Technical Accounting Interview Questions You Need to Know

As you prepare for your technical accounting interview, it's essential to brush up on some key concepts and terminology. One of the most important topics to review is accounting for revenue recognition.

Revenue recognition is a critical area of accounting, and interviewers will likely ask you about the different methods and principles involved. You can expect questions on topics like the accrual method, the matching principle, and the concept of materiality.

The Financial Accounting Standards Board (FASB) is the governing body responsible for setting accounting standards in the US, and their guidance on revenue recognition is a key area of focus. You should be familiar with the five-step model for revenue recognition, which includes identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price, and recognizing revenue.

Interviewers will also ask about the differences between GAAP and IFRS, so be prepared to discuss the similarities and differences between the two.

Accounting concepts are the foundation of financial reporting, and it's essential to understand them to ace a technical accounting interview. GAAP (Generally Accepted Accounting Principles) is a set of rules and guidelines that accountants follow to prepare financial statements.

To illustrate this, consider the example of revenue recognition, where a company sells a product to a customer. The sale is recorded as revenue when the product is delivered and the customer takes control of it, not when the sale is made or payment is received.

Accrual accounting is another key concept, which matches revenues with the periods in which they are earned, rather than when cash is received. This is demonstrated in the example of a company providing services to a customer over several months.

Capitalizing a purchase is a key accounting decision that can impact your business's financial statements. If the purchase will be used in the ongoing operations of the business for greater than one year, it's typically capitalized and depreciated or amortized.

Land is an exception to this rule, as it's not depreciated. This means that if you buy a piece of land for your business, you won't write it down over time like you would with other assets.

Goodwill is another exception, as it's not usually amortized. This is because goodwill represents the value of a business's reputation and customer relationships, which can be difficult to quantify and depreciate.

The decision to capitalize or expense a purchase is crucial for accurate financial reporting and tax purposes.

Assets, liabilities, and equity are the building blocks of a company's financial foundation. They represent the different sources of capital that have helped fund a company's assets.

Assets are resources with positive economic value that can be exchanged for money or bring positive monetary benefits in the future. This can include cash, inventory, equipment, and property.

Liabilities, on the other hand, are the outside sources of capital that have helped fund a company's assets. These represent unsettled financial obligations to other parties, such as loans or credit card debt.

Equity is the internal source of capital that has helped fund a company's assets. It represents the capital that has been invested into the company, and is often referred to as the company's net worth.

Here's a quick summary of what each represents:

A $10 increase in depreciation can have a ripple effect on your financial statements. This change would result in a $10 depreciation expense being recognized on the income statement, reducing operating income (EBIT) by $10.

Assuming a 20% tax rate, net income would decrease by $8. This is calculated by subtracting the tax benefit from the depreciation expense, which is $10 - (1 - 20%) = $8.

The $8 decrease in net income flows into the top of the cash flow statement, where the $10 depreciation expense is added back to the cash flow from operations. This is because depreciation is a non-cash expense.

As a result, the ending cash balance would increase by $2, as the $10 depreciation expense is added back to the cash flow from operations.

The $2 increase in cash flows to the top of the balance sheet, but PP&E is decreased by $10 due to depreciation. This results in a $8 decrease in assets, which is matched by the $8 decrease in retained earnings.

Here's a summary of the impact on the three financial statements:

Budgeting and forecasting are critical components of financial planning. Effective budgeting involves analyzing historical financial data, understanding market trends, and making informed predictions about future financial performance.

To prepare a financial forecast, candidates should gather relevant data, including past financial statements and market analysis, and use this data to create projections for revenue, expenses, and cash flow. Regularly reviewing and updating the forecast based on actual performance and changing conditions is also crucial.

Budget management is critical for maintaining a company's financial health, and effective budget management involves standardizing budget reports, setting realistic budget goals, and collaborating with various departments. For example, a candidate might use a standardized approach to budget management, ensuring consistency across departments, and collaborate closely with department heads to set realistic budgets and monitor expenditures against these budgets regularly.

A good budgeting and forecasting methodology involves analyzing historical data and current market trends, and using software tools or models to create detailed budgets and forecasts. For instance, a candidate might use software like Adaptive Insights for creating detailed budgets and forecasts, and create a rolling forecast that is updated quarterly to help the company stay agile and adjust to market changes quickly.

Here are some common budgeting methods:

These budgeting methods can help companies make informed financial decisions and stay on track with their financial goals.

Budgeting and forecasting are essential skills for anyone looking to manage their finances effectively.

Zero-based budgeting is a method where every single dollar is accounted for and assigned a job, leaving no room for unnecessary expenses.

Incremental budgeting involves building on the previous year's budget by adding a percentage increase to each category. This method is often used by businesses that experience steady growth.

