ACCOUNTING BASICS AND INTERVIEW QUESTIONS ANSWERS

ACCOUNTING BASICS AND INTERVIEW QUESTIONS ANSWERS

1. Definition of accounting: “the art of recording, classifying and summarizing in a significant manner
and in terms of money, transactions and events which are, in part at least of a financial character and
interpreting the results there of”.
2. Book keeping: It is mainly concerned with recording of financial data relating to the business
operations in a significant and orderly manner.
3. Concepts of accounting:
A. Separate entity concept
B. Going concern concept
C. Money measurement concept
D. Cost concept
E. Dual aspect concept
F. Accounting period concept
G. Periodic matching of costs and revenue concept
H. Realization concept.

4 Conventions of accounting:
A. Conservatism
B. Full disclosure
C. Consistency
D. Materiality

5. Systems of book keeping:

A. single entry system
B. double entry system

6. Systems of accounting:

A. Cash system accounting

B. Mercantile system of accounting.
7. Principles of accounting:
A. Personal a/c: Debit the receiver
Credit the giver

B. Real a/c: Debit what comes in

Credit what goes out
C. Nominal a/c: Debit all expenses and losses
Credit all gains and incomes

8. Meaning of journal: Journal means chronological record of transactions.

9. Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the business
enterprise whether real, nominal, personal.
10. Posting: It means transferring the debit and credit items from the journal to their respective
accounts in the ledger.
11. Trial balance: Trial balance is a statement containing the various ledger balances on a
particular date.
 12. Credit note: The customer when returns the goods get credit for the value of the goods
returned. A credit note is sent to him intimating that his a/c has been credited with the value of the goods
returned.
13. Debit note: When the goods are returned to the supplier, a debit note is sent to him indicating
that his a/c has been debited with the amount mentioned in the debit note.
14. Contra entry: Which accounting entry is recorded on both the debit and credit side of the
cashbook is known as the contra entry.
15. Petty cash book: Petty cash is maintained by business to record petty cash expenses of the
business, such as postage, cartage, stationery, etc.
16. Promisory note: an instrument in writing containing an unconditional undertaking signed by
the maker, to pay certain sum of money only to or to the order of a certain person or to the barer of the
instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.
18. Stale Cheque: A stale cheque means not valid of cheque that means more than six months the
cheque is not valid.
20. Bank reconciliation statement: It is a statement reconciling the balance as shown by the
bank passbook and the balance as shown by the Cash Book. Obj: to know the difference & pass necessary
correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the revenue.
22. Capital income: The term capital income means an income which does not grow out of or
pertain to the running of the business proper.
23. Revenue income: The income, which arises out of and in the course of the regular business
transactions of a concern.
24. Capital expenditure: It means an expenditure which has been incurred for the purpose of
obtaining a long term advantage for the business.
25. Revenue expenditure: An expenditure that incurred in the course of regular business
transactions of a concern.

26. Differed revenue expenditure: An expenditure, which is incurred during an accounting

period but is applicable further periods also. Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were sold on
credit.
28. Depreciation: Depreciation denotes gradually and permanent decrease in the value of asset
due to wear and tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not represented by tangible possession or property.
Examples of preliminary expenses, discount on issue of shares, debit balance in the profit And loss
account when shown on the assets side in the balance sheet.
30. Intanglbe Assets: Intangible assets mean the assets which is not having the physical
appearance. And it’s have the real value, it shown on the assets side of the balance sheet.
31. Accrued Income: Accrued income means income which has been earned by the business
during the accounting year but which has not yet been due and, therefore, has not been received.
32. Outstanding Income: Outstanding Income means income which has become due during the
accounting year but which has not so far been received by the firm.
33. Suspense account: The suspense account is an account to which the difference in the trial
balance has been put temporarily.
34. Depletion: It implies removal of an available but not replaceable source, Such as extracting
coal from a coal mine.
35. Amortization: The process of writing of intangible assets is term as amortization.
36. Dilapidations: The term dilapidations to damage done to a building or other property during
tenancy.
 37. Capital employed: The term capital employed means sum of total long term funds employed
in the business. i.e.
(Share capital+ reserves & surplus +long term loans – (non business assets + fictitious
assets)
38. Equity shares: Those shares which are not having pref. rights are called equity shares.
39. Pref.shares: Those shares which are carrying the pref.rights are called pref. shares Pref.rights
in respect of fixed dividend. Pref.right to repayment of capital in the event of company winding up.
40. Leverage: It is a force applied at a particular work to get the desired result.
41. Operating leverage: the operating leverage takes place when a changes in revenue greater
changes in EBIT.
42. Financial leverage: it is nothing but a process of using debt capital to increase the rate of
return on equity
43. Combine leverage: It is used to measure of the total risk of the firm = operating risk +
financial risk.

44. Joint venture: A joint venture is an association of two or more the persons who combined for
the execution of a specific transaction and divide the profit or loss their of an agreed ratio.
45. Partnership: Partnership is the relation b/w the persons who have agreed to share the profits
of business carried on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives advances
against its receivables, from financial institutions (called factor)
47. Capital reserve: The reserve which transferred from the capital gains is called capital
reserve.
48. General reserve: the reserve which is transferred from normal profits of the firm is called
general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance like surplus
cash.
50. Minority Interest: Minority interest refers to the equity of the minority shareholders in a
subsidiary company.
51. Capital receipts: Capital receipts may be defined as “non-recurring receipts from the owner
of the business or lender of the money crating a liability to either of them.
52. Revenue receipts: Revenue receipts may defined as “A recurring receipts against sale of
goods in the normal course of business and which generally the result of the trading activities”.
53. Meaning of Company: A company is an association of many persons who contribute money
or money’s worth to common stock and employs it for a common purpose. The common stock so
contributed is denoted in money and is the capital of the company.
54. Types of a company:
1. Statutory companies
2. Government company
3. Foreign company
4. Registered companies:
A. Companies limited by shares
B. Companies limited by guarantee
C. Unlimited companies
D. private company
E. public company
 55. Private company: A private co. is which by its AOA: Restricts the right of the members to
transfer of shares Limits the no. Of members 50. Prohibits any Invitation to the public to subscribe for its
shares or debentures.
56. Public company: A company, the articles of association of which does not contain the
requisite restrictions to make it a private limited company, is called a public company.
57. Characteristics of a company:
> Voluntary association
> Separate legal entity
> Free transfer of shares
> Limited liability
> Common seal
> Perpetual existence.
58. Formation of company:
> Promotion
> Incorporation
> Commencement of business
59. Equity share capital: The total sum of equity shares is called equity share capital.
60. Authorized share capital: It is the maximum amount of the share capital, which a company
can raise for the time being.
61. Issued capital: It is that part of the authorized capital, which has been allotted to the public
for subscriptions.
62. Subscribed capital: it is the part of the issued capital, which has been allotted to the public
63. Called up capital: It has been portion of the subscribed capital which has been called up by
the company.
64. Paid up capital: It is the portion of the called up capital against which payment has been
received.
65. Debentures: Debenture is a certificate issued by a company under its seal acknowledging a
debt due by it to its holder.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.

67. Deemed public Ltd. Company: A private company is a subsidiary company to public
company it satisfies the following terms/conditions Sec 3(1)3:
1. Having minimum share capital 5 lakhs
2. Accepting investments from the public
3. No restriction of the transferable of shares
4. No restriction of no. of members.
5. Accepting deposits from the investors

68. Secret reserves: Secret reserves are reserves the existence of which does not appear on the
face of balance sheet. In such a situation, net assets position of the business is stronger than that disclosed
by the balance sheet.
These reserves are created by:
1. Excessive depot an asset, excessive over-valuation of a liability.
2. Complete elimination of an asset, or under valuation of an asset.

69. Provision: provision usually means any amount written off or retained by way of providing
depreciation, renewals or diminutions in the value of assets or retained by way of providing for any
known liability of which the amount cannot be determined with substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the purpose it was
originally made is also considered as reserve Provision is charge against profits while reserves is an
appropriation of profits Creation of reserve increase proprietor’s fund while creation of provisions
decreases his funds in the business.
71. Reserve fund: The term reserve fund means such reserve against which clearly investment
etc.,
72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with some
other a/c or group of accounts so that the existence of the reserve is not known such reserve is called an
undisclosed reserve.
73. Finance management: Financial management deals with procurement of funds and their
effective utilization in business.

