Finance Questions By T&D Team, CRC

FINANCE QUESTION

1. What do you understand by the term working capital?

Ans.) Working capital is defined as current assets minus current liabilities; it tells the financial
statement user how much cash is tied up in the business through items such as receivables and
inventories and also how much cash is going to be needed to pay off short term obligations in
the next 12 months.

2. Can you define the meaning of goodwill?

Ans.) Goodwill may be defined as the redundant value of the cost price against the essential
market value of the same. Fundamentally, goodwill qualifies in the category of intangible
assets.

3. What do you understand by the term debentures?

Ans.) A debenture is nothing but a certificate of loan agreement furnished under the company’s
stamp. Essentially, the debenture holder is mandated to receive a fixed return along with the
principal amount at the time of the maturity of the debenture.

4. What do you understand by the term cost accountancy?

Ans.) Cost accountancy may be defined as the overall presentation of cost control and other
account figures in order to uphold the fairness of a particular venture and to aid the prospects
of a grounded managerial decision making. Apart from accounting of the costs, cost
accountancy is also concerned with reflecting profitability.

5. I buy a piece of equipment, walk me through the impact on the 3 financial

statements.

Ans.) Initially, there is no impact (income statement); cash goes down, while PP&E goes up
(balance sheet), and the purchase of PP&E is a cash outflow (cash flow statement)

Over the life of the asset: depreciation reduces net income (income statement); PP&E goes
down by depreciation, while retained earnings go down (balance sheet); and depreciation is
added back (because it is a non-cash expense that reduced net income) in the cash from
operations section (cash flow statement).
Finance Questions By T&D Team, CRC

6. What are Financial Statements of a company and what do they tell about
a company?

Ans.) Financial Statements of a company are statements, in which the company keeps a formal
record about the company’s position and performance over time. The objective of Financial
Statements is to provide financial information about the reporting entity that is useful to exist
and potential investors, creditors, and lenders in making decisions about whether to invest, give
credit or not. There are mainly three types of financial statements which a company prepares.

1. Income Statement – Income Statement tells us about the performance of the company over
a specific account period. Financial performance is given in terms of revenue and expense
generated through operating and non-operating activities.

2.Balance Sheet – Balance Sheet tells us about the position of the company at a specific point
in time. Balance Sheet consists of Assets, Liabilities and Owner’s Equity. Basic equation of
Balance Sheet: Assets = Liabilities + Owner’s Equity.

3.Cash Flow Statement – Cash Flow Statement tells us the amount of cash inflow and outflow.
Cash Flow Statement tells us how the cash present in the balance sheet changed from last year
to the current year.

7. Explain Cash Flow Statement in detail

Ans.) Cash Flow Statement is an important financial statement that tells us about the cash
inflow and cash outflow from the company. Cash Flow can be prepared by the Direct method
and Indirect method. Generally, the company uses the Direct method for preparing the Cash
Flow Statement as seen in the annual report of the company. The direct method starts with cash
collected from customers adding interests and dividends and then deducting cash paid to
suppliers, interest paid, income tax paid. The indirect method starts from net income and then
we add back all the non-cash charges which are depreciation and amortization expense, we also
add working capital changes.

Cash Flow Statement is categorized into three activities: Cash Flow from Operations, Cash
Flow from Investing and Cash Flow from Financing.

Cash Flow from Operations consists of cash inflows and outflows which are generated from
the company’s core business or product. Cash Flow from Investing consists of the cash inflows
and outflows from a company in the form of investments like purchase or sale of PP&E
Finance Questions By T&D Team, CRC

(property, plant & equipment). Cash Flow from Financing consists of cash inflows and
outflows generated from all the financing activities of the company like issuance of Bonds or
early retirement of Debt.

8. What Is Deferred Revenue?

Ans.) Deferred revenue, also known as unearned revenue, refers to advance payments a
company receives for products or services that are to be delivered or performed in the future.
The company that receives the prepayment records the amount as deferred revenue, a liability,
on its balance sheet.

