Top 20 Accounting Interview Questions for IB (With Answers)

These are the accounting questions that come up most frequently in investment banking interviews. Each one includes a model answer and, where relevant, the common mistakes candidates make. Use this as your final review before an interview.

1. Walk me through the three financial statements.

The Income Statement shows revenue, expenses, and Net Income over a period. Net Income flows to the Cash Flow Statement as the starting line. Non-cash charges are added back, working capital changes are adjusted, and investing and financing activities are included to arrive at the net change in cash. That change in cash ties to the Cash and Cash Equivalents line on the Balance Sheet, where Assets = Liabilities + Equity.

2. If depreciation increases by £10, walk me through the impact on all three statements (25% tax rate).

IS: EBIT falls £10, tax savings of £2.50, Net Income falls £7.50. CFS: Start with lower NI (--£7.50), add back £10 D&A, net cash up £2.50. BS: PP&E down £10, cash up £2.50, total assets down £7.50. Retained earnings down £7.50. Balances.

3. What's the difference between capitalising and expensing?

Capitalising puts the cost on the Balance Sheet as an asset and spreads the expense over time through depreciation. Expensing hits the Income Statement immediately. CapEx is capitalised; regular operating costs are expensed. Capitalising increases current-period profit but reduces future profit through D&A.

4. What is goodwill and how is it created?

Goodwill is the excess of the purchase price over the fair value of a target's identifiable net assets in an acquisition. It represents intangible value like brand, relationships, and synergies. It's not amortised – it sits on the Balance Sheet and is tested annually for impairment.

5. How does an inventory write-down affect the statements?

IS: COGS increases, Net Income falls. CFS: The write-down is non-cash, so it's added back. No cash impact. BS: Inventory (asset) decreases, Retained Earnings decrease by the after-tax amount.

6. What's the difference between deferred revenue and accounts receivable?

Deferred revenue is cash received before the service is delivered – it's a liability. Accounts receivable is revenue earned but not yet collected – it's an asset. They're opposite timing differences.

7. Explain deferred tax liabilities and deferred tax assets.

DTL: Company owes more tax in the future (e.g., accelerated tax depreciation today). DTA: Company will pay less tax in the future (e.g., NOL carryforwards). Both arise from timing differences between book and tax accounting.

8. A company makes a £100m acquisition. How is it recorded?

Target's assets and liabilities are restated to fair value on the acquirer's Balance Sheet. The difference between £100m and the fair value of net assets is Goodwill. If paid in cash: Cash down £100m, target assets up, Goodwill created. If paid in stock: Equity up, target assets up, Goodwill created. No Income Statement impact at the time of the deal.

9. What is stock-based compensation and how does it affect the statements?

SBC is a non-cash expense. IS: Operating expense increases, Net Income decreases. CFS: Added back in operating activities (non-cash). BS: Equity increases (additional paid-in capital goes up, offsetting the retained earnings decrease). Net cash impact is zero, but there's real dilution to existing shareholders.

10. Operating lease vs finance lease?

Post-IFRS 16, both are on the Balance Sheet. The difference: finance leases transfer substantially all risks and rewards of ownership. Operating leases don't. Finance leases have higher front-loaded expense (interest + depreciation of asset), operating leases have a straight-line lease expense. For interviews, know that IFRS 16 brought operating leases on-balance sheet, increasing reported debt and assets.

11. What happens when a company issues £50m in debt?

IS: No immediate impact (interest expense starts in future periods). CFS: £50m cash inflow under Financing Activities. BS: Cash up £50m, Debt up £50m. Assets = L+E.

12. A company repurchases £30m of shares. Impact?

IS: No impact. CFS: £30m cash outflow under Financing Activities. BS: Cash down £30m, Shareholders' Equity down £30m (Treasury Stock increases). EPS increases because fewer shares outstanding.

13. What's the difference between LIFO and FIFO?

LIFO (Last In, First Out): newest inventory is sold first. In rising prices, COGS is higher, profit is lower, tax is lower. FIFO (First In, First Out): oldest inventory is sold first. COGS is lower, profit is higher, tax is higher. LIFO is not allowed under IFRS.

14. Why might two companies in the same sector have very different P/E ratios?

Different growth rates, margin profiles, risk levels, capital structures, market sentiment, and one-off items. A high-growth company will have a higher P/E because investors are paying for future earnings. Also, P/E is affected by leverage (it's post-interest), so different capital structures distort the comparison.

15. What is working capital and why does it matter?

Working Capital = Current Assets - Current Liabilities. It measures the company's short-term liquidity. Changes in working capital affect cash flow: if AR increases, the company has earned revenue but hasn't collected cash. If AP increases, the company owes suppliers but hasn't paid yet. Working capital management directly impacts free cash flow and therefore valuation.

16. Walk me through a £10m asset purchase.

IS: No immediate impact (the cost is capitalised, not expensed). CFS: £10m cash outflow under Investing Activities (CapEx). BS: PP&E increases £10m, Cash decreases £10m. Over time, depreciation will flow through the IS.

17. What is EBITDA and why do bankers use it?

Earnings Before Interest, Tax, Depreciation, and Amortisation. Bankers use it because it's a proxy for operating cash flow that's capital-structure neutral (no interest) and ignores non-cash charges (D&A). It allows comparison across companies regardless of leverage and accounting methods.

18. What happens if Accounts Receivable goes up by £20m?

Revenue was recorded on the IS (income went up). But the cash hasn't been collected. CFS: subtract £20m from operating cash flow. BS: AR (asset) up £20m, Cash is lower by £20m. The company earned the revenue but didn't receive the cash yet.

19. What's a goodwill impairment and how does it work?

If the acquired business has declined in value, goodwill is written down. IS: Impairment charge reduces Net Income. CFS: Added back (non-cash). BS: Goodwill (asset) decreases, Retained Earnings decrease. No cash impact.

20. Why is cash flow from operations different from Net Income?

Because Net Income includes non-cash charges (D&A, SBC), timing differences (revenue recognised but not collected, expenses incurred but not paid), and uses accrual accounting. The CFS adjusts Net Income for all of these to show the actual cash generated.