Value-based budgeting focuses on allocating funds based on the return on investment, prioritizing projects that are expected to generate the highest returns. This approach can be particularly useful for organizations looking to maximize their resources.

Preparing a forecast involves analyzing historical financial data, understanding market trends, and making informed predictions about future financial performance. This process requires gathering relevant data, including past financial statements and market analysis.

To create projections for revenue, expenses, and cash flow, you can use software tools or models. Regularly reviewing and updating the forecast based on actual performance and changing conditions is crucial.

A good financial forecast should show a candidate's analytical skills and their ability to use data to make informed financial predictions. This can be achieved by using tools like Adaptive Insights for creating detailed budgets and forecasts.

To ensure budgets and forecasts are accurate and realistic, it's essential to approach them with a clear methodology. This can include analyzing historical data and current market trends, and regularly reviewing and updating the forecast.

Here are some key steps to consider when preparing a forecast:

By following these steps and using the right tools, you can create a reliable and accurate financial forecast that helps inform your financial planning and decision-making.

Budgeting and forecasting are critical components of financial planning, and understanding how to approach them can make a significant difference in a company's financial health.

There are various budgeting methods, including zero-based budgeting, incremental budgeting, and value-based budgeting, which can be useful for different situations.

Effective budget management involves standardizing budget reports, setting realistic budget goals, and collaborating with various departments.

To approach budgeting and forecasting, analyze historical data and current market trends, and use software tools like Adaptive Insights to create detailed budgets and forecasts.

Regularly reviewing and updating the forecast based on actual performance and changing conditions is crucial for accuracy and realism.

Budgeting and forecasting involve gathering relevant data, including past financial statements and market analysis, to create projections for revenue, expenses, and cash flow.

A good budgeting and forecasting approach should show the candidate's analytical skills and their ability to use data to make informed financial predictions.

Here are some key strategies for effective budget management:

By using these strategies and approaches, you can create a solid foundation for budgeting and forecasting that will help your company stay on track financially.

Preparing financial statements and reports is a core responsibility for accountants, requiring attention to detail and a strong understanding of financial principles. This includes preparing balance sheets, income statements, and cash flow statements, which provide a comprehensive picture of a company's financial health.

The balance sheet shows a company's assets, liabilities, and equity at a point in time, while the income statement illustrates revenues and expenses over a period. The cash flow statement, however, is often considered the most important as it shows the cash flows generated or used in operating, investing, and financing activities.

To ensure accuracy and completeness in financial reports, strong internal controls and segregation of duties should be implemented, along with regular account reconciliations and thorough reviews of financial data. External audits also play a crucial role in verifying financial information, and continuous monitoring and improvement of reporting processes is essential.

Here are some key steps to ensure accuracy and completeness in financial reports:

The income statement is a vital financial statement that shows a company's profitability over a specified period of time.

It's calculated by taking the company's revenue and subtracting out various expenses to arrive at net income. The income statement is typically organized into several sections, including revenue, cost of goods sold, gross profit, operating expenses, and net income.

Revenue is the income earned from sales of goods or services. Cost of goods sold (COGS) represents direct costs associated with the production of the goods that the company sells or the services it delivers. Gross profit is the difference between revenue and COGS.

Operating expenses, also known as indirect costs, refer to the costs that are not directly associated with the production or manufacturing of goods or services. These expenses include sales, general, and administrative (SG&A) and research & development (R&D).

Here's a breakdown of the standard income statement:

Understanding the income statement is crucial for making informed business decisions, as it provides a clear picture of a company's financial performance and profitability.

Negative working capital is a normal occurrence in certain industries, such as grocery retail and the restaurant business. It's a sign of efficiency in businesses with low inventory and accounts receivable.

In these industries, customers pay upfront, and suppliers often give 30 days or more credit. This means the company receives cash from customers before it needs the cash to pay suppliers.

Negative working capital doesn't always indicate financial trouble, but it can in some cases. If a company has negative working capital, it may struggle to meet its near-term obligations.

A negative working capital balance usually goes into "Deferred Revenue" on the balance sheet as a liability if the revenue has not been earned yet.

Here are some examples of industries where negative working capital is common:

Keep in mind that negative working capital can have different implications depending on the industry and company. It's essential to consider the specific context when interpreting this financial metric.

Inventory write-downs can have a significant impact on a company's financial statements. On the balance sheet, the asset account of inventory is reduced by the amount of the write-down.

The write-down is also reflected in shareholders' equity, as it reduces the value of the company's assets. This change is typically recorded in the period the write-down occurs.

An inventory write-down is recognized as an expense on the income statement, reducing net income. This expense can be recorded in either COGS or a separate line item.

As a non-cash expense, the write-down is added back to operating cash flows on the cash flow statement. However, it must not be double-counted when calculating the changes in non-cash working capital.