Deferred revenue is a liability because it reflects revenue that has not been earned and
represents products or services that are owed to a customer. As the product or service is
delivered over time, it is recognized proportionally as revenue on the income statement.

9. What is Accrued Income and its treatment:

Ans.) Accrued Income:

In Accrual basis of accounting, an accrued income is an income which has already been
‘Earned’ but not received by the business. Hence, an accrued Income is a current asset for any
business. It may happen that certain items of income such as interest on investment,
commission, rent, etc are earned during the current accounting year but have not been actually
received by the end of the same year. Such incomes are known as Accrued Income.

Accounting Treatment of Accrued Income:

Under the accrual basis of accounting, accrued income is recorded with an adjustment entry
prior to issuing financial statements. Hence, accrued income will have an impact on P&L A/c
as well as Balance Sheet. There will need to be an adjustment entry that debits Accrued Income
A/c (Current Asset – a balance sheet account), and credits Income A/c (an income statement
account). Hence, the amount of accrued income will be added to the related income in profit
and loss account and new account of accrued income will appear on asset side of balance sheet.

10. What are Outstanding Expenses and its treatment:

Ans.) During the usual course of a business, there are expenses that will be incurred during the
current accounting period and are not paid or in other words, there are certain expenses that
Finance Questions By T&D Team, CRC

take place during the current accounting period but payment for the same are not made, such
expenses are called outstanding expenses.

The outstanding expense is a personal account with a credit balance and is treated as a liability
for the business. It is recorded on the liability side of the balance sheet of a business.

For accounting accuracy, these expenses need to be realised whether they are paid or not. Like
the other expenses incurred by a business, it is also charged against the profit that is obtained
for the current year.

Outstanding expenses are reflected on the liability side of the balance sheet and at the time of
Trading and Profit and Loss A/c preparation, the outstanding expenses should be added to the
particular expenses category to which it belongs.

11. Capital Expenditures vs. Revenue Expenditures

Ans.) Capital expenditures are typically one-time large purchases of fixed assets that will be
used for revenue generation over a longer period. Capital expenditures represent significant
investments of capital that a company makes to maintain or, more often, to expand its business
and generate additional profits. Capital expenditures consist of the purchase of long-term
assets, which are assets that last for more than one year but typically have a useful life of many
years.

Capital expenditures are often used to undertake new projects or investments by a company.
Typically, the purpose of CAPEX is to expand a company's ability to generate revenue and
earnings.

Revenue expenditures are short-term expenses used in the current period or typically within
one year. Revenue expenditures include the expenses required to meet the ongoing operational
costs of running a business, and thus are essentially the same as operating expenses (OPEX).

The differences between capital expenditures and revenue expenditures include whether the
purchases will be used over the long-term or short-term. Capital expenditures (CAPEX) are
funds used by a company to acquire, upgrade, and maintain physical assets such as property,
buildings, or equipment.

CAPEX Accounting Treatment:

Finance Questions By T&D Team, CRC

The purchases or cash outflows for capital expenditures are shown in the investing section of
the cash flow statement (CFS). The CFS shows all of the inflows and outflows of cash in a
particular period. When a company buys equipment, for example, they must show the cash
outflow on their CFS. In addition, the equipment must also be recorded within total assets on
the balance sheet. Since long-term assets provide income-generating value for a company for
a period of years, companies are not allowed to deduct the full cost of the asset in the year the
expense is incurred. Instead, they must recover the cost through year-by-year depreciation over
the useful life of the asset.

Revenue Expenditures Accounting Treatment:

Revenue expenditures or operating expenses are recorded on the income statement. These
expenses are subtracted from the revenue that a company generates from sales to eventually
arrive at the net income or profit for the period. Revenue expenses can be fully tax-deducted in
the same year the expenses occur. In other words, the expenses reduce profit from a tax
standpoint, and thus, reduce the taxable income for the tax period.

