Interview prep · Accounting
Accounting interview questions
Accounting is the gate every other technical stands behind. Before an interviewer trusts you with a DCF or a merger model, they check whether you can push one number through the income statement, cash flow statement, and balance sheet without the balance sheet breaking. It is a proxy for whether you can be trusted inside a live model, which is why it opens so many technical rounds.
The escalation path is predictable. Screeners start with the classics: describe each statement, explain how they link, walk through $10 of depreciation. The next layer is single transactions with several moving parts — buying equipment with debt, writing down inventory, collecting a receivable — where the test is keeping the order straight and remembering the tax effect. By the superday, interviewers reach for the edge cases: the same transaction one year later so accumulated effects appear, deferred taxes, goodwill and impairments, and questions where cash and book treatment diverge.
What separates candidates is not knowing more accounting — it is answering in a fixed sequence, stating the tax effect explicitly, and confirming the balance sheet ties at the end. You do not need CPA depth. You need a narrow set of mechanics drilled until they are automatic, plus the composure to apply them to a scenario you have not seen before.
Free sample questions, answered
What are the three financial statements and what does each show?+
Income statement: profitability over a period (revenue down to net income). Balance sheet: a snapshot of assets, liabilities and equity at a point in time. Cash flow statement: actual cash moving in/out over a period, split into operating, investing and financing.
⚠ Common wrong answer: Describing the balance sheet as showing performance 'over the year' and treating the cash flow statement as just the income statement restated in cash. Why it fails: The balance sheet is a snapshot at a single point in time, not a period measure, and the cash flow statement exists precisely because accrual net income is not cash — non-cash charges and working-capital timing drive the two apart.
Walk me through how a $10 increase in depreciation flows through the three statements (40% tax).+
Income statement: pretax income falls $10, so net income falls $6. Cash flow statement: start with net income -$6, add back the $10 non-cash depreciation, so cash rises $4. Balance sheet: cash up $4, PP&E down $10 (net assets -$6); on the other side retained earnings down $6. It balances. Net effect: you saved $4 in cash via the tax shield.
⚠ Common wrong answer: "Net income falls by $10, and cash falls too because the expense went up." Why it fails: It forgets the tax shield and the non-cash nature of depreciation: net income falls only $6 at a 40% tax rate, and cash actually RISES $4 because no cash left the business while the tax bill shrank.
How are the three statements linked?+
Net income from the income statement flows to the top of the cash flow statement and into retained earnings (equity) on the balance sheet. The cash flow statement's ending cash becomes the cash line on the balance sheet. Non-cash items and working-capital changes on the CFS reconcile accrual net income to actual cash.
⚠ Common wrong answer: "Net income flows to the top of the cash flow statement — that's the link." Why it fails: That is only one of three connections. Net income (less dividends) also rolls into retained earnings on the balance sheet, the cash flow statement's ending cash becomes the balance-sheet cash line, and balance-sheet working-capital changes feed back into cash from operations — stop after one link and the loop never closes.
Why can a profitable company still run out of cash?+
Profit is accrual-based and ignores timing of cash. Cash can be trapped in growing receivables or inventory (working capital), drained by heavy capex, or consumed by debt repayments and interest - none of which fully show up in net income. Liquidity, not profitability, determines survival.
⚠ Common wrong answer: "Because of non-cash expenses like depreciation dragging it down." Why it fails: That is backwards — non-cash expenses make profit UNDERSTATE cash, not overstate it. The real culprits are cash trapped in receivables and inventory, heavy capex, and debt service, none of which fully hit net income.
What's the difference between cash-based and accrual accounting?+
Cash accounting records revenue and expenses when cash actually changes hands. Accrual accounting records revenue when it's earned and expenses when incurred, regardless of cash timing (via receivables, payables, deferred revenue, etc.). GAAP/IFRS use accrual.
⚠ Common wrong answer: "Accrual accounting records revenue when the customer pays and expenses when you get the bill." Why it fails: That flips the definition — accrual recognizes revenue when EARNED and expenses when INCURRED; cash timing is exactly what accrual accounting is designed to ignore.
