IB Interview Questions: Accounting

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Level 1 Accounting Questions

Accounting and Financial Statement Basics

1. Walk me through the Three Financial Statements

The three financial statements are the Income Statement, the Balance Sheet, and the Statement of Cash Flows (or Cash Flow Statement).

The Income Statement shows the profitability of a company over a period of time on an Accounting (i.e. Accrual) basis.

The key items on the Income Statement are Revenue (i.e. Sales) less Cost of Goods Sold, Selling General and Administrative Expense, Interest Income / (Expense), Other Income (Expense), and Income Taxes. The bottom of the Income Statement shows Net Income which reflects the net profit on an accrual basis over a period of time.

The Balance Sheet shows the company’s Assets (i.e. what it owns), Liabilities (i.e. what it owes), and Equity (owner investment + accumulated profit – dividends) at the time of reporting. It’s called a balance sheet because Assets must equal Liabilities plus Owners Equity.

The Statement of Cash Flows shows us the underlying drivers of the net change in cash during a period of time. The three major sections of the Cash Flow Statement are the Cash Flows from Operations (CFO), Cash Flows from Investing (CFI) and Cash Flows from Financing (CFF).

2. What is the difference between Cash and Accrual-Basis accounting?

Cash Basis accounting reflects dollars in and out. Accrual Basis Accounting reflects Revenue when it’s earned Expenses when they are incurred, regardless of the Cash that changes hands.

3. What is the impact of Debits/Credits on Assets and Liabilities?

A Debit increases an Asset account, while a Credit decreases an Asset account.

Conversely, a Debit decreases a Liability account, while a Credit increases an Asset account.

4. What is the Revenue Recognition principle?

The Revenue Recognition Principle states that revenues should be recognized when the sale of a service or good has been earned and the transaction is substantially complete…not when the cash is received.

5. What is the Matching principle?

The Matching Principle states that we have to recognize (i.e. ‘match’) Expenses in the same period in which the Revenues (arising from those expenses) are earned.









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