Accounting interview questions

What a strong answer covers

• State the equation: Assets = Liabilities + Equity (Owners' or Shareholders' Equity).
• Explain that every transaction has at least two effects under double-entry bookkeeping, so total debits always equal total credits and both sides stay equal.
• Give a concrete example: buying equipment for cash raises one asset and lowers another; borrowing cash raises an asset and a liability together.
• Note that equity can be expanded to include contributed capital plus retained earnings, which links net income back into the balance sheet.

Where people lose the point

• ×Reversing the equation or putting liabilities and equity on the same side as assets.
• ×Claiming a single transaction only touches one account, missing the dual effect of double-entry.
• ×Forgetting that retained earnings connect the income statement into equity.

What a strong answer covers

• Cash basis records revenue and expenses only when cash actually moves; accrual basis records them when earned or incurred, regardless of cash timing.
• GAAP and IFRS require accrual accounting because it reflects the matching and revenue recognition principles and gives a truer picture of performance in a period.
• Illustrate with accounts receivable (revenue earned but not yet collected) and accrued expenses (incurred but not yet paid).
• Note cash basis is simpler and allowed for some small businesses or tax purposes, but distorts periods with large timing gaps.

Where people lose the point

• ×Saying accrual accounting ignores cash entirely rather than just decoupling recognition from cash timing.
• ×Claiming cash basis is never allowed; it is permitted for many small entities and some tax filings.
• ×Confusing which method produces receivables and payables (only accrual creates them).

What a strong answer covers

• Net income from the income statement flows into retained earnings on the balance sheet and is the starting line of the cash flow statement.
• The cash flow statement reconciles net income to the change in cash by adjusting for non-cash items and working capital changes across operating, investing, and financing activities.
• The ending cash balance on the cash flow statement equals the cash line on the balance sheet, and the balance sheet must still balance.
• Depreciation is a good example: it reduces net income, is added back in operating cash flow, and reduces net PP&E on the balance sheet.

Where people lose the point

• ×Treating the three statements as independent instead of a linked system.
• ×Forgetting that net income routes to retained earnings, not directly to a cash account.
• ×Mixing up which non-cash items get added back versus subtracted in the cash flow statement.

What a strong answer covers

• Income statement: depreciation rises $100, so pre-tax income falls $100; at 20% tax, net income falls $80.
• Cash flow statement: start from net income down $80, add back the $100 non-cash depreciation, so operating cash flow and total cash rise by $20 (the tax shield).
• Balance sheet assets: cash up $20 and net PP&E down $100, a net asset decrease of $80.
• Balance sheet equity: retained earnings fall $80 from lower net income, so both sides move by $80 and the balance sheet still balances.

Where people lose the point

• ×Forgetting the tax shield and moving cash by the full $100 instead of $20.
• ×Failing to reduce net PP&E by the depreciation amount on the balance sheet.
• ×Ending with a balance sheet that does not balance because retained earnings or cash was miscalculated.

What a strong answer covers

• Revenue is recognized when performance obligations are satisfied and control of goods or services transfers to the customer, not simply when cash is received.
• Reference the ASC 606 / IFRS 15 five steps: identify the contract, identify performance obligations, determine the transaction price, allocate it to obligations, and recognize revenue as each is satisfied.
• Give an example such as an annual SaaS subscription recognized ratably over the service period, with unearned amounts sitting in deferred revenue.
• Explain that this ties directly to the matching principle and prevents front-loading or deferring revenue improperly.

Where people lose the point

• ×Saying revenue is recognized when cash is collected, which is the cash basis, not the principle.
• ×Ignoring deferred revenue for prepaid or subscription arrangements.
• ×Being unable to name or apply the five-step model when asked to go deeper.

What a strong answer covers

• Profit is an accrual measure while cash is about timing, so a company can book revenue yet not collect it, tying cash up in receivables and inventory.
• Rising accounts receivable and inventory are uses of cash; rising accounts payable is a source of cash, and these swings show up in the operating section of the cash flow statement.
• Rapid growth often worsens this because the company funds inventory and receivables before customers pay, creating a cash gap despite strong reported earnings.
• Point to the cash conversion cycle (days inventory plus days receivable minus days payable) as the metric that quantifies how long cash is trapped.

Where people lose the point

• ×Equating net income with cash and denying the two can diverge.
• ×Getting the sign wrong on working capital changes, for example treating a receivable increase as a cash inflow.
• ×Overlooking that heavy capital expenditure or debt repayment can also drain cash even when operations are profitable.