Accounting: what candidates ask
How many accounting questions should I prep for an IB interview?+
There is no magic number, and question counts vary by interviewer. In practice, the statement-link fundamentals plus a few dozen transaction walkthroughs cover the large majority of what gets asked. Depth beats volume: interviewers change one assumption in a question you have seen, so understanding the mechanics matters more than memorizing a long list.
Do I need to be an accounting or finance major to answer these questions?+
No. IB interviews test a narrow, learnable slice of accounting — the three statements, their links, and recurring transaction scenarios — not audit standards or bookkeeping. Candidates from non-business backgrounds pass these rounds regularly; interviewers generally care whether the mechanics are automatic, not where you learned them.
What is the hardest accounting topic that still comes up in interviews?+
Multi-period and tax-driven questions tend to cause the most trouble: deferred taxes, walking a transaction through the statements a year later, and write-downs or impairments with their tax effects. They are harder because they layer several mechanics at once, which is exactly why interviewers use them to separate candidates late in a process.
Every Accounting question in the bank
All 118 published questions from Accounting & the 3 Statements — each links to its own page. Free ones show the full model answer.
16
- What are the three financial statements and what does each show?free
- What's the difference between cash-based and accrual accounting?free
- Where does a company's net income end up on the balance sheet?
- Walk me through how paying a $100 cash dividend flows through the three statements.
- In one sentence each, what does a deferred tax asset (DTA) and a deferred tax liability (DTL) represent in plain economic terms?
- What is goodwill in plain terms, and what does a large goodwill balance tell you about a company's history?
- What is Other Comprehensive Income (OCI), and what are its main components?
- What is the difference between a defined contribution and a defined benefit pension plan, and which one creates a big balance-sheet item?
- What is a pension plan's 'funded status,' and where does it appear in the financial statements?
- What is a contra account? Give three or four common examples.
- What is the LIFO reserve, and what do analysts use it for?
- How is inventory carried on the balance sheet when its value falls — and can a write-down ever be reversed?
- Under ASC 606, how does a standard warranty differ from an extended (service) warranty in the accounting?
- A retailer sells gift cards. When does it recognize revenue, and what is 'breakage'?
- Under the equity method, why are dividends received from the investee NOT recorded as income?
- What are the key accounting and economic differences between RSUs and stock options as compensation?
46
- Walk me through how a $10 increase in depreciation flows through the three statements (40% tax).free
- How are the three statements linked?free
- Why can a profitable company still run out of cash?free
- What is working capital and what does an increase in it do to cash?
- What's the difference between deferred revenue and accounts receivable?
- What is a deferred tax liability (DTL), and name the classic cause.
- What is a deferred tax asset (DTA), and give two common causes.
- Why does goodwill get created in an acquisition, and how do you calculate it (simplified)?
- Explain the relationship between capex, depreciation/amortization, and PP&E. What does it mean when D&A consistently exceeds capex?
- When do you capitalize a cost versus expense it, and why does it matter for the financials?
- LIFO vs. FIFO: in an inflationary environment, which produces higher net income, higher taxes, and higher inventory on the balance sheet?
- What's the difference between accounts payable and accrued expenses (accrued liabilities)?
- What is a prepaid expense, where does it live, and how does it move through the statements?
- Walk me through how a customer prepaying $100 cash for a future service hits the three statements, then how recognition works later (ignore taxes/COGS for the prepayment).
- Walk me through how issuing $100 of debt (cash) flows through the three statements, including the first year's interest at 10% (25% tax).
- Walk me through how a $100 share buyback (for cash) flows through the three statements.
- EBITDA vs. net income vs. free cash flow — what does each capture and what are the key blind spots of EBITDA?
- Why do you ADD BACK depreciation on the cash flow statement but you DON'T add back the cash portion of a capex outlay there?
- Walk me through how accruing (but not yet paying) $100 of wages hits the three statements (25% tax).
- Why is goodwill no longer amortized under US GAAP, and what's the difference between goodwill and other acquired intangibles in terms of P&L impact?
- What is the single most common driver of a deferred tax LIABILITY, and walk through why the timing works that way.
- Give three distinct sources of a deferred tax ASSET that are NOT net operating losses.
- A company books $25 of total tax expense, of which $20 is current and $5 is deferred. What does each piece mean and which one is cash?
- What is a net operating loss (NOL) carryforward, and how does it become a deferred tax asset?