74. Objectives of financial management: financial management having two objectives that Is:
1. Profit maximization: The finance manager has to make his decisions in a manner so that the
profits of the concern are maximized.
2. Wealth maximization: Wealth maximization means the objective of a firm should be to
maximize its value or wealth, or value of a firm is represented by the market price of its common stock.
75. Functions of financial manager:
> Investment decision
> Dividend decision
> Finance decision
> Cash management decisions
> Performance evaluation
> Market impact analysis

76. Time value of money: The time value of money means that worth of a rupee received today
is different from the worth of a rupee to be received in future.
77. Capital structure: It refers to the mix of sources from where the long-term funds required in
a business may be raised; in other words, it refers to the proportion of debt, preference capital and equity
capital.
78. Optimum capital structure: Capital structure is optimum when the firm has a combination
of equity and debt so that the wealth of the firm is maximum.
79. Wacc: It denotes weighted average cost of capital. It is defined as the overall cost of capital
computed by reference to the proportion of each component of capital as weights.
80. Financial break-even point: It denotes the level at which a firm’s EBIT is just sufficient to
cover interest and preference dividend.
81. Capital budgeting: Capital budgeting involves the process of decision making with regard to
investment in fixed assets. Or decision making with regard to investment of money in longterm projects.
82. Payback period: Payback period represents the time period required for complete recovery
of the initial investment in the project.
83. ARR: Accounting or average rates of return means the average annual yield on the project.
84. NPV: The Net present value of an investment proposal is defined as the sum of the present
values of all future cash inflows less the sum of the present values of all cash out flows associated with
the proposal.

85. Profitability index: Where different investment proposal each involving different initial
investments and cash inflows are to be compared.
86. IRR: Internal rate of return is the rate at which the sum total of discounted cash inflows
equals the discounted cash out flow.
87. Treasury management: It means it is defined as the efficient management of liquidity and
financial risk in business.
 88. Concentration banking: It means identify locations or places where customers are placed
and open a local bank a/c in each of these locations and open local collection canter.
89. Marketable securities: Surplus cash can be invested in short term instruments in order to
earn interest.
90. Ageing schedule: In an ageing schedule the receivables are classified according to their age.
91. Maximum permissible bank finance (MPBF): It is the maximum amount that banks can
lend a borrower towards his working capital requirements.
92. Commercial paper: A cp is a short term promissory note issued by a company, negotiable by
endorsement and delivery, issued at a discount on face value as may be determined by the issuing
company.
93. Bridge finance: It refers to the loans taken by the company normally from commercial banks
for a short period pending disbursement of loans sanctioned by the financial institutions.
94. Venture capital: It refers to the financing of high-risk ventures promoted by new qualified
ntrepreneurs who require funds to give shape to their ideas.
95. Debt securitization: It is a mode of financing, where in securities are issued on the basis of a
package of assets (called asset pool).
96. Lease financing: Leasing is a contract where one party (owner) purchases assets and permits
its views by another party (lessee) over a specified period
97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course of
business.
98. Over draft: Under this facility a fixed limit is granted within which the borrower allowed to
overdraw from his account.
99. Cash credit: It is an arrangement under which a customer is allowed an advance up to certain
limit against credit granted by bank.
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any
tangible security.
101. Share capital: The sum total of the nominal value of the shares of a company is called share
capital.

102. Funds flow statement: It is the statement deals with the financial resources for running
business activities. It explains how the funds obtained and how they used.
103. Sources of funds: There are two sources of funds internal sources and external sources.
Internal source: Funds from operations is the only internal sources of funds and some important points
add to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets Deduct the
following items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation Of fixed assets
External sources: (a) Funds from long-term loans
(b)Sale of fixed assets
(c) Funds from increase in share capital

104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of
tax liability (d) Payment of fixed liability

105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For
example 6 months or less from another company which have surplus liquidity? Such deposits made by
one company in another company are called ICD.
 106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt
issued by banks there is no prescribed interest rate on such CDs it is based on the prevailing market
conditions.
107. Public deposits: It is very important source of short term and medium term finance. The
company can accept PD from members of the public and shareholders. It has the maturity period of 6
months to 3 years.
108. Euro issues: The euro issues means that the issue is listed on a European stock Exchange.
The subscription can come from any part of the world except India.
109. GDR (Global depository receipts): A depository receipt is basically a negotiable
certificate, dominated in us dollars that represents a non-US company publicly traded in local currency
equity shares.
110. ADR (American depository receipts): Depository receipts issued by a company in the
USA are known as ADRs. Such receipts are to be issued in accordance with the provisions stipulated by
the securities Exchange commission (SEC) of USA like SEBI in India.

111. Commercial banks: Commercial banks extend foreign currency loans for international
operations, just like rupee loans. The banks also provided overdraft.
112. Development banks: It offers long-term and medium term loans including foreign currency
loans
113. International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide
indirect assistance for obtaining foreign currency.
114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for
professionally or technically qualified entrepreneurs and persons possessing relevantexperience and skills
and entrepreneur traits.
115. Unsecured loans: It constitutes a significant part of long-term finance available to an
enterprise.
116. Cash flow statement: It is a statement depicting change in cash position from one period to
another.
117. Sources of cash:
Internal sources
(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
(e) Creation of reserves
External sources-
(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments
118. Application of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans and deposits

119. Budget: It is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies.
 120. Budgetary control: It is the system of management control and accounting in which all
operations are forecasted and so for as possible planned ahead, and the actual results compared with the
forecasted and planned ones.
121. Cash budget: It is a summary statement of firm’s expected cash inflow and outflow over a
specified time period.
122. Master budget: A summary of budget schedules in capsule form made for the purpose of
presenting in one report the highlights of the budget forecast.
123. Fixed budget: It is a budget, which is designed to remain unchanged irrespective of the
level of activity actually attained.
124. Zero- base- budgeting: It is a management tool which provides a systematic method for
evaluating all operations and programmes, current of new allows for budget reductions and expansions in
a rational inner and allows reallocation of source from low to high priority programs.
125. Goodwill: The present value of firm’s anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank pass book and balance
shown by the cash book.
127. Objective of BRS: The objective of preparing such a statement is to know the causes of
difference between the two balances and pass necessary correcting or adjusting entries in the books of the
firm.
128. Responsibilities of accounting: It is a system of control by delegating and locating the
Responsibilities for costs.
129. Profit centre: A centre whose performance is measured in terms of both the expense incurs
and revenue it earns.
130. Cost centre: A location, person or item of equipment for which cost may be ascertained and
used for the purpose of cost control.
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and summarizing costs for
determination of costs of products or services planning, controlling and reducing such costs and
furnishing of information management for decision making.

133. Elements of cost:

(A) Material
(B) Labour
(C) Expenses
(D) Overheads
134. Components of total costs: (A) Prime cost (B) Factory cost
(C)Total cost of production (D) Total c0st
135. Prime cost: It consists of direct material direct labour and direct expenses. It is also known
as basic or first or flat cost.
136. Factory cost: It comprises prime cost, in addition factory overheads which include cost of
indirect material indirect labour and indirect expenses incurred in factory. This cost is also known as
works cost or production cost or manufacturing cost.
137. Cost of production: In office and administration overheads are added to factory cost, office
cost is arrived at.
138. Total cost: Selling and distribution overheads are added to total cost of production to get the
total cost or cost of sales.
139. Cost unit: A unit of quantity of a product, service or time in relation to which costs may be
ascertained or expressed.
140.Methods of costing: (A)Job costing (B)Contract costing (C)Process costing (D)Operation
costing (E)Operating costing (F)Unit costing (G)Batch costing.
 141. Techniques of costing: (a) marginal costing (b) direct costing (c) absorption costing (d)
uniform costing.
142. Standard costing: standard costing is a system under which the cost of the product is
determined in advance on certain predetermined standards.
143. Marginal costing: it is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of production, i.e., materials, labour,
direct expenses and variable overheads.
144. Derivative: derivative is product whose value is derived from the value of one or more basic
variables of underlying asset.
145. Forwards: a forward contract is customized contracts between two entities were settlement
takes place on a specific date in the future at today’s pre agreed price.

