance interview questions — beginner, intermediate, and advanced. You'll have a better idea of what to expect from the interviewer in a financial interview if you go through all of these questions.

Beginner-Level Finance Interview Questions

1. How is it possible for a company to have a positive net income but still go bankrupt?

Ans: While facing bankruptcy, a corporation might demonstrate positive net income via degrading working capital (by increasing accounts receivable and decreasing accounts payable) and financial strategies.

2. What Is Working Capital and What Does It Mean?

Ans: Working capital is the amount left over after current liabilities are subtracted from current assets. It shows how much cash is locked up in the business due to inventories and accounts receivable, as well as how much cash is required to pay off the company's short-term obligations (in the coming 12 months).

3. Why do capital expenditures increase assets but other cash outflows do not, resulting in expenses?

Ans: Capital expenditures are capitalized because they provide long-term advantages to the company. A new branch, for example, would earn a lot of money for the company for a long time, but an employee's labor will only benefit until the time of paying the salaries, which is why they create an expenditure. The key distinction between an asset and a cost is this.

4. Describe how a cash flow statement works.

Ans: We begin with net income and work our way down the list, making adjustments along the way, to get at cash flows from operations. To calculate cash flow from investments, you'll need to include capital expenditures, the purchase of intangible assets, the purchase or sale of investment securities, and asset sales. To arrive at finances, you'll need to discuss the issue or buyback of equity and debt, as well as paying out dividends, after you've got the cash flow from investments.

The overall change in cash is then calculated by adding cash flows from investments, activities, and borrowing. Finally, using the cash balance at the start of the term and the change in cash, you can calculate the cash balance after the period. This is the basic format of a cash flow statement.

5. Is it possible for a company to have positive cash flows while experiencing financial difficulties?

Yes, even if a company is in financial problems, it can display positive cash flows by making illogical working capital improvements (delaying payables and selling inventory) or by not allowing revenue to move forward in the pipeline.

6. What does Preference Capital imply?

In simple terms, preferred capital is the sum raised through the issuance of preference shares. This is a hybrid technique of funding the company because it combines the benefits of both debentures and equity. When it comes to dividend payments, capital takes precedence over equity capital.

7. What do you mean when you say "hedging"?

Ans: Hedging is a risk management approach that we use to offset investment losses. We accomplish this by taking the opposing side of a linked asset. However, as the quantity of risk hedging decreases, the potential reward decreases as well. Hedging can be compared to insurance, in which you pay a certain premium and receive guaranteed recompense.

If the asset in issue causes you a loss, hedging compensates you by taking the opposite position in a similar asset. This is why a hedger differs from speculators in that a hedger focuses on avoiding risks rather than maximizing gains.

Intermediate-Level Finance Interview Questions

1. What exactly is RAROC?

Ans: Risk-Adjusted Return On Capital (RAROC) is a risk-based profitability measuring framework that we use to assess risk-adjusted financial performance. It provides a comprehensive view of profitability across businesses. It is one of the most effective tools for determining a bank's profitability. With RAROC, you may compute predicted returns more precisely by combining them with risk exposure and verified economic capital.

2. What exactly do you mean when you say "fair value"?

Ans: Fair value refers to an unbiased and rational evaluation of an asset's, good's, or service's possible market price. The fair market value of an asset is the price at which it may be bought or sold in a current transaction between willing parties that is not a liquidation. The fair value of liabilities, on the other hand, relates to the amount that you can incur or settle in a current transaction between two willing parties that is not a liquidation.

3. What exactly do you mean when you say "secondary market"?

Ans: In the secondary market, people trade securities that have previously been offered to the public in the primary market and are listed on the stock exchange. The secondary market, often known as the aftermarket, includes the NASDAQ, Bombay Stock Exchange (BSE), and New York Stock Exchange, to name a few (NYSE).

4. How do you distinguish between cost accounting and costing?

Ans: Costing is the technique of determining the cost of a product or service, whereas cost accounting is the system for analyzing a company's expenses. Cost accounting is a part of accounting that examines, analyses, and forecasts cost data to determine the expenses incurred by a business enterprise.

Costing, on the other hand, is the process of determining product costs and prices. Cost accounting is a field of accountancy, whereas costing is a technique. The former has little impact on a company's decision-making, whereas the latter is critical for making well-informed decisions.

5. What exactly do you mean when you say "cost accounting"? Do you know what the goals of cost accounting are?

Ans: Cost accountancy is a combination of costing and cost accounting in which expenditure is classified, recorded, and allocated to calculate the cost of a product or service. It collects and analyses relevant data, then presents it clearly and understandably to aid in decision-making.

Advanced-Level Finance Interview Questions

1. What exactly do you mean when you say "adjustment entries"? Why Do We Allow Them to Pass?

Ans: Adjustment entries are the entries we make to the nominal and associated accounts at the end of each accounting period so that we may show the right profit and loss in the profit and loss accounts and keep the balance sheet accurate.

It's critical to pass adjustments before preparing the final financial statements, since if we don't, the final statements will represent wrong information, causing errors and confusion. Furthermore, if the adjustment entries are not passed, the balance sheet will not reflect the true state of the business.

2. What exactly do you mean when you say "put option"?

Ans: A put option is a financial market derivative product that permits a holder to sell an asset to the writer of the put at a certain price by a specific date. The purchase of a put option conveys a negative statement about the stock's prospects.

3. What does "deferred tax liability" mean?

Ans: A deferred tax liability is the amount owed to the IRS that the corporation has not yet paid but plans to do so in the future. When a company's tax expenses are less than what is shown in its tax returns or financial statements, this occurs.

4. What is the definition of goodwill?

Ans: A goodwill asset is a difference between the acquisition price and the fair market value of a newly acquired business.

5. What Is the Difference Between a Ledger and a Journal Entry?

Ans: The journal is a book of prime entry that records all transactions to demonstrate which accounts were debited and which were credited. The ledger, on the other hand, is the book in which distinct accounts are kept. You'd have to classify the transactions in a journal and then add them to the ledger's appropriate accounts. The book of final entry is another name for the ledger.