- What is a valuation allowance, and what is the threshold for recording one?
- On the cash flow statement, why is the change in net deferred taxes an add-back (or subtraction) in operating activities?
- Distinguish book (effective) tax expense from cash taxes paid. Where do you find each, and what bridges them?
- Why might two companies with identical pre-tax book income report very different EFFECTIVE tax rates, and how do deferred taxes fit in?
- Name the main categories of identifiable intangible assets recognized in a typical acquisition, and which tend to be finite- vs. indefinite-lived.
- What is the practical difference, post-deal, between value allocated to identifiable intangibles versus value left in goodwill?
- What is an impairment, and what is the conceptual trigger for testing goodwill or an intangible for impairment?
- Under current US GAAP (ASU 2017-07), where do the components of defined-benefit pension cost sit on the income statement, and what does that mean for EBIT?
- Where do pension actuarial gains and losses go, and what happens to the pension obligation when discount rates RISE?
- Why do analysts treat an underfunded pension as a debt-like item, and how does it typically enter the enterprise-value bridge?
- In consignment arrangements, who carries the inventory and when is revenue recognized?
- When a parent consolidates a subsidiary, why must intercompany transactions be eliminated? What would go wrong if they weren't?
- A parent owns 70% of a subsidiary that earns $100 of net income. What appears on the consolidated income statement, and which number drives the parent's EPS?
- What is a LIFO liquidation, and why does it artificially inflate earnings?
- A company pays a vendor to implement a cloud/SaaS system it doesn't own. Are those implementation costs capitalized or expensed (ASU 2018-15)?
- Contrast the capitalization rules for internal-use software vs. software to be sold externally under US GAAP.
- What is a sale-leaseback, why do companies do them, and how does ASC 842 treat the gain?
- When employee RSUs vest and the company withholds shares to cover the employee's taxes, how does that hit the cash flow statement?
- A software company sells a bundled deal for $120: a perpetual license (standalone price $100) plus one year of support (standalone price $50). How is revenue recognized?
- How does a company account for expected product RETURNS under ASC 606 when it recognizes a sale?
- What happens to the accounting for a long-lived asset (or disposal group) once it is classified as HELD FOR SALE?
- Under ASC 606, when is revenue from licensing intellectual property recognized upfront versus over time?
56
- A company buys $100 of inventory on credit (no cash yet). Walk through the three statements.
- If you could use only one statement to evaluate a company, which would you pick and why?
- Walk me through how a $100 NOL carryforward is created and then used, across the financials (assume 25% tax rate).
- Walk me through how a $100 goodwill impairment flows through the three statements (25% tax rate). Note the tax gotcha.
- Walk me through how stock-based compensation (SBC) of $100 affects the three statements (assume 25% tax, ignore window-dressing of EPS).
- Under current rules, how does an operating lease vs. a finance lease appear on the lessee's financials?
- When do you use the equity method vs. full consolidation vs. just marking an investment, and how is each shown?
- What is noncontrolling (minority) interest, why does it exist, and why is it added in the bridge from equity value to enterprise value?
- Explain the allowance for doubtful accounts and what happens when you actually write off a receivable.
- What is negative (net) working capital, and why can it actually be a GOOD sign?
- Define unlevered free cash flow vs. levered free cash flow. Why does a DCF typically use unlevered FCF?
- At a high level, what is purchase price allocation (PPA) and what are its main components?
- Walk me through how a $100 inventory write-down flows through the three statements (25% tax rate).
- You sell a building with a book value of $100 for $150 cash. Walk me through the three statements (25% tax). Why is the gain subtracted in operating cash flow?
- What is a valuation allowance against a deferred tax asset, and when is it recorded?
- How does book (GAAP) tax expense differ from cash taxes actually paid, and where do you see the difference?
- A company capitalizes $100 of software development that it should have expensed. What happens to net income, EBITDA, and cash flow this year (25% tax)?
- Conceptually, how is a deferred tax balance actually calculated from the books vs. the tax return?
- What is the difference between a TEMPORARY difference and a PERMANENT difference, and which one creates deferred taxes?
- Walk me through how a $40 increase in a deferred tax liability flows through the three statements in the year it arises (no other activity).