146. Futures: A future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Future contracts are standardized exchange traded contracts.
147. Options: An option gives the holder of the option the right to do something. The option
holder option may exercise or not.
148. Call option: A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price.
149. Put option: A put option gives the holder the right but not obligation to sell an asset by a
certain date for a certain price.
150. Option price: Option price is the price which the option buyer pays to the option seller. It is
also referred to as the option premium.
151. Expiration date: The date which is specified in the option contract is called expiration date.
152. European option: It is the option at exercised only on expiration date itself.
153. Basis: Basis means future price minus spot price.
154. Cost of carry: The relation between future prices and spot prices can be summarized in
terms of what is known as cost of carry.
155. Initial margin: The amount that must be deposited in the margin a/c at the time of first
entered into future contract is known as initial margin.
156 Maintenance margin: This is somewhat lower than initial margin.
157. Mark to market: In future market, at the end of the each trading day, the margin a/c is
adjusted to reflect the investors’ gains or loss depending upon the futures selling price. This is called mark
to market.
158. Baskets: basket options are options on portfolio of underlying asset.
159. Swaps: swaps are private agreements between two parties to exchange cash flows in the
future according to a pre agreed formula.
160. Impact cost: Impact cost is cost it is measure of liquidity of the market. It reflects the costs
faced when actually trading in index.
161. Hedging: Hedging means minimize the risk.
162. Capital market: Capital market is the market it deals with the long term investment funds.
It consists of two markets 1.primary market 2.secondary market.
163. Primary market: Those companies which are issuing new shares in this market. It is also
called new issue market.
164. Secondary market: Secondary market is the market where shares buying and selling. In
India secondary market is called stock exchange.

165. Arbitrage: It means purchase and sale of securities in different markets in order to profit
from price discrepancies. In other words arbitrage is a way of reducing risk of loss caused by price
fluctuations of securities held in a portfolio.
 166. Meaning of ratio: Ratios are relationships expressed in mathematical terms between figures
which are connected with each other in same manner.
167. Activity ratio: It is a measure of the level of activity attained over a period.
168. Mutual fund: A mutual fund is a pool of money, collected from investors, and is invested
according to certain investment objectives.
169. Characteristics of mutual fund: Ownership of the MF is in the hands of the of the
investors MF managed by investment professionals The value of portfolio is updated every day
170. Advantage of MF to investors: Portfolio diversification Professional management
Reduction in risk Reduction of transaction casts Liquidity Convenience and flexibility
171. Net asset value: the value of one unit of investment is called as the Net Asset Value
172. Open-ended fund: open ended funds means investors can buy and sell units of fund, at
NAV related prices at any time, directly from the fund this is called open ended fund.
173. Close ended funds: close ended funds means it is open for sale to investors for a specific
period, after which further sales are closed. Any further transaction for buying the units or repurchasing
them, happen, in the secondary markets.
174. Dividend option: investors who choose a dividend on their investments, will receive
dividends from the MF, as when such dividends are declared.
175. Growth option: investors who do not require periodic income distributions can be choose
the growth option.
176. Equity funds: equity funds are those that invest pre-dominantly in equity shares of
company.
177. Types of equity funds: Simple equity funds Primary market funds Sectoral funds Index
funds
178. Sectoral funds: Sectoral funds choose to invest in one or more chosen sectors of the equity
markets.
179. Index funds: The fund manager takes a view on companies that are expected to perform
well, and invests in these companies
180. Debt funds: the debt funds are those that are pre-dominantly invest in debt securities.
181. Liquid funds: the debt funds invest only in instruments with maturities less than one year.
182. Gilt funds: gilt funds invests only in securities that are issued by the GOVT. and therefore
does not carry any credit risk.

183. Balanced funds: Funds that invest both in debt and equity markets are called balanced
funds.
184. Sponsor: sponsor is the promoter of the MF and appoints trustees, custodians and the AMC
with prior approval of SEBI.
185. Trustee: Trustee is responsible to the investors in the MF and appoint the AMC for
managing the investment portfolio.
186. AMC: the AMC describes Asset Management Company; it is the business face of the MF,
as it manages all the affairs of the MF.
187. R & T Agents: the R&T agents are responsible for the investor servicing functions, as they
maintain the records of investors in MF.
188. Custodians: Custodians are responsible for the securities held in the mutual fund’s
portfolio.
189. Scheme takes over: if an existing MF scheme is taken over by another AMC, it is called as
scheme take over.
190. Meaning of load: Load is the factor that is applied to the NAV of a scheme to arrive at the
price.
192. Market capitalization: market capitalization means number of shares issued multiplied
with market price per share.
 193. Price earnings ratio: The ratio between the share price and the post tax earnings of
company is called as price earnings ratio.
194. Dividend yield: The dividend paid out by the company, is usually a percentage of the face
value of a share.
195. Market risk: It refers to the risk which the investor is exposed to as a result of adverse
movements in the interest rates. It also referred to as the interest rate risk.
196. Re-investment risk: It the risk which an investor has to face as a result of a fall in the
interest rates at the time of reinvesting the interest income flows from the fixed income security.
197. Call risk: Call risk is associated with bonds have an embedded call option in them. This
option hives the issuer the right to call back the bonds prior to maturity.
198. Credit risk: Credit risk refers to the probability that a borrower could default on a
commitment to repay debt or band loans
199. Inflation risk: Inflation risk reflects the changes in the purchasing power of the cash flows
resulting from the fixed income security.
200. Liquid risk: It is also called market risk, it refers to the ease with which bonds could be
traded in the market.

201. Drawings: Drawings denotes the money withdrawn by the proprietor from the business for
his personal use.
202. Outstanding Income: Outstanding Income means income which has become due during the
accounting year but which has not so far been received by the firm.
203. Outstanding Expenses: Outstanding Expenses refer to those expenses which have become
due during the accounting period for which the Final Accounts have been prepared but have not yet been
paid.
204. Closing stock: The term closing stock means goods lying unsold with the businessman at
the end of the accounting year.
205. Methods of depreciation:
1. Unirorm charge methods:
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods:
a. Diminishing balance method
b. Sum of years digits method
c. Double declining method
3. Other methods:
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
e. Insurance policy method.
206. Accrued Income: Accrued Income means income which has been earned by the business
during the accounting year but which has not yet become due and, therefore, has not been received.

207. Gross profit ratio: it indicates the efficiency of the production/trading operations.
Formula : Gross profit
-------------------X100
Net sales
 208. Net profit ratio: it indicates net margin on sales
Formula: Net profit
--------------- X 100
Net sales
209. Return on share holders’ funds: it indicates measures earning power of equity capital.
Formula:
Profits available for Equity shareholders
-----------------------------------------------X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): it shows the amount of earnings attributable to each
equity share.
Formula:
Profits available for Equity shareholders
----------------------------------------------
Number of Equity shares

211. Dividend yield ratio: it shows the rate of return to shareholders in the form of dividends
based in the market price of the share
Formula:
Dividend per share
---------------------------- X100
Market price per share

212. Price earnings ratio: it a measure for determining the value of a share. May also be used to
measure the rate of return expected by investors.
Formula: Market price of share (MPS)
------------------------------------X 100
Earnings per share (EPS)

213. Current ratio: it measures short-term debt paying ability.

Formula:
Current Assets
------------------------
Current Liabilities

214. Debt-Equity Ratio: it indicates the percentage of funds being financed through borrowings;
a measure of the extent of trading on equity.
Formula: Total Long-term Debt
---------------------------
Shareholders’ funds

215. Fixed Assets ratio: This ratio explains whether the firm has raised adequate long-term funds
to meet its fixed assets requirements.
Formula: Fixed Assets
-------------------
Long-term Funds

216. Quick Ratio: The ratio termed as ‘liquidity ratio’. The ratio is ascertained y comparing the
liquid assets to current liabilities.
Formula:
 Liquid Assets
------------------------
Current Liabilities

217. Stock turnover Ratio: The ratio indicates whether investment in inventory in efficiently
used or not. It, therefore explains whether investment in inventory within proper limits or not.
Formula: cost of goods sold
------------------------------
Average stock

218. Debtors Turnover Ratio: The ratio the better it is, since it would indicate that debts are
being collected more promptly. The ration helps in cash budgeting since the flow of cash from customers
can be worked out on the basis of sales.
Formula: Credit sales
----------------------------
Average Accounts Receivable

