Financial Analyst Interview Flashcards

Question 1

What does an income statement show?

Accepted Answer

The income statement (profit and loss statement) reports financial performance over a period, starting with revenue and subtracting costs and expenses to arrive at net income. It shows profitability and how it is generated, with key lines like gross profit, operating income, and net income revealing margins at each level.

Question 2

What does a balance sheet show?

Accepted Answer

The balance sheet is a snapshot of financial position at a specific date, listing what a company owns (assets), what it owes (liabilities), and the owners' residual stake (equity). It must always balance per the accounting equation, Assets equal Liabilities plus Equity, showing how assets are financed.

Question 3

What does the cash flow statement track?

Accepted Answer

The cash flow statement reconciles net income to actual cash by tracking three sections: operating (core business cash), investing (asset purchases and sales), and financing (debt and equity flows). It reveals true liquidity since a profitable company on paper can still run out of cash.

Question 4

What is revenue?

Accepted Answer

Revenue, or the top line, is the total amount earned from a company's primary business activities before any costs are deducted, recognized when earned under accrual accounting. Growth and quality of revenue are central to valuation, distinct from profit, which is what remains after expenses.

Question 5

What is net income?

Accepted Answer

Net income, or the bottom line, is what remains of revenue after subtracting all costs, operating expenses, interest, and taxes. It measures overall profitability, flows into retained earnings on the balance sheet, and underlies earnings per share, though it can be affected by non-cash items and one-time events.

Question 6

How is gross profit calculated?

Accepted Answer

Gross profit equals Revenue minus Cost of Goods Sold, representing the profit from core production before operating expenses, interest, and taxes. Gross margin (gross profit divided by revenue) shows how efficiently a company produces its goods and how much is left to cover other costs.

Question 7

What does EBIT represent?

Accepted Answer

EBIT (Earnings Before Interest and Taxes), also called operating income, measures profit from operations before financing and tax effects. It isolates operating performance so companies with different capital structures and tax situations can be compared, calculated as revenue minus operating expenses and cost of goods sold.

Question 8

What is EBITDA and why is it used?

Accepted Answer

EBITDA adds depreciation and amortization back to EBIT, approximating operating cash generation by removing non-cash charges and capital structure and tax effects. It is widely used for comparing companies and in valuation multiples, but it ignores capital expenditure and working capital needs, so it can overstate real cash flow.

Question 9

What are assets?

Accepted Answer

Assets are economic resources a company controls that are expected to provide future benefit, such as cash, inventory, receivables, equipment, and intangibles. They are classified as current (convertible to cash within a year) or non-current, and appear on the balance sheet financed by liabilities and equity.

Question 10

What are liabilities?

Accepted Answer

Liabilities are a company's financial obligations to outside parties, such as loans, accounts payable, and deferred revenue, settled by transferring assets or services. They are split into current (due within a year) and long-term, and represent claims on the company's assets that rank ahead of equity holders.

Question 11

What is shareholders' equity?

Accepted Answer

Shareholders' equity is the residual value belonging to owners after subtracting liabilities from assets, comprising contributed capital and retained earnings. It represents the net worth of the business and the owners' stake, increasing with profits and new investment and decreasing with losses and dividends.

Question 12

What is the fundamental accounting equation?

Accepted Answer

The accounting equation, Assets equal Liabilities plus Equity, is the foundation of double-entry bookkeeping and ensures the balance sheet always balances. Every transaction affects at least two accounts to keep it in equilibrium, reflecting that everything a company owns is financed either by debt or by owners.

Question 13

What is working capital?

Accepted Answer

Working capital equals current assets minus current liabilities and measures a company's ability to cover short-term obligations and fund day-to-day operations. Positive working capital indicates liquidity, while managing it efficiently (inventory, receivables, payables) frees up cash and improves operational health.

Question 14

What are accounts receivable?

Accepted Answer

Accounts receivable is money owed to a company by customers who purchased on credit, recorded as a current asset. Managing it, measured by days sales outstanding, affects cash flow, since slow collections tie up cash and raise the risk of bad debts that may never be collected.

Question 15

What are accounts payable?

Accepted Answer

Accounts payable is the amount a company owes to suppliers for goods or services purchased on credit, recorded as a current liability. Stretching payment terms preserves cash, but too slow can damage supplier relationships, so it is managed alongside receivables in the cash conversion cycle.

Question 16

What is depreciation?

Accepted Answer

Depreciation allocates the cost of a tangible fixed asset over its useful life, matching the expense to the periods that benefit from the asset. It is a non-cash expense that reduces reported profit and the asset's book value, with methods like straight-line spreading cost evenly across years.

Question 17

How does amortization differ from depreciation?