- A company has book pre-tax income of $0 but pays cash taxes. Then later it has book income but pays no cash tax. Give a single mechanism that explains both.
- Under current US federal rules (post-TCJA), what are the key limits on using NOL carryforwards, and how does that differ from the old regime?
- What is the Section 382 limitation, and why does it matter when valuing a target's NOLs in M&A or an LBO?
- How should you treat a target's existing NOLs and DTAs when building an LBO or merger model?
- What is the income-statement effect of RECORDING a valuation allowance versus RELEASING (reversing) one?
- A profitable company suddenly reports a tax BENEFIT (negative tax expense) despite positive pre-tax income. Name two deferred-tax-related explanations.
- How does a change in the statutory tax RATE affect existing deferred tax balances, and where does that hit?
- Why does a corporate income-tax RATE CUT often produce a one-time non-cash GAIN for an established industrial company?
- Walk through how a $100 pre-tax NOL is created in Year 1 and used in Year 2 across the three statements (21% tax rate, realization probable).
- In a DCF, should you use book taxes or cash taxes, and how do deferred taxes enter unlevered free cash flow?
- Why do DTAs and DTLs typically get WRITTEN OFF (eliminated) in a DCF terminal value or steady-state assumption?
- What is the difference between an ASSET deal and a STOCK deal for tax purposes, and what does it mean for the tax basis of assets?
- In purchase accounting, why does writing up a target's assets create a deferred tax LIABILITY in a stock deal, and how do you size it?
- Why is goodwill impairment usually a PERMANENT difference, while acquired intangible amortization may be a TEMPORARY difference?
- How do deferred taxes affect accretion/dilution analysis in an M&A model?
- How does deferred revenue create a deferred tax ASSET, and walk through the timing.
- How does stock-based compensation create deferred taxes, and why can the eventual tax deduction differ from book expense?
- How do you read a company's tax footnote to assess earnings quality, focusing on deferred taxes?
- If a company has a large net DTL on its balance sheet, how should you think about it when valuing the company or in an EV-to-equity bridge?
- Give the full formula for goodwill created in an acquisition, being precise about the new intangibles and the deferred tax adjustment.
- Acquirer pays $1,000 for a target with $400 book equity. PPA writes PP&E up by $100 and recognizes $200 of new intangibles; tax rate is 25% and it's a stock deal for tax. How much goodwill is created?
- Why does a deferred tax liability get created in purchase price allocation, and walk through the mechanic.
- In an asset deal (or 338(h)(10) election) versus a stock deal, why might no DTL be created — and why do buyers like asset deals?
- Walk me through how $40 of annual amortization of acquired intangibles flows through the three statements (25% tax), assuming it is tax-deductible.
- Walk me through how a $200 goodwill impairment flows through the three statements, and explain the tax treatment carefully.
- Does a goodwill impairment affect a DCF or an LBO valuation? Why or why not?
- Under the current US GAAP goodwill impairment test (ASC 350, simplified one-step model), how do you measure the impairment?
- Walk me through the three statements: a company pays $90 cash for software it capitalizes, amortizes $30 in Year 1, then impairs the remaining $60 in Year 2 (25% tax, both charges deductible).
- A company contributes $100 of cash to its underfunded pension plan. Walk me through the three statements, and explain why the contribution is NOT the same as pension expense.
- You own 25% of an investee (equity method). It earns $200 of net income and pays $80 of total dividends this year. Walk me through your three statements (ignore taxes).
- How do you adjust a LIFO company's financials to compare it with FIFO peers? Its LIFO reserve is $100 at year-end and grew $40 during the year (25% tax).
- You own 30% of a company (equity method, carried at $30). You then buy another 50% to take control; the fair value of your ORIGINAL 30% stake is now $60. What happens to that old stake?
- Which items in Accumulated OCI eventually get 'recycled' into net income, and when?
- Break down net periodic pension cost into its components. Which assumption lets management flatter earnings without any cash effect?
- Year 1 of a finance lease: $100 initial lease liability and ROU asset, 6% discount rate, 5-year term, annual payment $23.74. Walk me through the three statements (25% tax).
- Why does a software target's deferred revenue often shrink in an acquisition ('deferred revenue haircut'), and what changed under ASU 2021-08?
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