219. Creditors Turnover Ratio: It indicates the speed with which the payments for credit
purchases are made to the creditors.
Formula: Credit Purchases
-----------------------
Average Accounts Payable

220. Working capital turnover ratio: It is also known as Working Capital Leverage Ratio. This
ratio indicates whether or not working capital has been effectively utilized in making sales.
Formula: Net Sales
----------------------------
Working Capital

221. Fixed Assets Turnover ratio: This ratio indicates the extent to which the investments in
fixed assets contribute towards sales.
Formula: Net Sales
--------------------------
Fixed Assets

222 .Pay-outs Ratio: This ratio indicates what proportion of earning per share has been used for
paying dividend.
Formula: Dividend per Equity Share
--------------------------------------------X100
Earning per Equity share

223. Overall Profitability Ratio: It is also called as “Return on Investment” (ROI) or Return on
Capital Employed (ROCE). It indicates the percentage of return on the total capital employed in the
business.
Formula: Operating profit
------------------------X 100
Capital employed

The term capital employed has been given different meanings a.sum total of all assets Whether
fixed or current b.sum total of fixed assets, c.sum total of long-term funds employed In the business, i.e.,
share capital +reserves &surplus +long term loans – (non business assets + fictitious assets). Operating
profit means ‘profit before interest and tax’
224. Fixed Interest Cover ratio: The ratio is very important from the lender’s point of view. It
indicates whether the business would earn sufficient profits to pay periodically the interest charges.
Formula: Income before interest and Tax
---------------------------------------
Interest Charges

225. Fixed Dividend Cover ratio: This ratio is important for preference shareholders entitled to
get dividend at a fixed rate in priority to other shareholders.
Formula: Net Profit after Interest and Tax
------------------------------------------
Preference Dividend
226. Debt Service Coverage ratio: This ratio is explained ability of a company to make payment
of principal amounts also on time.
Formula: Net profit before interest and tax
----------------------------------------------- 1-Tax rate
Interest + Principal payment installment
227. Proprietary ratio: It is a variant of debt-equity ratio . It establishes relationship between the
proprietor’s funds and the total tangible assets.
Formula: Shareholders funds
------------------------------
Total tangible assets
228. Difference between joint venture and partnership: In joint venture the business is carried
on without using a firm name, In the partnership, the business is carried on under a firm name. In the joint
venture, the business transactions are recorded under cash system In the partnership, the business
transactions are recorded under mercantile system. In the joint venture, profit and loss is ascertained on
completion of the venture In the partnership, profit and loss is ascertained at the end of each year. In the
joint venture, it is confined to a particular operation and it is temporary. In the partnership, it is confined
to a particular operation and it is permanent.
229. Meaning of Working capital: The funds available for conducting day to day operations of
an enterprise. Also represented by the excess of current assets over current liabilities.
230. Concepts of accounting:
1. Business entity concepts: - According to this concept, the business is treated as a separate
entity distinct from its owners and others.
2. Going concern concept :- According to this concept, it is assumed that a business has a
reasonable expectation of continuing business at a profit for an indefinite period of time.
3. Money measurement concept :- This concept says that the accounting records only those
transactions which can be expressed in terms of money only.
4. Cost concept: - According to this concept, an asset is recorded in the books at the price paid to
acquire it and that this cost is the basis for all subsequent accounting for the asset.
5. Dual aspect concept: - In every transaction, there will be two aspects – the receiving aspect and
the giving aspect; both are recorded by debiting one accounts and crediting another account. This is called
double entry.
6. Accounting period concept: - It means the final accounts must be prepared on a periodic basis.
Normally accounting period adopted is one year, more than this period reduces the utility of accounting
data.
7. Realization concept: - According to this concepts, revenue is considered as being earned on the
data which it is realized, i.e., the date when the property in goods passes the buyer and he become legally
liable to pay.
 8. Materiality concepts: - It is a one of the accounting principle, as per only important information
will be taken, and UN important information will be ignored in the preparation of the financial statement.
9. Matching concepts: - The cost or expenses of a business of a particular period are compared
with the revenue of the period in order to ascertain the net profit and loss.
10. Accrual concept: - The profit arises only when there is an increase in owners capital, which is
a result of excess of revenue over expenses and loss.
231. Financial analysis: The process of interpreting the past, present, and future financial
condition of a company.
232. Income statement: An accounting statement which shows the level of revenues, expenses
and profit occurring for a given accounting period.
233. Annual report: The report issued annually by a company, to its share holders. it containing
financial statement like, trading and profit & lose account and balance sheet.
234. Bankrupt: A statement in which a firm is unable to meets its obligations and hence, it is
assets are surrendered to court for administration
235. Lease: Lease is a contract between to parties under the contract, the owner of the asset gives
the right to use the asset to the user over an agreed period of the time for a consideration.
236. Opportunity cost: The cost associated with not doing something.
237. Budgeting: The term budgeting is used for preparing budgets and other producer for
planning,co-ordination,and control of business enterprise.
238. Capital: The term capital refers to the total investment of company in money, tangible and
intangible assets. It is the total wealth of a company.
239. Capitalization: It is the sum of the par value of stocks and bonds out standings.
240. Over capitalization: When a business is unable to earn fair rate on its outstanding
securities.
241. Under capitalization: When a business is able to earn fair rate or over rate on it is
outstanding securities.
242. Capital gearing: The term capital gearing refers to the relationship between equity and long
term debt.
243. Cost of capital: It means the minimum rate of return expected by its investment.
244. Cash dividend: The payment of dividend in cash
245. Define the term accrual: Recognition of revenues and costs as they are earned or incurred.
it includes recognition of transaction relating to assets and liabilities as they occur irrespective of the
actual receipts or payments.
245. Accrued expenses: An expense which has been incurred in an accounting period but for
which no enforceable claim has become due in what period against the enterprises.
246. Accrued revenue: Revenue which has been earned is an earned is an accounting period but
in respect of which no enforceable claim has become due to in that period by the enterprise.
247. Accrued liability: A developing but not yet enforceable claim by another person which
accumulates with the passage of time or the receipt of service or otherwise. It may rise from the purchase
of services which at the date of accounting have been only partly performed and are not yet billable.
248. Convention of Full disclosure: According to this convention, all accounting statements
should be honestly prepared and to that end full disclosure of all significant information will be made.
249. Convention of consistency: According to this convention it is essential that accounting
practices and methods remain unchanged from one year to another.
250. Define the term preliminary expenses: Expenditure relating to the formation of an
enterprise. There include legal accounting and share issue expenses incurred for formation of the
enterprise.
251. Meaning of Charge: charge means it is a obligation to secure an indebt ness. It may be
fixed charge and floating charge.
252. Appropriation: It is application of profit towards Reserves and Dividends.
 253. Absorption costing: A method where by the cost is determine so as to include the
appropriate share of both variable and fixed costs.
254. Marginal Cost: Marginal cost is the additional cost to produce an additional unit of a
product. It is also called variable cost.

