20 Accounting Interview Questions Ranked by Frequency (With Answers)

If you're recruiting for investment banking, accounting questions are coming. Almost every first-round interview has at least one, and they often decide whether you move on to the technical deep dive or get politely thanked for your time.

The good news: the same questions show up again and again. Below are the 20 you should know cold, ordered roughly from most to least commonly asked. The ranking reflects how often these topics come up in typical banking interviews. It's a practical guide, not a scientific survey. The answers are short enough to say out loud.

Quick note on assumptions: every worked example uses a 25% tax rate to keep the math clean. Tell your interviewer which rate you're using before you start.

The "Guaranteed to Come Up" Tier

1. Walk me through the three financial statements.

This is the most common accounting question in banking, period. Keep it to about 30 seconds.

• Income statement: shows revenue, expenses, and profit over a period of time, ending in net income.
• Balance sheet: a snapshot at one point in time of assets, liabilities, and shareholders' equity. Assets must equal liabilities plus equity.
• Cash flow statement: starts with net income, adjusts for non-cash items and working capital, then adds investing and financing activities to show the actual change in cash.

2. How do the three statements link together?

Interviewers want to see that you understand the flow, not just the definitions.

• Net income from the income statement is the first line of the cash flow statement.
• Net income also flows into retained earnings on the balance sheet (minus any dividends).
• The cash flow statement adjusts for non-cash items and changes in balance sheet accounts, and the ending cash becomes the cash line on the balance sheet.

3. Depreciation increases by $10. Walk me through the statements.

The classic "walk me through" question. Here's the answer step by step.

Income statement:

• Operating income falls by $10.
• With a 25% tax rate, taxes fall by $2.50.
• Net income falls by $7.50.

Cash flow statement:

• Net income is down $7.50.
• Depreciation is non-cash, so you add back $10.
• Cash is up $2.50.

Balance sheet:

• Cash is up $2.50, PP&E is down $10, so total assets are down $7.50.
• Retained earnings are down $7.50, so liabilities plus equity are down $7.50.

It balances. The $2.50 cash increase is the tax savings, which is the key insight: depreciation saves cash only because it lowers taxes.

4. If you could only use one statement to evaluate a company, which would you pick?

The cash flow statement. It shows whether the business actually generates cash, which is what keeps a company alive. Profits on paper don't pay employees or service debt.

Some people argue for the balance sheet, but the cash flow statement is the standard answer, and you should explain your reasoning either way.

5. If you could only use two statements, which would you pick?

The income statement and the balance sheet. If you have the beginning and ending balance sheets plus the income statement for the period, you can rebuild the cash flow statement yourself.

The "Very Likely" Tier

6. Walk me through the cash flow statement.

Three sections, top to bottom:

• Cash flow from operations (CFO): start with net income, add back non-cash expenses like depreciation and stock-based compensation, then adjust for changes in working capital.
• Cash flow from investing (CFI): capital expenditures, acquisitions, and purchases or sales of investments.
• Cash flow from financing (CFF): issuing or repaying debt, issuing or buying back stock, and paying dividends.

Add the three together and you get the net change in cash for the period.

7. What is working capital, and why does an increase in it reduce cash?

Working capital = current assets minus current liabilities. In banking, people usually mean operating working capital, which excludes cash and debt.

When an operating asset like accounts receivable goes up, the company has recorded revenue it hasn't collected yet. That cash is tied up, so it's subtracted on the cash flow statement.

Example: a company makes a $10 sale on credit. Net income reflects the sale, but accounts receivable rises by $10 and no cash came in, so CFO shows a $10 reduction for the change in AR.

8. Inventory increases by $10, paid for in cash. Walk me through the statements.

• Income statement: no change. Inventory isn't expensed until it's sold (then it hits COGS).
• Cash flow statement: the increase in inventory reduces CFO by $10. Cash is down $10.
• Balance sheet: cash down $10, inventory up $10. Total assets unchanged, and nothing changes on the other side.

9. A company borrows $100 to buy $100 of PP&E. Walk me through the statements.

At the moment of the purchase:

• Income statement: no change.
• Cash flow statement: CFI shows -$100 (CapEx), CFF shows +$100 (debt). Net change in cash is zero.
• Balance sheet: PP&E up $100, debt up $100. Balanced.

After one year, assuming 10-year straight-line depreciation ($10 per year) and a 10% interest rate ($10 of interest):

• Income statement: pre-tax income falls by $20, so net income falls by $15.
• Cash flow statement: net income down $15, add back $10 of depreciation. Cash is down $5.
• Balance sheet: cash down $5 and PP&E now $90, so assets are up $85 versus before the deal. On the other side, debt is up $100 and retained earnings are down $15, also up $85. Balanced.

The follow-up year is where many candidates stumble, so practice it.

10. What's the difference between accrual and cash accounting?

• Cash accounting records revenue and expenses only when cash changes hands.
• Accrual accounting records revenue when it's earned and expenses when they're incurred, regardless of when cash moves.

Most companies of any real size use accrual accounting, which is exactly why the cash flow statement exists: to reconcile accrual-based net income back to actual cash.

