Finance Interview Questions (and Answers)

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A. What is the impact on the company’s EBITDA, net income, cash flow, and valuation if it can capitalize R&D costs instead of expensing them?

Impact on EBITDA:

EBITDA increases by the exact amount of R&D expenses that are capitalized.

Impact on Net Income:

Net income increases, though the exact amount depends on the depreciation method and tax treatment.

Impact on Cash Flow:

Cash flow is largely unchanged; however, cash taxes may vary due to changes in depreciation expenses, potentially causing slight differences in cash flow.

Impact on Valuation:

Valuation remains essentially constant, except for the timing impact of cash taxes on the net present value (NPV) of cash flows.

B. What, in your opinion, makes a good financial model?

A good financial model should adhere to strong financial modeling principles, such as:
  • Clarity: Model assumptions (inputs) should be in one place and distinctly colored (e.g., blue font for inputs in bank models).
  • Understandability: The model should clearly show how inputs are translated into outputs, with logical flow and clear formulas.
  • Error Checking: Include error checks to ensure the model is working correctly (e.g., balance sheet balances, correct cash flow calculations).
  • Detail and Presentation: Contain the necessary detail without being overly complex and have a dashboard that displays key outputs with charts and graphs.


C. What happens on the income statement if inventory goes up by $10?

Nothing. This is a trick question — only the balance sheet and cash flow statements are impacted by the purchase of inventory.

D. What is working capital?

Working capital is generally defined as current assets minus current liabilities. In banking, it is more narrowly defined as current assets (excluding cash) less current liabilities (excluding interest-bearing debt). Another definition is accounts receivable plus inventory minus accounts payable. Understanding all three definitions can provide a thorough answer.


E. What does negative working capital mean?

Negative working capital is common in industries like grocery retail and restaurants, where:

Customers pay upfront.
Inventory moves quickly.
Suppliers offer credit terms.

This means the company receives cash from customers before paying suppliers, indicating efficiency in businesses with low inventory and accounts receivable. In other cases, negative working capital may signal financial trouble if the company struggles to pay its current liabilities.

F. When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and depreciated according to the company’s accounting policies.


G. How do you record PP&E and why is this important?

Accounting for Property, Plant & Equipment (PP&E) involves four key areas:
  • Initial Purchase
  • Depreciation
  • Additions (Capital Expenditures)
  • Dispositions

Revaluation may also be necessary. PP&E is critical for many businesses as it generates revenue, profitability, and cash flow.

H. How does an inventory write-down affect the three financial statements?

Balance Sheet: Inventory is reduced by the amount of the write-down, decreasing shareholders’ equity.
Income Statement: An expense is recorded in either cost of goods sold (COGS) or a separate line item, reducing net income.

Cash Flow Statement: The write-down is added back to cash from operating activities as a non-cash expense (but should not be double-counted in changes of non-cash working capital).

I. Why would two companies merge? What major factors drive mergers and acquisitions?

Companies pursue mergers and acquisitions to:

Achieve synergies (cost savings).
Enter new markets.
Gain new technology.
Eliminate a competitor.
Improve financial metrics (accretive deals).
[Note: Social reasons such as ego, empire-building, and justifying higher executive compensation can also play a role but should be mentioned cautiously.]

J.If you were CFO of our company, what would keep you up at night?

Consider the company's current financial position or industry context and highlight concerns across:

Income Statement: Growth rates, margins, and profitability.
Balance Sheet: Liquidity, capital assets, credit metrics, liquidity ratios, leverage, return on assets (ROA), and return on equity (ROE).
Cash Flow Statement: Short-term and long-term cash flow profiles, potential need to raise funds, or returning capital to shareholders.
Non-financial Factors: Company culture, government regulation, and conditions in the capital markets.

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