Technical questions

Accounting questions

Answer 'walk me through' questions on the three statements, then prove each answer with numbers.

22 minintermediateFree lesson

Learning objectives

Give a structured spoken answer to 'walk me through the three statements' and 'how are they linked?'
Calculate the effect of a single transaction on the income statement, cash flow statement and balance sheet
Prove an answer with the balance check: Δassets = Δliabilities + Δequity

Almost every finance interview, from FP&A to investment banking, opens its technical section with accounting. The questions sound simple, so candidates under-prepare, and the interviewer learns a lot from how you answer: do you start in the right place, use the right words, and check yourself before you finish?

A strong answer has a fixed shape. Say what each statement measures, then how the statements connect, then stop. When the question is a transaction ("what happens when…"), go income statement → cash flow statement → balance sheet, and finish by showing that the balance sheet still balances.

Worked example

Model answer: "Walk me through the three financial statements"

"The income statement* shows profitability over a period: revenue, less costs and expenses, down to net income. The balance sheet is a snapshot at a date: what the company owns (assets) and how it is funded (liabilities and shareholders' equity), and the two sides are always equal. The cash flow statement explains the change in cash over the period: it starts from net income, adds back non-cash charges and adjusts for working capital to give cash from operations, then adds investing and financing cash flows.*

They link in three places: net income is the first line of the cash flow statement and flows into retained earnings on the balance sheet; the closing cash on the cash flow statement is the cash on the balance sheet; and items like depreciation, capex and working capital tie the cash flow statement to balance-sheet lines."

About 45 seconds. Notice what it leaves out: no list of every line item, no definitions of accruals. If the interviewer wants more, they'll ask.

Follow-ups you should expect, with one-line answers:

"Which statement would you look at first?" The cash flow statement: profit can be managed with accounting judgement, cash much less so. (Some interviewers want the balance sheet, for solvency. The point is to give a reason.)
"Can a profitable company go bankrupt?" Yes, if it runs out of cash, for example because receivables and inventory grow faster than profit or debt falls due.
"Where does depreciation appear?" Expense on the income statement (lowering tax), added back on the cash flow statement because it isn't a cash payment, and reducing net PP&E on the balance sheet.

The three links you use in every transaction question

ΔNet income = ΔPre-tax income × (1 − t) · ΔCash = CFO + CFI + CFF · ΔAssets = ΔLiabilities + ΔEquity

t: tax rate; unless told otherwise, assume tax is paid in cash in the same year
CFO: cash flow from operations: net income + non-cash charges − increases in working-capital assets + increases in working-capital liabilities
CFI, CFF: cash flow from investing (capex, acquisitions) and financing (debt, shares, dividends); outflows are negative
ΔEquity: net income less dividends, plus any shares issued

Worked example

Worked example: inventory costing 60 sold on credit for 100 (tax 20%)

Income statement. Revenue +100, cost of goods sold −60: pre-tax income +40.0. Tax at 20% is 8.0, so net income is +32.0.

Cash flow statement. Start with net income +32.0. Receivables rose by 100 (the customer hasn't paid): −100. Inventory fell by 60: +60. Cash from operations is −8.0: the only cash that moved is the tax paid.

Balance sheet. Cash −8.0, receivables +100, inventory −60: total assets +32.0. Equity (retained earnings) +32.0. Assets +32.0 = liabilities 0 + equity +32.0, so it balances.

Spoken: "Revenue up 100, COGS up 60, so pre-tax income up 40 and net income up 32 after 20% tax. On the cash flow statement net income is up 32, but receivables up 100 is a use of cash and inventory down 60 a source, so cash is down 8: the tax. On the balance sheet cash is down 8, receivables up 100, inventory down 60, so assets are up 32, matching retained earnings up 32."

Calculation

Exercise 1

Calculate

Drill (aim for 60 seconds). A company records SAR 15m of stock-based compensation: an expense paid in shares, not cash. It is tax-deductible this year at 20%, and tax is paid in cash. What is the change in the company's cash (SAR m)? Use a minus sign for a decrease.

Your answer

Calculation

Exercise 2

Calculate

Drill. A customer pays SAR 40m in cash today for equipment to be delivered next year. Tax (20%) is due only on revenue once it is earned. What is the change in the company's total assets (SAR m)?

Your answer

Concept check

Exercise 3

Check your understanding

Interviewer: "You can see only one statement to judge whether a company will survive the next two years. Which do you pick, and why?" Which answer is strongest?

The cash flow statement: it shows whether operations generate cash or burn it, how much is reinvested and how the gap is funded. Profit can look healthy while cash drains away.The income statement, because net income is the best measure of performance.Any of them: they all contain the same information.The balance sheet, because total assets show how big the company is.

Worksheet

Exercise 4

Challenge: Four transactions through the statements

Each column is one transaction, with tax at 20% paid in cash in the year. Fill rows 8–15 with formulas linked to the inputs (no typed numbers except 0 for lines a transaction doesn't touch):

Credit sale: inventory costing the amount in B5 is sold on credit for the price in B4.
Accrued bonus: a staff bonus is expensed this year but paid next year.
Prepaid rent: next year's rent is paid in cash today.
Equipment bought: paid in cash on the last day of the year.

Every column's check (row 15) must be zero.

0/32 cells entered · Ctrl+. jumps to the next empty cell

	A	B	C	D	E
1	Inputs (SAR m)
2	Tax rate (tax paid in cash in the year)	20.0%
3	Transaction	Credit sale	Accrued bonus	Prepaid rent	Equipment bought
4	Amount: sale price / bonus / rent paid / equipment cost	150.0	25.0	18.0	70.0
5	Cost of the inventory sold	90.0
6	Equipment arrives on the last day of the year: no depreciation yet.
7	Effect on the statements (+ / −)	Credit sale	Accrued bonus	Prepaid rent	Equipment bought
8	Net income
9	Cash flow from operations
10	Cash flow from investing
11	Net change in cash
12	Change in non-cash assets
13	Change in liabilities
14	Change in shareholders' equity
15	Check: Δcash + Δnon-cash assets − Δliabilities − Δequity

InputYou build (dashed while empty)Given, lockedCredit sale · Net income

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