The Most Common Accounting Interview Questions

Introduction

Banking interviewers draw on a surprisingly short list of accounting questions. Wording changes from bank to bank and interviewer to interviewer, but the same twenty or so ideas account for most of what candidates hear, because they are the ideas every analyst uses in their first months on the job: how the three statements fit together, what earnings before interest, taxes, depreciation and amortization (EBITDA) measures, why working capital consumes cash, how a purchase or a write-down moves through the accounts, and where deferred taxes and goodwill come from.

None of the answers below is a script. Interviewers notice memorized wording quickly, and the follow-up to a recited answer is usually "why?" For each question, the goal is to know what a strong answer has to contain, so that it can be said naturally and defended. How these questions fit into the interview process is covered in how accounting is tested in banking interviews.

The opening accounting question in most interviews is about the statements as a system. The walkthrough itself has its own article, walking through the three statements, so this section covers the questions that usually follow it.

If You Could Use Only One Statement, Which Would You Choose?

There is no single right answer, but there is a right structure: choose, justify and acknowledge the trade-off. Most candidates choose the cash flow statement, because cash is harder to shape with accounting judgment than earnings and because it shows whether the business funds itself. A reasonable alternative is the balance sheet, which shows what the company owns and owes and, with two years of balance sheets and net income, lets you rebuild much of the cash flow statement. The income statement is the weakest choice on its own, because it ignores capital spending, working capital and financing. The fuller debate is covered in which financial statement matters most.

Can a Profitable Company Go Bankrupt?

Yes, and the strong answer explains how. Profit is not cash: a growing company can report net income while its cash is absorbed by receivables, inventory and capital spending, and if it cannot fund that gap or refinance debt as it matures, it fails despite being profitable on paper. The mirror question, whether an unprofitable company can generate cash, has the same logic in reverse, through large non-cash charges or collections running ahead of revenue. The mechanics are set out in why profitable companies run out of cash.

Why Do Companies Need Three Statements?

Because each answers a different question. The income statement measures performance over a period on an accrual basis, the balance sheet records resources and obligations at a single date, and the cash flow statement reconciles the two by explaining how cash actually moved. Under accrual accounting, revenue and expenses are recorded when earned and incurred rather than when cash changes hands, so without the cash flow statement there would be no way to see the gap.

Questions about the income statement test definitions that every model depends on, and loose definitions here are noticed immediately.

What Is the Difference Between EBIT, EBITDA and Net Income?

Earnings before interest and taxes (EBIT), broadly the same as operating income, is profit from operations before financing costs and tax. EBITDA adds back depreciation and amortization, which makes it a rough proxy for operating cash generation before capital spending and working capital, and it is the basis for the most common valuation multiple and for leverage measures in credit. Net income is what remains for shareholders after interest, taxes and everything else. A strong answer adds the caveat: EBITDA ignores capital spending, so it flatters capital-intensive businesses, and "adjusted" versions often remove costs that recur. The definitions are covered in EBIT and EBITDA.

When Is Revenue Recognized?

Under the revenue standard, Accounting Standards Codification (ASC) 606, revenue is recognized when control of a good or service passes to the customer, in the amount the company expects to be entitled to. The standard's five steps are identifying the contract, identifying the performance obligations, determining the price, allocating it to the obligations and recognizing revenue as each is satisfied, at a point in time or over time. A strong answer gives an example: a software company selling a three-year subscription recognizes the revenue over the three years, even if the customer pays upfront, as explained in revenue recognition under ASC 606.

What Is the Difference Between Accrual and Cash Accounting?

Accrual accounting records revenue when earned and expenses when incurred, matching costs to the revenue they help produce; cash accounting records them when cash moves. Public companies use accrual accounting under US generally accepted accounting principles (US GAAP), which is why net income and cash flow differ and why the cash flow statement exists. The matching principle is the idea worth naming, because it explains depreciation, accrued expenses and deferred revenue in one go.

What Is the Difference Between Basic and Diluted EPS?

Basic earnings per share (EPS) divides net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS adds the shares that would exist if options, restricted stock units, warrants and convertible securities were turned into stock, provided that doing so would lower EPS. For options and warrants, the treasury stock method assumes the exercise proceeds are used to buy back shares at the average price, so only the net new shares count. A strong answer notes that a security which would raise EPS, such as options far out of the money, is excluded as anti-dilutive, and that bankers use the diluted count, often recalculated at the current share price, when moving from equity value to a value per share, as explained in basic vs diluted earnings per share.