255. What are the ex-ordinary items in the P&L a/c: The transaction which is not related to
the business is termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or losses on the sale
of fixed assets, interest received from other company investments, profit or loss on foreign exchange,
unexpected dividend received.
256. Share premium: The excess of issue of price of shares over their face value. It will be
showed with the allotment entry in the journal; it will be adjusted in the balance sheet on the liabilities
side under the head of “reserves & surplus”.
257. Accumulated Depreciation: The total to date of the periodic depreciation charges on
depreciable assets.
258. Investment: Expenditure on assets held to earn interest, income, profit or other benefits.
259. Capital: Generally refers to the amount invested in an enterprise by its owner. Ex; paid up
share capital in corporate enterprise.
260. Capital Work In Progress: Expenditure on capital assets which are in the process of
construction as completion.
261. Convertible Debenture: A debenture which gives the holder a right to conversion wholly or
partly in shares in accordance with term of issues.
262. Redeemable Preference Share: The preference share that is repayable either after a fixed
(or) determinable period (or) at any time dividend by the management.
263. Cumulative preference shares: A class of preference shares entitled to payment of
emulates dividends. Preference shares are always deemed to be cumulative unless they are expressly
made non-cumulative preference shares.
264. Debenture redemption reserve: A reserve created for the redemption of debentures at a
future date.
265. Cumulative dividend: A dividend payable as cumulative preference shares which it unpaid
Emulates as a claim against the earnings of a corporate before any distribution is made to the other
shareholders.
266. Dividend Equalization reserve: A reserve created to maintain the rate of dividend in future
years.
267. Opening Stock: The term ‘opening stock’ means goods lying unsold with the businessman
in the beginning of the accounting year. This is shown on the debit side of the trading account.
268. Closing Stock: The term ‘Closing Stock’ includes goods lying unsold with the businessman
at the end of the accounting year. The amount of closing stock is shown on the credit side of the trading
account and as an asset in the balance sheet.
269. Valuation of closing stock: The closing stock is valued on the basis of “Cost or Market
prices whichever is less” principle.
272. Contingency: A condition (or) situation the ultimate out comes of which gain or loss will be
known as determined only as the occurrence or non occurrence of one or more uncertain future events.
273. Contingent Asset: An asset the existence ownership or value of which may be known or
determined only on the occurrence or non occurrence of one more uncertain future event.
274. Contingent liability: An obligation to an existing condition or situation which may arise in
future depending on the occurrence of one or more uncertain future events.
275. Deficiency: the excess of liabilities over assets of an enterprise at a given date is called
deficiency.
276. Deficit: The debit balance in the profit and loss a/c is called deficit.
277. Surplus: Credit balance in the profit & loss statement after providing for proposed
appropriation & dividend, reserves.
 278. Appropriation Assets: An account sometimes included as a separate section of the profit
and loss statement showing application of profits towards dividends, reserves.
279. Capital redemption reserve: A reserve created on redemption of the average cost: - the
cost of an item at a point of time as determined by applying an average of the cost of all items of the same
nature over a period. When weights are also applied in the computation it is termed as weight average
cost.
280. Floating Change: Assume change on some or all assets of an enterprise which are not
attached to specific assets and are given as security against debt.
281. Difference between Funds flow and Cash flow statement: A Cash flow statement is
concerned only with the change in cash position while a funds flow analysis is concerned with change in
working capital position between two balance sheet dates. A cash flow statement is merely a record of
cash receipts and disbursements. While studying the short-term solvency of a business one is interested
not only in cash balance but also in the assets which are easily convertible into cash.
282. Difference between the Funds flow and Income statement:
A funds flow statement deals with the financial resource required for running the business
activities. It explains how were the funds obtained and how were they used, whereas an income statement
discloses the results of the business activities, i.e., how much has been earned and how it has been spent.
A funds flow statement matches the “funds raised” and “funds applied” during a particular period. The
source and application of funds may be of capital as well as of revenue nature. An income statement
matches the incomes of a period with the expenditure of that period, which are both of a revenue nature.

Q: Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying
salary, taxes, etc., do not create any asset, and instead instantly create an expense on the
income statement that reduces equity via retained earnings?

A: Capital expenditures are capitalized because of the timing of their estimated benefits – the

lemonade stand will benefit the firm for many years. The employees’ work, on the other hand,

benefits the period in which the wages are generated only and should be expensed then. This is

what differentiates an asset from an expense.

Q: Walk me through a cash flow statement.

A. Start with net income, go line by line through major adjustments (depreciation, changes in

working capital and deferred taxes) to arrive at cash flows from operating activities.

 Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of
investment securities to arrive at cash flow from investing activities.

 Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow
from financing activities.
  Adding cash flows from operations, cash flows from investments, and cash flows from financing
gets you to total change of cash.

 Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash
balance.

Q: What is working capital?

A: 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.

Q: Is it possible for a company to show positive cash flows but be in grave trouble?

A: Absolutely. Two examples involve unsustainable improvements in working capital (a

company is selling off inventory and delaying payables), and another example involves lack of

revenues going forward.in the pipeline

Q: How is it possible for a company to show positive net income but go bankrupt?

A: Two examples include deterioration of working capital (i.e. increasing accounts receivable,

lowering accounts payable), and financial shenanigans.

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

A: 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).

Q: Why are increases in accounts receivable a cash reduction on the cash flow statement?

A: Since our cash flow statement starts with net income, an increase in accounts receivable is

an adjustment to net income to reflect the fact that the company never actually received those

funds.

Q: How is the income statement linked to the balance sheet?

A: Net income flows into retained earnings.

Q: What is goodwill?

A: Goodwill is an asset that captures excess of the purchase price over fair market value of an

acquired business. Let’s walk through the following example: Acquirer buys Target for $500m in

cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m =

book value (A-L) of $50m.

 Acquirer records cash decline of $500 to finance acquisition

 Acquirer’s PP&E increases by $100m
 Acquirer’s debt increases by $50m
 Acquirer records goodwill of $450m

Q: What is a deferred tax liability and why might one be created?

A: Deferred tax liability is a tax expense amount reported on a company’s income statement that

is not actually paid to the IRS in that time period, but is expected to be paid in the future. It

arises because when a company actually pays less in taxes to the IRS than they show as an

expense on their income statement in a reporting period.

Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead

to differences in income between the two, which ultimately leads to differences in tax expense

reported in the financial statements and taxes payable to the IRS.

 Q: What is a deferred tax asset and why might one be created?

A: Deferred tax asset arises when a company actually pays more in taxes to the IRS than they

show as an expense on their income statement in a reporting period.

 Differences in revenue recognition, expense recognition (such as warranty expense), and net
operating losses (NOLs) can create deferred tax assets.

Explain each real account and nominal account with examples.

Real Account is an account of assets and Liabilities.

Types of Real account
o Furniture Account
o Land Account
o Machinery Account
o Building Account
o Goodwill Account
o Patents & Trade Marks Account.
Nominal Account is an account of incomes or expenses.
Types of Nominal account
o Salary Account,
o Commission Paid/Received Account,
o Telephone Expenses Account,
o Wages Account,
o Printing & Stationery Account,
o Interest Paid/Received Account.

What is the difference between mercantile system and cash system of accounting?

In mercantile system, expenses are considered as expenses during the period to which they pertain. Similarly, i
are considered to be incomes during the period to which they pertain. This system of accounting is considered t
more ideal. On the hand, in cash system, expenses are considered to be expenses only when they are paid for
incomes are considered to be income when they are actually received. This system of accounting is mainly used
organizations established not for earning the profits.
 What are the accounting concepts?

Accounting concepts are the basic assumptions on which the process of accounting is based.

Following are the accounting concepts

o Business Entity Concept
o Dual Aspect Concept
o Going Concern Concept
o Accounting Period Concept
o Cost Concept
o Money Measurement Concept
o Matching Concept

What is owner’s equity? How will you calculate it?

Owner’s equity, also known as capital of the business is the claim of the owner of the business against the asse
business. Owner’s equity is calculated by subtracting equity of creditors from the total equity.

What is double entry Bookkeeping? What are its rules?

Double entry bookkeeping follows the principle according to which every debit has a corresponding credit; henc
all debits is always equal to the total of all credits. In this system, one account is debited and at the same time a
account is credited by the similar amount.

Following are the rules for different account

For Personal Accounts : Debit the receiver, Credit the giver.

For Real Account : Debit what comes in, Credit what goes out.
For Nominal Account : Debit all the expenses, Credit all the incomes.

What is bank reconciliation statement? What are the steps to prepare it?

Bank reconciliation statement is a statement prepared at periodical intervals, with a view to indicated the items w
cause disagreement between the balances as per the bank columns of the cash book and the bank pass book o
 given date.

Follow the below steps to prepare a bank reconciliation statement

o Take the balance either as per cash book or as per pass book as a starting point.
o Compare the items appearing in the bank column of the cash book with the item appearing in the bank pass bo
o Tick off the items in the pass book with the entries in the cash book. A list of unticked items either in cash book
book will be found.
o Add or deduct items from the balance which has been taken as a starting point.
o The resultant figure will be the balance as shown by the pass book or vice versa.

What are the reasons for the difference in the balances as shown by the cash book and the pass book?

o Cheques deposited into the bank but not yet collected and credited.
o Cheques issued but not yet presented for payment.
o Bank Charges.
o Amount collected or credited by bank on standing instructions.
o Amount paid or debited by the bank on standing instructions.
o Interest credited by bank.
o Interest debited by bank on overdraft.
o Direct payment by customers into the bank account.
o Dishonour of cheques or bills.
o Errors in recording of transactions by either the firm or the bank.

