Finanical Modeling/ Financial Statement Analysis Interview Questions
Hello All,
I have been out of the finance interviewing game for a while, I am a 2nd year analyst at a boutique IB.
Need some help preparing for a technical interview I will hopefully be having soon - can anyone here help me with questions on financial modeling, financial statement analysis and questions which point towards the connectivity on the 3 statements, i mean being in banking hopefully i know the answers..lol, but have forgotten the interviewing skills and sort of questions.. so any help is most welcome!!!
Do they still ask questions regarding valuation to people with banking exp?
Also: The person who will be interviewing me is a recent X-Bulge bracket associate, so his questions will be around what they ask at the BB firms - so all of you current or x BB people, do suggest something.
Thanks!
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Google is your best friend. But here goes anyway:
QUESTIONS:
1) Walk me through how the 3 main financial statements are connected.
2) If depreciation increases by $10, what happens to the 3 financial statements?
3) What happens to the 3 financial statements this year and the next if a company purchases PP&E worth $100 at year end with cash?
4) Which item shows up on all 3 financial statements?
5) If you could just choose 1 financial statement to value a company, which one would it be and why?
ANSWERS:
Note: I'm not 100% if my answer is perfect - I'm sure veterans here will correct me if I'm wrong.
1) LT assets on B/S used to work out dep on I/S and CFS and CAPEX on CFS net income on I/S (net of any dividend) = change in RE on B/S Ending CF from CFS = change in cash balance on B/S
2) Tip: start from I/S --> CFS --> B/S (so that you end with B/S, allowing you to check if it indeed balances) Assuming tax of 40%: I/S: pretax income decrease by $10, tax decrease by $4, net income decrease by $6 CFS: CF from Op increase by $4 (tax saving) B/S: Cash increase by $4, PP&E decrease by $10 (due to increase in contra) --> Asset side decrease by $6 RE decrease by $6 --> L&E side decrease by $6
3) Assuming tax=40%, PP&E depreciated on straight-line basis over 5yr: Yr0 I/S: no change Yr0 CFS: CF from Investing increase by $100 (CAPEX) Yr0 B/S: Cash decreases by $100, PP&E increases by $100 Yr1 I/S: depreciation increases by $20, pretax income decrease by $20 so net income decrease by $12 Yr1 CFS: CF from Op increase by $8 (tax saving) Yr 1 B/S: Cash increases by $8, PP&E decrease by $20 --> Asset side decrease by $12 RE decrease by $12 --> L&E side decrease by $12 *Variation of this question like debt financing can be made (make easy assumptions on int exp and work the same way)
4) Depreciation (assuming indirect method). Also, if firm pays no dividends and reports CFS using indirect method, change in RE = net income = top line of CFS
5) I am not entirely sure but I say B/S: assuming no dividend, you can work out net income from change in RE, which is also the top line of CFS. (+ other stuff like you can see value of equity, assets on B/S, etc)
If you're a 2nd year analyst, I'd say you can still expect to receive similar valuation type questions. As I said, just google - there are so many sites (including this one if you dig around) with questions and tips.
Good luck
Thanks there, yeah these questions look familiar. There was one about line of credit and 3 statements - cant remember exactly, let me dig to see if I can find that Q. Any clue of what I am talking about..hopefully i am not too unclear.
Yes. It's obnoxious but I've asked people to walk me through a DCF. I once interviewed a laid off analyst from Morgan Stanley and boy was he offended.
For people at your level, you should really be able to talk about your deals and your role on them. The questions are going to revolve around what EBITDA multiple a company was bought, sold, priced at, how the deal was structured, etc.
I go into questions regarding the combination of financial statements if the person has M&A experience on their resume and claim to have built the merger model. Make sure to defend everything on your resume.
Thanks corneillus, definitely great insight! what about questions re: prepare a model for us and in-house exercise.. have u ever given that? How crazy do they make it? any idea?
What topics/subjects do you suggest to master for a 1st year analyst, apart from financial statements and valuation?
I'm new to this field. Could you please elucidate the merger model - I mean what does it contain?
bump. i would like to know more about it too.
How detailed do the accounting questions go?
What is the most important financial statement from the banking point of view? I have heard cash flow statement, but I may be wrong.
Does IB interview ask you to pick out a stock and explain why?
How important is say, industry analysis in IB? And analyzing competitive landscape of things as well as other fundamental analysis of various companies?
Questions on Financial Statement Line Items (Originally Posted: 07/18/2013)
I am continuing on my quest to strengthen my modeling skills and get a better handle on all the accounting concepts I’ll be tasked with dealing with. My main question is, in forecasting numbers for models such as a 3 statement model or even just doing the working capital change for a DCF, how to you handle some of the more esoteric line items that you sometimes find in a company’s financials.
Here is a small list of some of the items I have come across that I haven’t covered in school thus far nor could I find a sufficient explanation in the notes to the financials or via a Google search:
BS => Other Asset => Cash surrender value of life insurance
BS => Long- Term Asset => Investments and joint ventures
BS => Current Liabilities => Checks outstanding in excess of bank balances
BS => Current & Non-Current Liabilities => Salary continuation plan
BS => Current Liabilities => Liabilities of businesses held for sale
BS => Long-Term Liabilities => Accrual for casualty insurance claims
CF => Operating Activities => Accretion of imputed interest on purchase of intangible asset
CF => Operating Activities => Interest accretion on contingent consideration
CF => Investing Activities => Cash surrender value of officers’ life insurance
In a similar vein, how do you handle forecasting for 3 statement model purposes items like derivatives such as swaps or futures?
You start by reading the definition.
http://www.investopedia.com/terms/w/workingcapital.asp
You are only concerned with current assets and liabilities.
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