11. Can a profitable company go bankrupt?

Yes. Net income isn't cash. A company can report profits while running out of money if, for example:

• Customers are slow to pay (accounts receivable keeps growing).
• It's pouring cash into inventory or capital expenditures.
• It has large debt repayments coming due.

This is a great place to connect back to question 4 and show you understand why cash flow matters.

12. What is EBITDA, and why do bankers use it?

EBITDA = earnings before interest, taxes, depreciation, and amortization. It's not a GAAP metric.

Bankers like it because:

• It's a rough proxy for operating cash flow.
• It's capital-structure neutral (it's before interest), so you can compare companies with different amounts of debt.
• It's the basis for EV/EBITDA, one of the most common valuation multiples.

Bonus points: mention the weaknesses. EBITDA ignores capital expenditures and working capital needs, so a capital-heavy business can look much healthier on EBITDA than it really is.

The "Solid Chance" Tier

13. What is deferred revenue?

Deferred revenue is cash a company has received before it has delivered the product or service. It's a liability, because the company still owes the customer something.

Example: a customer pays $120 upfront for a 12-month software subscription.

• Day one: cash up $120, deferred revenue up $120.
• Each month: $10 moves from deferred revenue to revenue on the income statement.

14. Why doesn't CapEx show up on the income statement?

Capital expenditures buy assets that benefit the company over many years, so the cost is capitalized on the balance sheet as PP&E. It then hits the income statement gradually through depreciation over the asset's useful life.

This follows the matching principle: expenses should line up with the periods in which they help generate revenue.

15. What is goodwill, and how is it created?

Goodwill is created in an acquisition when the buyer pays more than the fair value of the target's net identifiable assets.

Example: you buy a company for $500. Its identifiable assets minus liabilities, at fair value, are worth $400. You record $100 of goodwill.

Under US GAAP, public companies don't amortize goodwill. Instead, they test it for impairment at least once a year and write it down if its value has dropped.

16. How do you calculate free cash flow?

The simple version: free cash flow = cash flow from operations minus capital expenditures.

Example: CFO of $150 and CapEx of $50 means free cash flow of $100. That's the cash available to pay down debt, pay dividends, buy back shares, or make acquisitions.

In a DCF you'll use unlevered free cash flow, which removes the effect of interest. Expect that as a follow-up in valuation questions.

17. How does stock-based compensation flow through the statements?

Say a company records $10 of stock-based compensation.

• Income statement: pre-tax income down $10, net income down $7.50.
• Cash flow statement: net income down $7.50, add back $10 because SBC is non-cash. Cash up $2.50.
• Balance sheet: cash up $2.50. On the other side, retained earnings are down $7.50 but common stock/APIC is up $10, so equity is up $2.50. Balanced.

The standard interview answer assumes the expense is tax-deductible right away. In reality the tax treatment and timing are messier, but don't go there unless asked.

The "Shows Up in Tougher Interviews" Tier

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

These are inventory methods:

• FIFO (first in, first out): the oldest inventory is expensed first.
• LIFO (last in, first out): the newest inventory is expensed first.

Example: you buy three units at $10, $12, and $14, then sell one for $20.

• FIFO: COGS is $10, gross profit is $10.
• LIFO: COGS is $14, gross profit is $6.

When prices are rising, LIFO gives higher COGS, lower taxable income, lower taxes, and a lower inventory balance. Also worth knowing: LIFO isn't permitted under IFRS.

19. What are deferred tax liabilities and deferred tax assets?

They come from differences between book accounting (what companies report to investors) and tax accounting (what they report to tax authorities).

• Deferred tax liability (DTL): the company pays less tax now than its book numbers suggest and will pay more later. The common cause is accelerated depreciation for tax purposes.
• Deferred tax asset (DTA): the reverse. The company will pay less tax in the future, for example because of net operating losses it can use against future income.

Example: book depreciation is $10, tax depreciation is $30. Taxable income is $20 lower than book income, so cash taxes are $5 lower (25% of $20). The DTL increases by $5.

20. How are leases treated under current accounting rules?

Under US GAAP's current lease standard (ASC 842), both operating and finance leases go on the balance sheet as a right-of-use asset and a lease liability.

The difference shows up on the income statement:

• Operating leases: a single, generally straight-line lease expense.
• Finance leases: split into amortization of the asset and interest on the liability, similar to buying an asset with debt.

Under IFRS 16, lessees treat nearly all leases like finance leases. You won't get this one often, but it can come up in groups that care about EBITDA comparisons, since lease treatment affects EBITDA.

How to Actually Study These

Knowing the answers isn't enough. You need to deliver them smoothly under pressure. A few tips:

• Say them out loud. Reading an answer and speaking it are two different skills. Practice with a friend or record yourself.
• Always walk the statements in the same order: income statement, cash flow statement, balance sheet. A consistent structure keeps you from getting lost.
• Check that it balances. End every "walk me through" answer by confirming both sides of the balance sheet moved by the same amount. Interviewers love hearing it.
• State your tax rate first. It shows you're organized and makes the math easy to follow.
• Master the top 12 before anything else. The first two tiers cover most of what you'll face in a first round. Questions 13 through 20 separate good candidates from great ones in later rounds.

Get these 20 down, and accounting goes from the section you dread to the section where you build momentum for the rest of the interview.