What is the adjustment entries made while preparing the final accounts from the Trial Balance?

o Closing Stock
o Depreciation
o Outstanding Expenses
o Prepaid Expenses
o Accrued Income
o Income received in advance
o Bad Debits
o Provision for Doubtful Debts
o Provision for Discount on Debtors
o Interest on Capital
o Drawings
o Deferred Revenue Expenditure Written off
o Abnormal Loss due to fire etc.
o Goods distributed as free samples
o Goods sent on approval basis
o Commission payable to the manager

What is debit note and credit note? What is the difference between them?

Debit note is an intimation sent to a person dealing with the business that his account is being debited for the p
indicated therein. It is a note made out with a carbon duplicate. The original one is sent to the party to whom the
are returned and the duplicate copy is kept for office record.
Credit note is an intimation sent to a person dealing with the business that his account is being credited for the
indicated therein.

What is the difference between Cash discount and Trade discount?

o Cash discount is an allowance made by retailers to the customers for prompt payment. On the other hand, trad
discount is an allowance made by the wholesaler dealer to retailers off the catalogue or invoice price. This allow
made between purchasers and sellers engaged in the same class of trade.
o Cash discount is always allowed or received when payment is made. Trade discount enables the retailers to se
products to customers at catalogue or price list issued by the wholesaler.
o Cash discount is an allowance in addition to the trade discount made by the seller to the buyer.
o Cash discount is recorded in account books while trade discount is not shown separately.
o The main purpose of allowing trade discount is to enable the retailers to sell the goods at list price while the pu
providing cash discount is prompt payment by the debtor to the creditor.

What items are included in Profit and Loss account?

o Salaries
o Rent
o Rates and Taxes
o Interest
o Commission
o Trade Expenses
o Printing and Stationery
o Advertisement
o Carriage out, freight out, carriage out
o Repairs
o Travelling expenses
o Samples
o Depreciation
o Apprentice premium
o Life insurance premium
o Insurance premium
o Income tax
o Interest on capital and drawings
o Loss or gain on asset sold
o Discount received and allowed
o Trade discount

What is the difference between a trial balance and a balance sheet?

o Trial balance is a list of balances from the ledger account while balance sheet is a statement of assets and liab
o Trial balance contains balances of all personal, real and nominal accounts, while balance sheet contains balan
only those personal and real accounts which represent assets and liabilities.
o Trial balance is prepared before preparation of trading and profit and loss account, while balance sheet is prep
after the preparation of trading and profit and loss account.
o Trial balance is prepared to check the arithmetical accuracy of posting into ledger while balance sheet is prepa
indicate the financial position of the business on a particular date.
o Debt and credit balances are shown side by side while balance sheet is prepared on a T form basis, the left ha
showing liabilities while right hand side representing assets.
o Closing stock does not appear in the trial balance while it is shown on the assets side of balance sheet.

What is Contingent Liabilities?

Contingent liability is an obligation, relating to a past transaction or other event or condition, that may arise in
 consequence, as a future event now deemed possible but not probable. Thus such liabilities as may arise in fut
called contingent liabilities. For example: guarantee to a bank for loan advanced to a third party, possible penalt
and penalties payable to the government or income tax authorities etc. Future losses from natural calamities are
contingent liabilities. They are not recorded in books of account. They do not appear on the liabilities side of the
sheet. They are shown by way of a footnote at the bottom of the balance sheet.

Explain convention of materiality?

This convention proposes that while accounting for the various transactions, only those transactions will be cons
which have material impact on profitability or financial status of the organization and other insignificant transacti
be ignore. In keeping with the principle of materiality, unimportant items are either let out or merged with other it
Sometimes, such items are shown as footnotes or in parentheses according to their relative importance.

What are the important terms used in balance sheet?

Assets
o Current assets and fixed assets
o Tangible assets and Intangible assets
Equity is a claim which can be enforced against the assets of the firm in the court. Thus equity refers to a claim
o An owner only,
o A creditor only,
o An owner and the creditor both.
Liability
o Current Liability
o Long term Liability or fixed Liabilities
o Contingent Liabilities

What is Deferred Revenue Expenditure? Give some examples.

Deferred Revenue Expenditure is a type of expenditure which does not result into the acquisition of any fixed as
the benefits from such expenditure is not received during the period which they are paid for.
For example - Initial Advertisement Expenditure, Research and development Expenditure, Preliminary Expense

Define Trial Balance. What are the main characteristics and uses of a trial balance?
 Trial balance is a list of all balances standing on the ledger accounts of a firm at any given time.

Following are the main characteristics of a trial balance.

o It is a statement prepared in a tabular form.
o It has two columns: one for debit balances and another for credit balances.
o Closing balances as shown by ledger accounts are shown in the statement.
o It is not an account but only a statement of balances.
o It is prepared on the basis of balanced accounts.
o It is a method of verifying the arithmetical accuracy of entries made in the ledger.
o It helps in preparation of Trading account, Profit & Loss account and Balance Sheet at the end of the period wh
exhibit the financial position of the firm.

What are the common errors in accounting? What steps will you follow to locate errors?

Following are the common errors in accounting:

o Errors of Omission
o Errors of Commission
o Errors of Principle
o Compensating Error
To locate the errors in the trial balance follow the below steps:
o Check the total of all the subsidiary books, cash book and trial balance.
o Ensure that all the opening balances have been correctly brought forward in the current year’s books of accoun
o Ensure that all the ledger accounts have been properly balanced and the balances of all the ledger accounts h
been reflected in the Trial Balance.
o The difference in trial balance should be halved to locate such errors.
o If the difference in the trial balance is divisible by 9 without any reminder, it may indicate the transposition or
transplacement of the amounts.
o The trial balance of the current year can be compared with the trial balance of the previous year to locate certa
highlighting error.

What is the relation between journal and ledger?

o The journal is the book of first entry whereas the ledger is the book of second entry.
o The journal as a book of source entry ordinarily has greater weight as legal evidence than the ledger.
o The journal is the book for chronological record whereas the ledger is the book for analytical record.
o The unit of classification of data within the journal is the transaction; in the ledger the unit of classification of da
the ledger is the account.
o The process of recording in the journal is called journalizing, the process of recording in the ledger is called pos

List down the errors which affect Trial Balance and errors which do not affect Trial Balance.

Errors which affect the agreement of trial balance:

o Wrong totaling of subsidiary books.
o Posting on the wrong side of an account
o Omission of posting an amount in the ledger
o Posting of wrong amount
o Error in balancing
Errors which do not affect the agreement of trial balance:
o Error of Principle
o Errors of Omission
o Errors of Commission
o Recording of wrong amount in the books of prime entry or subsidiary books.
o Compensating Errors.
1. What are the different branches of accounting?
2. What is the difference between cost accounting, financial accounting and managerial accounting?
3. What is the difference between book keeping and accounting?
4. What are the important terms which are used in accounting?
5. What is personal account, real account and nominal account?
6. Explain dual aspect concept in accounting?
7. What is the difference between mercantile system and accrual system of accounting?
8. What are bills receivable and bills payable?
9. What are the accounting concepts? Explain each of them.
10. What are the accounting principles?
11. What is owner’s equity? How will you calculate it?
12. What are the rules of Debit and Credit?
13. What do you understand by the term assets and liabilities?
14. What is double entry book keeping?
15. What is bank reconciliation statement? What are the steps to calculate it?
16. What is overhead in accounting terms?
17. What is the difference between cash flow and fund flow statements?
18. What is debit note and credit note? What is the difference between them?
19. What are the golden rules of accounting?
20. What is an adjusting journal entry?
21. What is deferred account?
22. Explain Accounting 101?
23. What are accounting entities?
24. What is the Provision? What is the Entry for Provision?
25. What is the Importance of accounting standards?
26. What are the functions of accounting?
27. What is Contingent Liabilities?
28. Why Accounting is important in business?
29. What are the four classifications of Bad and Doubtful Debts as per the context of the Bank?
30. What is an operative accounts?
31. What is the difference between Accounts and Finance?
32. What is FBT (Fringe Benefit Tax)?
33. What is the relationship between bookkeeping and accounting?
34. Why does the accounting equation have to balance?
35. What is the difference between accounting and bookkeeping?
36. What is accounting period?
37. What is an accounting loss?
38. What is an EA in accounting?
39. What is the software applications used for accounts receivable?
40. What is inventory management?
41. What do you mean by Working Capital?
42. Define "book value" as applied to accounting?
43. What are the basic assumptions in accounting?
44. What is accounting normalization?
45. What are the various items fall under balance sheet?
46. What is the difference between cash basis and accrual basis balance sheet?
47. How do you pass a journal entry for purchase order in books of account?
48. What do you understand by Contingent liability?
49. How to prepare funds flow statement?
50. What is gross profit margin?
51. What is accounting report?
52. What are the different kinds of MIS reports?
53. What is meant by appropriation?
54. What do you understand by inter company settlement?
55. What is the meaning of TDS? How it is charged

Common Finance Interview Questions and Answers:

Basically, finance questions can be a little difficult to answer if you don’t know how to go about it.
Nonetheless, we have lined up some of the basic interview questions for finance which are usually asked.
Read them carefully, understand and practise before you prepare them.