In other words, the cost of capital expenditures is spread out over many periods or years,
whereas revenue expenditures are expensed in the current year or period.

12. Difference between operating profit and net income

Ans.) Two important terms found on any company's income statement are operating profit and
net income. Both profit metrics show the level of profitability for a company, but they differ in
important ways. Operating profit shows a company's earnings after all expenses are taken out
except for the cost of debt, taxes, and certain one-off items. Net income, on the other hand,
shows the profit remaining after all costs incurred in the period have been subtracted from
revenue generated from sales.

Operating Profit:

Operating profit is the amount of revenue that remains after subtracting a company's variable
and fixed operating expenses. In other words, operating profit is the profit a company earns
from its business. The metric includes expenses for the raw materials used in production to
create products for sale, called cost of goods sold or COGS. Operating profit also includes all
of the day-to-day costs of running a business, such as rent, utilities, payroll, and depreciation.
Depreciation is the accounting process that spreads out the cost of an asset, such as equipment,
over the useful life of the asset.
Finance Questions By T&D Team, CRC

Net Income:

Net income, also called net profit, reflects the amount of revenue that remains after accounting
for all expenses and income in a period. Net income is the last line and sits at the bottom of the
income statement. As a result, it's often referred to as a company's "bottom line" number.

Net income is the result of all costs, including interest expense for outstanding debt, taxes, and
any one-off items, such as the sale of an asset or division. Net income is important because it
shows a company's profit for the period when taking into account all aspects of the business.

While both operating profit and net income are measurements of profitability, operating profit
is just one of many calculations that occur along the way from total revenue to net income.

13. Difference Financial accounting and management accounting

Ans.) Accounting, refers to the process of recording, classifying and summarizing in monetary
terms, the business transactions and events and interpreting the results. It is used by entities to
keep a track of their financial transactions. Financial Accounting and Management accounting
are the two branches of accounting.

Financial accounting stresses on giving true and a fair view of the financial position of the
company to various parties. Financial Accounting is an accounting system which is concerned
with the preparation of financial statement for the outside parties like creditors, shareholders,
investors, suppliers, lenders, customers, etc. It is the purest form of accounting in which proper
record keeping and reporting of financial data are done, to provide relevant and material
information to its users.

Financial Accounting is based on various assumptions, principles and convention like going
concern, materiality, matching, realisation, conservatism, consistency, accrual, historical cost,
etc. The financial statement consists of a Balance Sheet, Income Statement and Cash flow
statement which are prepared as per the guidelines provided by the relevant statute.
Finance Questions By T&D Team, CRC

On the contrary, management accounting aims at providing both qualitative and quantitative
information to the managers, so as to assist them in decision making and thus maximizing the
profit.

Management Accounting, also known as Managerial Accounting is the accounting for

managers which helps the management of the organisation to formulate policies and
forecasting, planning and controlling the day-to-day business operations of the organisation.
Both the quantitative and qualitative information are captured and analysed by the management
accounting.

The functional area of management accounting is not limited to providing a financial or cost
information only. Instead, it extracts the relevant and material information from financial and
cost accounting to assist the management in budgeting, setting goals, decision making, etc.

14. Why profit is shown on liability side of the balance sheet?

Ans.) Net Profit is the amount earned by the Owner and it is always added to the Capital. As
Capital is liability of the firm/Co. therefore it is shown on the liability side of the balance sheet

Profit is the return on investment/capital provided by the Company to the

owners/promoters/shareholders.

Investors provide money in 2 forms to Companies

• Debt/Loan (return expected is interest)

• Capital/Equity (return expect is profit)

Profits are made by business operations and then a part or whole of the profit is distributed or
given away to the owners/shareholders on a periodic basis in the form of dividend, bonus
shares, profit share

That’s why you will see profit on the Liability side of balance sheet of a Company.

