alright so you've sent the application passed the resume screening and now they've invited you to an
interview and everyone's telling you about dcf npv aaa but what does it all mean so welcome to the
one video that will cover the most common finance interview questions that i and my colleagues
have faced while applying to some of these companies either for internships or full-time
jobs and the three main sections we'll cover are accounting finance and brain teasers let's go
first up we have accounting questions and we'll go over three of the most common ones from easiest
all the way to hardest and firstly we've got what's the difference between cash and accrual
based accounting and basically cash accounting shows a transaction when the cash has gone in or
out of the company while accrual accounting records a transaction only when the revenue
has been earned or the expense has been incurred even if the money hasn't been received or hasn't
been paid till later for example if you sell 100 books to a university in january and they only pay
you 30 days later in february under cash-based accounting it would only be recognized in the
month of february when you actually receive the cash on the other hand under accrual accounting
it would be recorded on the month of the sale which would be the month of january
secondly we've got how do the three financial statements connect
and just as i recap there's the income statement the balance sheet and the cash flow statement
now there's many linking points in here so you'll probably only need to mention a few
let's go through them first we've got net income on the income statement and that links to retained
earnings on the balance sheet as retained earnings is calculated as beginning retained earnings plus
net income minus dividends and that equals ending retained earnings then on the cash flow statement
it connects into cash from operations under net income another link has to do with depreciation
on the income statement which connects to non-current assets on the balance sheet
that's because property plant and equipment under non-current assets is calculated as
beginning ppe plus any capital expenditures minus accumulated depreciation equals the ending ppe
in addition to that depreciation also links to the cash flow statement under operating cash
flow and ppe from the balance sheet links to investments in ppe on the cash flow statement
there are a few other links in there like cash but those two should be enough to prove your
understanding of the three statements and lastly how would a 10 dollar increase in inventory
affect the three financial statements in case you don't know inventory is an asset that's expected
to be sold so for example if you're a bookstore your books would be your inventory assuming the
inventory was paid in cash on the income statement it would have no effect and the reason for that
is that the inventory would only be recorded as an expense when it was actually sold so if it stays
in the warehouse it wouldn't be the case yet then on the balance sheet inventory would be up by 10
and assuming you paid in cash cash would be down by 10 meaning that everything there would
still be balancing and lastly on the cash flow statement cash would go down by 10 generally
with this type of a question you should be able to answer it both in reverse so for instance uh
inventory going down by 10 or also with other line items like depreciation going up or down as well
next up we've got finance questions and among the most common ones is what are the three main
valuation methods and these are the discounted cash flow the comparable companies analysis
and the precedent transactions analysis for the dcf it's an internal valuation method meaning that
the company looks at their cash flows internally and their finances and tries to determine a value
based on that on the other hand for the other two methods the comparable companies has to do
with what your peers so comparable companies to you are doing and based on that you're going to
be able to derive a valuation range for yourself using a ratio then the third method the present
transactions is based on previous transactions that have occurred with similar companies and how
that would affect your valuation a very common follow-up question to that is walk me through a
discounted cash flow and we made a video just on that you can check it out somewhere up over here
the second question is how would you assess a capital investment this question is very common in
financial planning and analysis type roles where you might need to invest in a new factory a new
store etc so you need to figure out whether it's going to be a viable investment for this there's
really three main methods as well there's the mpv which is the net present value of the project
where if it's greater than zero you typically accept the project then there's the irr known
as the internal rate of return where if the percentage is greater than the discount rate
then you accept the project and lastly you have the payback period which is the number of years it
takes to pay back for the investment this last one doesn't have a set rule when it comes to how many
years it should take to recover the investment as it depends on the company and how much cash it
has in hand and the last question in this section is what is ebitda and ebitda stands for earnings
before interest tax depreciation and amortization and in short it's just a measure of profitability
so the formula here is net income plus taxes plus interest expense plus depreciation and
amortization the reason it's quite popular is because it eliminates the effect of financing and
capital expenditures meaning that you can compare with different companies in the same industry
a bit more easily just purely based on operating profitability and speaking of finance if you're
liking this video you can also check out our course we're an investment banker a financial
analyst and myself teach everything we know about finance valuation and financial modelling first we
cover financial statement analysis using apple's real annual report as an example then we get into
financial modeling through a three statement model after that we begin the valuation phase where you
learn to do a discounted cash flow a comparable company's valuation and a precedent transaction
evaluation on adobe looking at the real financial statements to eventually derive a valuation range
lastly we'll show you how to present an investment thesis using a stock pitch format so if you're
interested in checking it out go to the link in the description below alright back to the video
next up we have brain teasers and these can generally be split into two main areas
one is mental math and the other one is guesstimates also known as market sizing
let's start with mental math and this is often just the calculation like 32 times 28 now if
you're like me you probably don't know the answer to that off the top of your head but there are a
few tricks in here that you can identify so let me show you in this type of question you'll often
notice a pattern in this one it's that both 28 and 32 are only two numbers away from 30. so knowing
that you can do a 30 times 30 which is 900 and that's not a very hard calculation from there you
know that you've went plus 2 and minus 2 so if you times both of them it's going to be minus 4. so
900 minus 4 it just ends up being 896 and that's the answer for you and obviously the same thing
applies to numbers that are maybe three away four away etc etc so that's one quick trick for you
then there's the guesstimates and these are pretty random questions like how many gas stations are
in the us or how much does your hairdresser make and these are quite tough in that you don't really
know how to prepare for them and there's not really a right answer here they're not actually
looking for a real number but instead they want to see the sequence of steps you take to get to that
answer so let's try the hairdresser one together firstly we're gonna have to make a few assumptions
so let's assume that the hairdresser charges us 20 dollars per cut and that takes around 30 minutes
let's say that they're open for 10 hours a day so that's 600 minutes that means that they can
take in 20 haircuts assuming that the occupancy is in full which would equate to around 400 but
we know it's unreasonable to think that they're always full during those 10 hours so instead
let's say their occupancy is at 75 so that would give them around 300 in revenue per day
you probably noticed here that i went quite easy with the different assumptions
for instance i assume that there's only one hairdresser which simplifies my calculations
and the amounts are very simplified here so maybe they actually charge me 18.5 dollars
but if you say that then it's obviously gonna make your calculations a lot harder so you're better
off going with round numbers and if you don't know the answer to some of their questions it's best if
you're honest and you just say so as opposed to trying to answer it and getting it wrong
check out this video over here if you want to learn more about the internships that i've taken
or this other link over here to learn more about finance and valuation best of luck with your
interview hit that like and that subscribe if you liked it and i'll catch you in the next one