1. How will you define goodwill and how has it been accounted for?

Goodwill happens to be an intangible asset which is defined as an excess value of the price of purchase
over market value in any business that has been acquired. An example can be used to explain this. If
Walmart has been sold for over a hundred billion dollars with PP&E book with value of over fifty billion,
an equity which is of thirty billion and another debt of ten bullion. The goodwill is then paid for at
Walmart and it would be of thirty billion- the whole sale price minus the value of the book which is of 70
billion.

2. What do you understand by the term deferred tax? what does it serve as?

When we speak of deferred or its tax asset, we mean a company which pays more taxes to IRS more than
they really own. The reason why it is an asset is because it may be used to offer all future tax expenses in
the time ahead. Deferred tax assets have also resulted in differences in terms of revenue recognition,
recognition of expenses and all losses of net operating.

3. What is the definition of deferred tax and liability? What does it serve as?
Deferred tax sheet occurs happens when an expense of tax was mentioned in a statement of income and
has not been paid within the given stipulated period to the IRS. It may be paid in the future date if that
happens. Liabilities in deferred tax could occur when a difference in the expense of depreciation is
noticed between reporting of books as well as reporting of internal revenue service which leads to
differences in income that are reflected on all income statements of companies. It could result in taxes
which are lower and at the same time is payable to the internal revenue service as well.

4. What are the three financial statements?

First there has to be an income statement. After the cash goes down and the balance sheet goes up, there
will be a cash outflow. Over the lives of assets, the depreciation will reduce net income while all earnings
that are retained will go down and depreciation shall be added once again in the operation section of the
cash.

5. Entry level finance interview questions you will be asked:

The following questions shall be asked during entry level and has been seen in most interviews. First of
all, you will be asked about the industrial average and under which circumstances do the corporations buy
all stock. Second you may asked to give a few examples of what you have done to demonstrate
leadership. Questions on strengths and weaknesses are quite common so be ready to answer them. There
are times when interviewers will ask you about the disadvantages and the advantages of any company
issuing stock. Questions about swap and how they work are quite common as well. Debt financing and
equity financing are often asked. Finally you should swap everything, how they work and how can you
value any department for spinoffs.

6. What is Working Capital?

One of the most common questions asked during interview is about working capital and how you should
define them. Working capital has been defined as a current asset minus all current liabilities. It also tells
you the financial statement user and how much cash has been tied up in any business through those items
which include inventories and receivables. Also what counts is how much cash will be needed to pay off
the short term obligations within 12 months.

How to Prepare for Accounting and Finance Interview?

The following mentioned are few tips to prepare for a finance interview and a accounts interview.

1. Get ready for technical questions:

It is important for you to be ready for technical questions. Though it isn’t common for most students
doing a major in non-finance or business to choose a career in accounting or finance, some of the students
believe they will not be asked any question related to tech. If you have been believing the same, you are
going to be fooled big time. This is not always true. When you attend a finance or accounting interview,
you have to make sure you remember some of the basic finance and accounting concepts. It is very
important you do so.

2. Have enough knowledge:

Once the interviewer has identified the gap in your knowledge, it could be hard to change your tone of the
interview. Even during the best of job markets, you will be having competition for good jobs so make
sure you have good knowledge regarding the job and know how to answer questions. For this you might
have to prepare at home from beforehand. Practise questions before attending the interview.

3. Keep your answers minimalistic:

When you are answering finance and accounts interview questions, remember to stay as minimalistic as
possible. You need to have proper explanations but make sure the answers are brief and not longer than
two minutes. Be concise and never go overboard. When you take up time to answer questions, you often
tend to lose the interviewer and sometimes lead the interviewer to keep coming back with questions
which are more complex and are on the same subject.

4. Be very careful:
If you really don’t know how to answer a question, you should say so. It is okay not to have an answer to
every question. In case the interviewer thinks you have been trying to pull one over him, then you
definitely are going to ruin the interview and your chances of landing the job. When job candidates make
an attempt to BS through an interview on finance, it never works out right. So be very careful.

5. Basic questions you must have an answer to:

You must also have a good understanding of the business model and how companies usually
differentiates itself from the other competitors. You must also review the website of the company
including its annual report, Bloomberg and other industry and annual publications. Second, you should
review the website of the company and its annual reports before attending the interview since you may be
asked questions related to them. Make sure you have a good idea about the market trends that affect the
industry and what can impact the company.

6. Prepare simple questions:

Finally be ready to answer simple questions. Complex question are good for preparation but simple ones
are of high value. You will be asked basic stuff before the manager goes into complex ones. So prepare
them as well.

Above mentioned are some of the interview questions and answers for finance and accounts. If you liked
reading the post and have found some benefits from it, do let us know in the comment box below. We
would like to hear from you. Plus we look forward to clarifying your doubts and questions. So don’t
forget to post them below. On that note, good luck and make sure you have read the post thoroughly,
understood the questions and have learnt how to answer them correctly.

Q1. Explain ‘financial modelling’.

Ans. Financial modelling is a quantitative analysis commonly used for either asset pricing or
general corporate finance.

Q2. Walk me through a ‘cash flow statement.’

Ans. You’ll have to be well-prepared for this question. Start with the net income and go line by
line explaining all major adjustments to arrive at cash flow from operating activities. Mention all
the necessary parts that are associated with it.

Q3. Is it possible for a company to have positive cash flow but still be in serious financial
trouble?

Ans. Yes. There are two examples –

(i) a company that is selling off inventory but delaying payables will show positive cash flow for a
while even though it is in trouble.
(ii) A company has strong revenues for the period but future forecasts show that revenues will
decline.

Q4. What do you think is the best evaluation metric for analysing a company’s stock?

Ans. There is no specific metric. It depends on how you put the answer and make the
interviewers understand value of the specific metric that you mention.

Q5. What is ‘working capital’?

Ans. Working capital is the best defined as current assets minus current liabilities.

Q6. Explain quarterly forecasting and expense models?

Ans. The analysis of expenses and revenue which is predicted to be produced or incurred in
future is called quarterly forecasting.
An expense model tells what expense categories are allowed on a particular type of work
order.

Q7. What is the difference between a journal and a ledger?

Ans. The journal is a book where all the financial transactions are recorded for the first time.
The ledger is one which has particular accounts taken from the original journal.

Also Read>> Career Opportunities in IFRS

Q8. Mention one difference between a P&L statement and a balance sheet?

Ans. The balance sheet summarises the financial position of a company for a specific point in
time. The P&L (profit and loss) statementshows revenues and expenses during a set period
of time.

Q9. What is ‘cost accountancy’?

Ans. Cost accountancy is the application of costing and cost accounting principles, methods
and techniques to the science, art and practice of cost control and the ascertainment of
profitability as well as the presentation of information for the purpose of managerial decision
making.

Q10. 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 analyse the profitability
of a projected investment or project.

Q11. How many financial statements are there? Name them

Also Read>> How Finance Learning can be Made More Interesting

Ans. There are four main financial statements – 1) balance sheets, 2) income statements, 3)
cash flow statements, and 4) statements of shareholders’ equity.

Q12. What are ‘adjustment entries’?

Ans. Adjustment entries are accounting journal entries that convert a company’s accounting
records to the accrual basis of accounting.

Q13. Do you follow the stock market? Which stocks in particular?