Accepted Answer

Amortization spreads the cost of intangible assets, such as patents or software, over their useful life, while depreciation does the same for tangible assets. Both are non-cash expenses that allocate cost over time; amortization also refers to paying down loan principal over a schedule.

Question 18

What is cost of goods sold?

Accepted Answer

Cost of Goods Sold (COGS) includes the direct costs of producing goods sold, such as materials and direct labor, but excludes overhead and operating expenses. Subtracting COGS from revenue gives gross profit, and its ratio to revenue reflects production efficiency and pricing power.

Question 19

What is the difference between fixed and variable costs?

Accepted Answer

Fixed costs (rent, salaries) remain the same regardless of production volume, while variable costs (materials, commissions) rise and fall with output. Understanding the mix drives break-even analysis and operating leverage, since high fixed costs amplify profit swings as volume changes.

Question 20

What is the break-even point?

Accepted Answer

The break-even point is the level of sales at which total revenue equals total costs, so profit is zero. In units it equals fixed costs divided by the contribution margin per unit (price minus variable cost). It shows the minimum needed to avoid a loss and how changes in price or costs shift that threshold.

Question 21

What does net profit margin measure?

Accepted Answer

Net profit margin equals net income divided by revenue, expressed as a percentage, showing how much of each dollar of sales becomes profit after all expenses. It reflects overall efficiency and pricing power, and comparing it across periods and competitors reveals profitability trends and cost control.

Question 22

What does ROI measure?

Accepted Answer

Return on Investment equals net gain from an investment divided by its cost, expressed as a percentage, measuring profitability and efficiency of capital deployed. It is simple and widely used for comparing options, though it ignores time and risk, so it is often paired with time-adjusted measures like NPV or IRR.

Question 23

What does return on equity measure?

Accepted Answer

Return on Equity equals net income divided by shareholders' equity, showing how effectively management uses owners' capital to generate profit. A higher ROE generally signals efficient use of equity, but it can be inflated by high leverage, so it is analyzed alongside debt levels and ROA.

Question 24

What does return on assets measure?

Accepted Answer

Return on Assets equals net income divided by total assets, measuring how efficiently a company converts its asset base into profit, independent of how those assets are financed. It is useful for comparing operational efficiency across companies, especially within the same asset-intensive industry.

Question 25

What does the current ratio measure?

Accepted Answer

The current ratio equals current assets divided by current liabilities, measuring short-term liquidity and the ability to cover obligations due within a year. A ratio above 1 means current assets exceed current liabilities, though an excessively high ratio may signal idle assets, and the ideal varies by industry.

Question 26

How does the quick ratio differ from the current ratio?

Accepted Answer

The quick ratio (acid-test) equals current assets minus inventory, divided by current liabilities, providing a stricter liquidity measure than the current ratio by excluding inventory that may be hard to convert to cash quickly. It assesses whether a company can meet short-term obligations without selling inventory.

Question 27

What does the debt-to-equity ratio indicate?

Accepted Answer

The debt-to-equity ratio equals total liabilities divided by shareholders' equity, indicating financial leverage and how much a company funds operations with debt versus owners' capital. Higher ratios mean greater leverage and risk but potentially higher returns; acceptable levels vary widely by industry.

Question 28

What is the purpose of budgeting?

Accepted Answer

Budgeting is the process of creating a financial plan of expected revenues and expenses over a period, setting targets that guide decisions and control spending. It allocates resources, sets accountability, and provides a benchmark against which actual results are compared in variance analysis.

Question 29

What is financial forecasting?

Accepted Answer

Financial forecasting estimates future revenues, expenses, and cash flows using historical data, trends, and assumptions about the business and economy. It informs planning, budgeting, hiring, and investment decisions, and unlike a fixed budget, forecasts are often updated as new information arrives (rolling forecasts).

Question 30

What is variance analysis?

Accepted Answer

Variance analysis compares actual financial results against the budget or forecast, identifying and explaining the differences (favorable or unfavorable) in revenue, costs, and volume. It helps management understand performance drivers, hold teams accountable, and adjust plans, distinguishing controllable from external causes.

Question 31

What is the difference between accrual and cash accounting?

Accepted Answer

Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of cash timing, giving a truer picture of performance and matching costs to revenue. Cash accounting records transactions only when cash changes hands, simpler but able to distort timing. GAAP requires accrual for most companies.

Question 32

What is GAAP?

Accepted Answer

Generally Accepted Accounting Principles are the standardized rules and conventions governing financial accounting and reporting in the United States, ensuring consistency, comparability, and transparency across companies. Adherence lets investors and regulators trust and compare financial statements; many other countries use IFRS instead.

Question 33

What is the time value of money?

Accepted Answer

The time value of money is the principle that a sum of money is worth more now than the same sum later because it can be invested to earn returns. It underpins discounting and compounding, present and future value calculations, and is fundamental to valuation, investment, and lending decisions.