15. Difference between enterprise value and equity value:

Ans.)

Enterprise value:

The enterprise value (which can also be called firm value or asset value) is the total value of
the assets of the business (excluding cash). When you value a business using unlevered free
cash flow in a DCF model you are calculating the firm’s enterprise value.
Finance Questions By T&D Team, CRC

Equity value:

The equity value (or net asset value) is the value that remains for the shareholders after any
debts have been paid off. When you value a company using levered free cash flow in a DCF
model you are determining the company’s equity value. If you know the enterprise value and
have the total amount of debt and cash at the firm you can calculate the equity value as shown
below.

16. Explain ‘financial modeling’.

Ans.) Financial modeling is a quantitative analysis commonly used for either asset pricing or
general corporate finance. It is the process wherein a company’s expenses and earnings are
taken into consideration (commonly into spreadsheets) to anticipate the impact of today’s
decisions in the future.

The financial model also turns out to be a very impactful tool for the following tasks:

• Estimate the valuation of any business

• Compare competition
• Strategic planning
• Testing different scenarios
• Budget planning and allocation
• Measure the impacts of any changes in economic policies

17. What is NPV? Where is it used?

Ans.) Net Present Value (NPV) is the difference between the present value of cash inflows
and the present value of cash outflows. NPV is used in capital budgeting to analyze the
profitability of a projected investment or project.
Finance Questions By T&D Team, CRC

18.What do you know about valuation techniques?

Ans.) For calculating the valuation of a business or stocks, generally, the following three types
of valuation techniques are used:

• DCF analysis – helps in forecasting future cash flows

• Comparable company analysis – helps in comparing the current worth of one business when
compared to other similar businesses using P/E, EBITDA
• Precedent transactions – helps in identifying the transactional values of a company by
comparing a business with other business which has been sold recently

19. What do you mean by ratio analysis?

Ans. The ratio analysis approach is frequently used by the financial analyst to get deeper
insights into a company’s overall equity analysis by using financial statements.

Analysis of different ratios helps stakeholders in measuring a company’s profitability,

liquidity, operational efficiency, and solvency status. And when these ratios are paired with
other essential financial metrics, it results in a deeper view of the financial health of the
company.

20. What is EBITDA?

Ans.) EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is
a measure of a company’s overall financial performance. EBITDA can be misleading because
it does not include the cost of capital investments like property, equity, plant, and equipment.

21.What is capital budgeting?

Ans.) Capital budgeting is the process that a business uses to determine which proposed fixed
asset purchases it should accept, and which should be declined. This process is used to create
a quantitative view of each proposed fixed asset investment, thereby giving a rational basis for
making a judgment.

22. What is PE ratio?

Finance Questions By T&D Team, CRC

Ans.) The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a
company's share (stock) price to the company's earnings per share. The ratio is used for valuing
companies and to find out whether they are overvalued or undervalued.

As an example, if share A is trading at $24 and the earnings per share for the most recent 12-
month period is $3, then share A has a P/E ratio of $24/($3 per year) = 8.

23. What is EPS.

Ans.) Earnings per share (EPS) is calculated as a company's profit divided by the outstanding
shares of its common stock. The resulting number serves as an indicator of a company's
profitability.

The higher a company's EPS, the more profitable it is considered to be.

24. Equity cost vs debt cost.

Ans.) Cost of equity is the cost of raising capital through common stock.

Cost of debt is the cost of raising capital through debt (e.g., loans, bonds, notes etc.)

Cost of equity would be always higher than cost of debt. This can be simply explained with
who will get their money back first in case of insolvency or bankruptcy. Creditors have to be
paid back before equity shareholders, since equity holders are always considered to be the last
stakeholders to be accounted. Because of this high risk, cost of equity should be higher than
cost of debt.

For investors, cost of equity would be the return on investment in equity and cost of debt is the
return on investing as part of debt.