Ans. You need to be very careful in answering this question. As a financial analyst, following the
stock market proves to be beneficial. Also, always be up-to-date with the stocks.

Also Read>> Career Paths you could explore with an IFRS certification!

Q15. What is a ‘composite cost of capital’?

Ans. Also known as the weighted average cost of capital (WACC), a composite cost of
capital is a company’s cost to borrow money given the proportional amounts of each type of
debt and equity a company has taken on.
WACC= Wd (cost of debt) + Ws (cost of stock/RE) + Wp (cost of pf. Stock)

Q16. What is ‘capital structure’?

Ans. The capital structure is how a firm finances its overall operations and growth by using
different sources of funds.

Check out IFRS Course

Q17. What is a ‘goodwill’?

Ans. Goodwill is an asset that captures excess of the purchase price over fair market value of
an acquired business.

The above questions and answers will help you in your preparation for the next interview for a
position of financial analyst. It will provide you with an idea of the type of questions that are
generally asked. However, you need to be prepared to answer all types of questions —
technical skills, interpersonal, leadership or methodology.
If you are looking to be successful in the financial industry, enrol yourself for a financial analyst
certification course to understand the techniques and skills required to be an expert.
What are four financial statements?

 Income statement (rev-cogs-exp = Net Income)

 Balance Sheet (Assets= Liabilities + Shareholder's equity)
 Statement of Cash Flows (Beginning Cash + CF from Operations + Cash Flow from
investing + CF from financing = ending cash)
 Statement of Stockholders' Equity

How are the three main financial statements connected?

 Net income flows from Income Statement into the Cash Flow from Operations on the CF
statement
 Net income - dividends is added to retained earnings from the prior period's Balance
Sheet to come up with retained earnings on this period's Balance Sheet
 Beginning Cash on the CF Statement is cash from the prior period's Balance Sheet and
Ending Cash on the CF statement is Cash on the current period's Balance Sheet

Walk me through the Income Statement?

The first line of the Income Statement represents revenues or sales. From that we subtract the
cost of goods sold, which gives gross margin. Subtracting operating expenses from gross
margin gives us operating income (EBIT). We then (add/subtract) interest expense (income),
taxes, and other expenses (income) to arrive at Net Income.

If you could choose only one statement to evaluate the financial state of a company,
which would you choose?

The cash flow statement because it shows the actual liquidity of the company and how much
cash it is generating and using. The balance sheet just shows a snapshot of the company at one
time, without showing the performance of the company, and the Income statement has a
number of non-cash expenses that may not actually be affecting the company's health. But the
key to a great company is generating significant cash flow and also having a healthy cash
balance and this will show on the CF statement.

What is EBITDA?

Earnings before Interest, Depreciation, Taxes and Amortization. EBITDA gives a good idea of a
company's profitability and is a quick metric for free cash flow because it will allow you to
determine how much cash is available from operations to pay interest, capex, etc. EBITDA = Rev-
Exp. It can be used in rough valuation as a metric, such as EV/EBITDA.

What is Enterprise Value?

Enterprise Value is the value of an entire firm, both debt and equity. This is the price that would
be paid for the company in the event of an acquisition without a premium. EV = Market Value of
Equity + Debt + Preferred Stock + minority interest - Cash

Can a company have a negative book equity value?

Yes. If there are large cash dividends or if the company has been operating at a loss for a long
time.

What are the ways you can value a company?

 Comparable Companies/Multiples Analysis

 Market Cap/Market Valuation
 precedent transactions
 Discounted Cash Flow (DCF)
 Leveraged Buyout Model (LBO)
 Liquidation Valuation
When does a LBO transaction occur?

Used when firm uses higher than normal amount of debt to finance purchase of a company,
then uses company's cash flows to pay off debt over time. The acquisiton's assets may be used
as collateral. Ideally, the acquisitions debt has been partially retired at time of exit.
Walk me through a DCF?
Find and predict FCFs during modeling period.

 Free cash flows = EBIT (1-t) + D&A - Capex - Change in NWC

 Predict cash flows beyond the term projected. This requires terminal value (terminal
growth Multiple, Perpetuity Method, Growth Rate)
 Once future cash flows have been projected then find PV of CFs at the WACC.
 The final cash flow in year N will be equal to the sum of the terminal value calculation
and the final year's FCF.

What is WACC and how do you calculate it?

Weighted Average Cost of Capital. It reflects the cost of the company raising new capital and
reflects the riskiness of a company.

Why do you project out FCF for the DCF model?

The reason we project out free cash flows for the DCF is because the FCF is the amount of actual
cash that could be hypothetically be paid out to debt and equity holders from a company.

What is CAPM?

Used to Calculate the required/expected return on equity. Return on Equity = Risk free rate +
Beta(Market Return - Risk Free Rate)

What is Beta?

Beta is a measure of the volatility of an investment compared with the market as a whole. The
market has a beta of 1, while investments that are more volatile than the market have a beta
greater than 1 and those that are less volatile have a beta less than 1.
Advanced / MBA Finance Interview Questions And Answers

These are questions that are also asked for junior-year Summer Analyst, full-time Analyst,
and MBA job interviews. These advanced finance questions require deeper thinking and
understanding of corporate finance.

How does a ten dollar increase in depreciation expense affect each of the three
financial statements? Assume taxes are .4

 Start with Income Statement (decreases NI by 10 and increases by tax shield (10*(1-t))
=4) so net income decreases by 6.
 Then go to cash flows. Since net income drops by 6 flows from operations reduce by 6,
but we have to add back dep since it is non cash so +10. This equals an increase by 4.
 Then go to balance sheet (Cash =+4, PP&E down by 10, Assets fall by 6, retained
earnings fall by 6)

Why would a company issue equity rather than debt to fund its operations?

 If the company feels its stock price is inflated they can raise a large amount of capital
compared to percentage of ownership sold
 If the projects the company plans to invest in with proceeds may not produce immediate
or consistent cash flows to pay debt
 If the company wants to adjust cap structure or pay down debt
 If the owners of the company want to sell off a portion of their ownership

How/Why do you lever or unlever beta?

By unlevering beta you remove the financial effects of debt in the capital structure. This will
show you the risk of a firm's equity compared to the market. Also when you have a company
that is not on the market and doesn't have a beta, you can take a company on the market that is
similar and unlever its beta as a proxy for the unlisted company's beta.
What is the difference between cash-base accounting and accrual?

Cash based accounting recognizes sales and expenses when cash actually flows out of the
company. Accrual based accounting recognizes revenues and expenses as they are incurred
regardless of whether cash flows out of the company at that exact time. Accrual based
accounting is the more popular method.

How is it possible for a company to have positive net income but go bankrupt?

If working capital erodes (such as increasing accounts receivable, lowering accounts payable), it
is possible. Also, financial fraud can also be a possibility.

What are the major factors that drive mergers and acquisitions?

 To achieve synergies (cost savings)

 Diversify or sharpen the focus, market, or products of the company
 Gain new technologies
 Eliminate a competitor from the market or grow market share
 Increase Supply-Chain Pricing Power by buying a supplier or distributor
 Improve financial metrics and numbers

If you were Chief Financial Officer (CFO) of a Fortune 500 company, what would be
your concerns? Explain from a high-level what the long-term financial implications
are for your company.

 Highlight different things on each of the three statements:

 Income statement: revenue growth, cost and margins, profits
 Balance sheet: liquidity ratios, capital assets, credit ratings
 Cash flow statement: cash flows in short and long-terms, raising money

Acing The Finance Interview

It's all about practice, practice, and practice! Make sure your behavioral stories are planned out,
and practiced (but don't sound too rehearsed!). Practice answering finance technical questions
on the fly, perhaps some Mock Interviews with Experienced Wall St. Mentors to really get
yourself in the zone.

Common Finance Interview Questions

At the very least, review the most common finance questions and answers above at least a few
times before your first interview. Nowadays, however, that really isn't enough to set yourself
apart from the competition. If you want to see the complete set of finance interview questions
(over 7,000 to be exact), cases, videos, templates, tricks, and answers - take a look at the
complete Investment Banking Interview Prep Package too!

Remember, at the end of the day - it'll be you, your preparation, and your confidence that will
win you the interview. Set yourself up to acing the interview and landing that dream offer! Good
luck!