Question 34

What is present value?

Accepted Answer

Present value is the current worth of a future cash flow, found by discounting it at a required rate of return: PV equals FV divided by (1 plus r) to the power n. It reflects the time value of money and is the basis for valuing investments, bonds, and projects by comparing future cash flows in today's terms.

Question 35

What is future value?

Accepted Answer

Future value is the amount an investment made today will grow to over time at a given rate, calculated as FV equals PV times (1 plus r) to the power n with compound interest. It shows the power of compounding and helps plan savings and investment growth over a horizon.

Question 36

How does compound interest differ from simple interest?

Accepted Answer

Simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus accumulated interest, so earnings grow exponentially over time. The compounding frequency (annual, monthly, daily) increases the effective return, making compounding a powerful force in long-term wealth building.

Question 37

What is net present value?

Accepted Answer

Net Present Value sums the present values of a project's future cash flows and subtracts the initial investment, using a discount rate reflecting required return. A positive NPV means the project is expected to create value above its cost, making it a core capital budgeting decision rule: accept positive-NPV projects.

Question 38

What is a dividend?

Accepted Answer

A dividend is a portion of a company's earnings distributed to shareholders, usually in cash, as a return on their investment. Dividends signal financial health and stability and provide income to investors, though companies may instead reinvest profits for growth or buy back shares.

Question 39

What is the difference between a stock and a bond?

Accepted Answer

A stock represents ownership equity in a company, with potential for capital gains and dividends but no guaranteed return and last claim in bankruptcy. A bond is a debt instrument where the holder lends money for periodic interest and principal repayment, generally lower risk with priority over equity in a default.

Question 40

What is the difference between capital and operating expenditures?

Accepted Answer

Capital expenditures (CapEx) are funds spent to acquire or improve long-term assets like equipment or property, capitalized and depreciated over time. Operating expenditures (OpEx) are ongoing costs to run the business, like rent and salaries, expensed immediately. The distinction affects profit timing, taxes, and cash flow.

Question 41

What is liquidity?

Accepted Answer

Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price, and to a company's ability to meet short-term obligations. Cash is the most liquid asset; illiquid assets like real estate take longer to sell. Liquidity ratios assess short-term financial health.

Question 42

How does solvency differ from liquidity?

Accepted Answer

Solvency is a company's ability to meet its long-term debts and continue operating, reflecting overall financial stability, while liquidity concerns meeting short-term obligations. A company can be liquid but insolvent, or vice versa; solvency is assessed with ratios like debt-to-equity and interest coverage.

Question 43

What is inflation and why does it matter in finance?

Accepted Answer

Inflation is the rate at which the general price level of goods and services rises, reducing the purchasing power of money over time. It matters because it erodes real returns, raises costs, and influences interest rates and discount rates, so analysts use real (inflation-adjusted) values for accurate long-term comparisons.

Question 44

What does the P/E ratio measure?

Accepted Answer

The price-to-earnings ratio equals share price divided by earnings per share, showing how much investors are willing to pay for each dollar of earnings. A high P/E may signal growth expectations or overvaluation, a low P/E value or risk; it is most meaningful compared within an industry.

Question 45

What is market capitalization?

Accepted Answer

Market capitalization equals share price multiplied by the number of outstanding shares, representing the total equity value the market assigns to a company. It is used to categorize companies (small, mid, large cap) and gauge size, distinct from enterprise value, which also accounts for debt and cash.

Question 46

What is burn rate?

Accepted Answer

Burn rate is how fast a company, often a startup, spends its cash reserves per month before reaching profitability. Combined with cash on hand it determines runway, the months until the company runs out of money, a critical metric for planning fundraising and managing survival.

Question 47

What is earnings per share?

Accepted Answer

Earnings per share equals net income (less preferred dividends) divided by the weighted average shares outstanding, measuring profitability on a per-share basis. It is a key driver of stock valuation and the P/E ratio, and is reported as basic and diluted, with diluted accounting for potential shares from options and convertibles.

Question 48

What is GDP?

Accepted Answer

Gross Domestic Product is the total monetary value of all finished goods and services produced within a country over a period, the broadest measure of economic activity. Its growth rate indicates economic health, influencing interest rates, corporate earnings expectations, and investment decisions.

Question 49

What are operating expenses?

Accepted Answer

Operating expenses are the costs a company incurs through normal business operations excluding cost of goods sold, such as salaries, rent, marketing, and administrative costs. They are subtracted from gross profit to arrive at operating income, and controlling them is key to operating efficiency and margins.

Question 50

What are retained earnings?