Balance sheet questions test whether a candidate understands the economic substance of each item, not just its line placement.

What Is Working Capital, and Why Does an Increase Reduce Cash?

Working capital

Current assets minus current liabilities. In banking, the operating version usually excludes cash and debt, leaving receivables, inventory and prepaid expenses less payables, accrued expenses and deferred revenue, the balances that move with the day-to-day business.

An increase in operating working capital means the company has tied up more cash in the business: it has more receivables not yet collected or more inventory not yet sold, or it has paid its suppliers faster. That is why an increase appears as a use of cash on the cash flow statement. The strong answer gives the intuition and an example, such as a retailer building inventory ahead of the holiday season, and notes that some businesses, such as subscription software, run negative working capital because customers pay before they are served. The drivers are covered in working capital drivers: receivable, inventory and payable days.

What Is Deferred Revenue, and Why Is It a Liability?

Deferred revenue is cash received for goods or services not yet delivered. It is a liability because the company owes the customer either the service or a refund. As the service is delivered, the liability falls and revenue is recognized. On the cash flow statement, an increase in deferred revenue is a source of cash, which is why fast-growing subscription businesses often generate more cash than profit. A strong answer connects the item to deals: since Accounting Standards Update (ASU) 2021-08, deferred revenue acquired in a business combination is generally carried over at the seller's amount rather than written down to fair value.

What Is the Difference Between FIFO and LIFO?

First-in, first-out (FIFO) assumes the oldest inventory is sold first, last-in, first-out (LIFO) that the newest is. When prices are rising, LIFO puts the most recent, higher costs into cost of goods sold, which lowers reported profit and taxes and leaves older, lower costs on the balance sheet; FIFO does the opposite. Strong answers mention two details: US companies that use LIFO for tax must also use it in their financial statements, under the conformity rule in Section 472 of the tax code, and LIFO is not permitted under International Financial Reporting Standards (IFRS). The methods are compared in inventory costing: FIFO, LIFO and weighted average.

Can Shareholders' Equity Be Negative?

Yes. Equity is assets minus liabilities, and it turns negative when a company has accumulated losses greater than the capital invested, or, more commonly among strong businesses, when it has returned more cash to shareholders through buybacks and dividends than it has earned and raised over its life. Several well-known consumer and restaurant companies with stable cash flows and long buyback programs report negative equity while remaining highly valued: Starbucks reported a total shareholders' deficit of about $8.1 billion at the end of fiscal 2025 in its annual report on Form 10-K. A strong answer separates the two cases: negative equity from losses is a warning sign, while negative equity from buybacks funded by reliable cash flow says little about solvency, which depends on the company's ability to service its debt. It also explains why return on equity is meaningless for such companies, a point covered in shareholders' equity explained.

Cash flow questions test whether candidates understand what a non-cash item is and why the cash flow statement starts from net income.

Why Do We Add Back Depreciation?

Because depreciation reduced net income without using cash in the period. The cash was spent when the asset was bought, and it appeared then as capital expenditure in investing activities. Adding depreciation back in operating cash flow removes the non-cash charge, while the tax saving it created remains, since taxes paid were genuinely lower. Strong answers mention that amortization of intangibles, impairments and other non-cash charges are added back for the same reason.

How Does Stock-Based Compensation Affect the Statements?

Stock-based compensation is recorded as an expense, reducing net income, but no cash is paid, so it is added back on the cash flow statement; the offset is an increase in shareholders' equity. A strong answer goes further: the expense is real, because it dilutes existing shareholders, so analysts should not simply ignore it when valuing a company, and many treat it as a cash-like cost or include the dilution in the share count, as discussed in stock-based compensation accounting.

What Is Free Cash Flow?

In its simplest form, free cash flow is cash flow from operations less capital expenditure: the cash a business generates after maintaining and growing its asset base. Bankers use two more precise versions. Levered free cash flow is available to equity holders after interest and debt obligations; unlevered free cash flow is available to all capital providers and is calculated before interest, which is why it is used in a discounted cash flow valuation. A strong answer also knows where interest and dividends sit under US GAAP: interest paid is an operating cash flow, so it is already deducted in cash flow from operations, while dividends paid are a financing cash flow. The variants are compared in free cash flow definitions.

What Is the Difference Between Capitalizing and Expensing a Cost?

