Top technical accounting questions

Obtaining a job offer in the current job market requires a great amount of preparation, contacts and, to some extent, luck. Baruch students seeking to obtain employment in the accounting field need to master a myriad of concepts, understand the application of formulas and grasp a number of intricate technical aspects pertinent to their respective fields. However, not everything that is asked on an interview is taught in school.

Ayanna Kerrison, a senior majoring in Finance who interviewed with Deloitte, Bank of America, Morgan Stanley, BMO Capital Markets, Credit Suisse and Bank of New York Mellon, highlighted some important questions that she was asked to answer.

What is the relationship between the income statement and the balance sheet?

A balance sheet shows the company's position at given points in time, whereas the income statement explains the changes that have taken place between those points. With that said, net income per the income statement is entered into the balance sheet as retained earnings, after dividends.

Financial Ratios: How do you calculate…?

Current ratio (working capital ratio): Current assets divided by current liabilities.

Debt-to-equity ratio: Total liabilities divided by total shareholders' equity.
Dividend-yield ratio: Common dividends per share divided by market price per share.

What are the major categories of the statement of cash flow and where are the categories, such as net income, dividends, account payable, investments and/or any other asset and liability accounts, displayed on the cash flow statement?

Cash flow from operating activities, cash flow from financing activities and cash flow from investing activities represent the three sections of the statement of cash flows.

Net income from the income statement is shown in the section labeled "cash flows from operating activities."

Dividends from the statement of retained earnings are shown in the section labeled "cash flows from financing activities."

Investments, accounts payable and other asset and liability accounts from the balance sheet are shown in all three sections.

What is the formula for FCF (free cash flow) and where can the information be found via the major financial statements?

Formula:
Earnings before interest and taxes x (1- t)* + Depreciation and Amortization - Capital Expenditures - Net increase (+ net decrease) in working capital + Other relevant cash flows
*"t" stands for the corporate tax rate.

The "earnings before interest and taxes" or "EBIT" can be found in the income statement.

The "Depreciation and Amortization" can be found in the balance sheet, the "capital expenditures," the change in working capital and other relevant cash flows (i.e. selling a building) can be located in the statement of cash flows.

How do you calculate the discount rate using WACC (Weighted Average Cost of Capital) and how is it different from APV (Adjusted Present Value)?

Both the WACC and APV formulas represent methods of calculating the discount rate in a DCF (Discounted Cash Flows) analysis. The difference in the methodologies is that the WACC calculates the rate of leveraged equity using CAPM (capital asset pricing model), while the APV calculates the rate for unleveraged, all-equity firms.

WACC is calculated as the proportion of the firm's capital that is funded by equity, multiplied by the discount rate of leveraged equity via CAPM, plus the proportion of the firm's capital that is funded by debt, multiplied by the cost of debt multiplied by one minus the tax rate.

Although there are an infinite amount of technical questions that can be asked during an interview, students can show off their knowledge and impress the interviewer if they are prepared for and understand these questions.