Accepted Answer

Retained earnings are the cumulative net profits a company has reinvested in the business rather than distributed as dividends, shown in shareholders' equity. They fund growth, debt repayment, and operations, and grow with profits and shrink with losses and dividend payments, reflecting reinvestment over the company's life.

Question 51

What is a discounted cash flow valuation?

Accepted Answer

DCF values an asset as the sum of its projected future free cash flows discounted to present value at a rate reflecting risk (often WACC), plus a terminal value. It is grounded in intrinsic value rather than market sentiment, but is highly sensitive to assumptions about growth, margins, and the discount rate.

Question 52

What is the weighted average cost of capital?

Accepted Answer

WACC is the average rate a company must pay to finance its assets, weighting the cost of equity and after-tax cost of debt by their proportions in the capital structure: WACC equals (E/V times cost of equity) plus (D/V times cost of debt times (1 minus tax rate)). It serves as the discount rate in DCF and the hurdle rate for investments.

Question 53

What does the internal rate of return represent?

Accepted Answer

IRR is the discount rate that makes a project's net present value zero, representing its expected annualized return. A project is attractive if its IRR exceeds the required hurdle rate. IRR is intuitive but can mislead with non-conventional cash flows or when comparing mutually exclusive projects, where NPV is more reliable.

Question 54

What is free cash flow?

Accepted Answer

Free cash flow is the cash a company generates from operations after subtracting capital expenditures needed to maintain or expand its asset base. It represents cash available to repay debt, pay dividends, or reinvest, and is a key input to DCF valuation because it reflects real distributable cash rather than accounting profit.

Question 55

What is terminal value in a DCF?

Accepted Answer

Terminal value captures the value of all cash flows after the explicit forecast horizon, often the majority of a DCF's total value. It is estimated via the perpetuity growth method (final cash flow grown at a long-term rate, divided by discount rate minus growth) or an exit multiple, and its assumptions heavily influence the result.

Question 56

How is the cost of equity estimated with CAPM?

Accepted Answer

The Capital Asset Pricing Model estimates cost of equity as the risk-free rate plus beta times the equity risk premium: r equals Rf plus beta times (Rm minus Rf). It reflects the return shareholders require for the stock's systematic risk, with beta measuring sensitivity to market movements, and feeds into WACC.

Question 57

What does beta measure?

Accepted Answer

Beta measures a stock's systematic risk, its sensitivity to market movements. A beta of 1 moves with the market, above 1 is more volatile, and below 1 less volatile. It is used in CAPM to determine cost of equity, capturing only non-diversifiable risk, since diversifiable risk earns no premium.

Question 58

What is enterprise value?

Accepted Answer

Enterprise value represents the total value of a company's operations, calculated as market capitalization plus total debt minus cash and equivalents. It reflects the cost to acquire the entire business and is capital-structure neutral, making it ideal for comparing companies and pairing with metrics like EBITDA in valuation multiples.

Question 59

Why is the EV/EBITDA multiple widely used?

Accepted Answer

The EV/EBITDA multiple compares enterprise value to operating earnings before interest, taxes, depreciation, and amortization, making it capital-structure and tax neutral and ignoring non-cash charges. This lets analysts compare companies with different leverage and depreciation policies, though it overlooks capital intensity and reinvestment needs.

Question 60

What does the cash conversion cycle measure?

Accepted Answer

The cash conversion cycle measures how long cash is tied up in operations: Days Inventory Outstanding plus Days Sales Outstanding minus Days Payable Outstanding. A shorter cycle means cash returns faster, improving liquidity and reducing financing needs, while a long cycle strains working capital.

Question 61

What does days sales outstanding indicate?

Accepted Answer

Days Sales Outstanding equals accounts receivable divided by total credit sales, times the number of days, measuring how long on average it takes to collect from customers. A rising DSO signals collection problems or looser credit terms that tie up cash, while a low DSO indicates efficient collections.

Question 62

What does inventory turnover measure?

Accepted Answer

Inventory turnover equals cost of goods sold divided by average inventory, showing how efficiently a company sells and restocks inventory. High turnover suggests strong sales and lean inventory, while low turnover may indicate overstocking or weak demand, tying up cash and risking obsolescence.

Question 63

What is sensitivity analysis in financial modeling?

Accepted Answer

Sensitivity analysis examines how a model's output, such as NPV or valuation, changes when a single key input (growth rate, margin, discount rate) is varied, holding others constant. It identifies which assumptions matter most and the range of plausible outcomes, helping quantify risk and stress-test conclusions.

Question 64

How does scenario analysis differ from sensitivity analysis?

Accepted Answer

Scenario analysis evaluates outcomes under coherent sets of assumptions changed together, such as base, best, and worst cases, reflecting realistic combinations of conditions. Unlike sensitivity analysis which isolates one variable, it captures interactions, giving a more holistic view of risk and the range of possible results.

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