An expensed cost reduces profit in the period it is incurred. A capitalized cost is recorded as an asset and then depreciated or amortized over its useful life, so it reaches the income statement gradually. The choice also moves the cash flow statement: a capitalized cost appears in investing cash flow as capital expenditure, while an expensed cost reduces operating cash flow. A strong answer draws out the consequence: capitalizing more raises EBITDA and operating cash flow without changing total cash spent, which is why bankers compare capitalization policies across peers, as discussed in capitalizing vs expensing costs.

Transaction questions are among the most common technical questions of all. The method for answering them aloud is set out in answering what-happens-if accounting questions. The answers to the classic versions, at a 25% tax rate, are worth knowing cold:

The table assumes any change in tax expense is settled in cash in the same period, the simplification most interviewers use, and that the stock compensation is deductible when expensed, which is a simplification too.

What Happens When Inventory Is Bought and Then Sold?

This is a two-step question that tests timing. Buying inventory with cash changes only the balance sheet and the cash flow statement: inventory rises, cash falls, and on the cash flow statement the increase in inventory is a use of cash in operating activities. The income statement is affected only when the inventory is sold.

What Happens if a Company Writes Down an Asset?

A write-down or impairment reduces the asset and net income, is added back on the cash flow statement because it is non-cash, and lowers retained earnings. The strong answer asks whether the charge is tax-deductible, because that decides whether cash changes. Interview questions usually treat an inventory write-down as deductible in the same year, so cash rises by the tax saved, although US tax rules generally allow the deduction only when the goods are sold or scrapped; goodwill impairments usually are not deductible at all, so cash is unchanged. The patterns are covered in impairments and write-downs on the three statements.

These questions appear more often in later rounds and for candidates with finance backgrounds, but even undergraduates are expected to handle the basic versions.

What Is a Deferred Tax Liability, and How Does It Arise?

A deferred tax liability is tax that has been postponed: the future tax on income already recognized in the financial statements but not yet taxed. The classic cause is accelerated depreciation, where a company deducts depreciation faster for tax than for its books, so it pays less tax today than its income statement shows and more later as the difference reverses. A strong answer contrasts it with a deferred tax asset, tax paid earlier than the books recognize, such as on accrued expenses deductible only when paid, or the future benefit of net operating losses. The details are in deferred tax liabilities.

How Are Leases Treated?

Since 2019, US public companies have recorded nearly all leases longer than twelve months on the balance sheet, as a right-of-use asset and a lease liability, under ASC 842. The difference between operating and finance leases is now mainly on the income statement and cash flow statement: an operating lease produces a single straight-line lease cost within operating expenses and operating cash flow, while a finance lease produces depreciation and interest, with the principal portion of payments in financing cash flow. A strong answer notes the effect on EBITDA, which is higher for finance leases, as explained in operating vs finance lease classification.

What Is Goodwill, and What Happens in an Acquisition?

Goodwill is the excess of the purchase price over the fair value of the net identifiable assets acquired, including intangibles such as customer relationships and technology. It represents things that cannot be separately recognized, such as an assembled workforce and expected synergies. Under US GAAP for public companies, goodwill is not amortized but tested for impairment at least annually. A strong answer outlines the acquisition: the buyer's cash or stock goes out, the target's assets and liabilities come in at fair value, with a few exceptions such as deferred revenue, new intangibles and their deferred tax effects are recognized, and goodwill is the balancing figure, the process covered in acquisitions on the three statements.

What Is the Difference Between the Equity Method and Consolidation?

The answer depends on ownership and control. A company that controls another, usually through more than half of the voting shares, consolidates it: all of the subsidiary's revenue, expenses, assets and liabilities appear in its statements, and the share owned by outside investors is shown as noncontrolling interest. A company with significant influence but not control, usually between 20% and 50%, uses the equity method: it records its share of the investee's net income in a single line and carries the investment as a single asset. Below that, investments are generally carried at fair value. A strong answer explains why it matters for valuation: when bridging from equity value to enterprise value, noncontrolling interest is added because the consolidated EBITDA includes the whole subsidiary, while equity investments are subtracted because their earnings are not in EBITDA, as set out in three ways to account for an investment.

Interviewers rarely stop at the first answer to any of these questions. A follow-up asking why, or what would change if one assumption moved, is the norm, so the best preparation is understanding each answer well enough to rebuild it from the accounting equation. Candidates who can do that for this short list are ready for most of what a first round or superday will ask, and the harder questions associates and laterals face mostly turn on deal accounting, which starts with purchase price allocation step by step.