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Intermediate Accounting Interview Questions Set

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Difficulty: Intermediate

Interviewer-led

5.0

< 100 Ratings

Times solved: 300+

Audit

Case Prompt:

This set of questions is designed to help you master the core concepts around the three financial statements. The difficulty ranges from beginner to advanced, progressing from foundational questions to a multi-step scenario that tests your understanding of capital expenditures, debt financing, depreciation, interest, and asset write-downs.

In total, walking through this set in an interview would take approximately 20 minutes, making up around 40% of a typical 45-minute interview. Below, you’ll find model answers for each question, including tips for the interviewer on what to look for in candidate answers.

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Walk me through the three financial statements.

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How do the three financial statements link together?

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The three financial statements are closely linked, and changes in one often flow through to the others. Here's how they connect:

Net Income from the bottom of the Income Statement flows into the top of the Cash Flow Statement as the starting point for cash from operations.
On the Cash Flow Statement, we then add back non-cash expenses like depreciation and amortization from the Income Statement, and we adjust for non-operating items like gains or losses on asset sales by flipping their signs.
Next, we adjust for changes in operating assets and liabilities (working capital) from the Balance Sheet. The rule of thumb is:
- If an asset increases, cash flow decreases
- If a liability increases, cash flow increases, and vice versa.
In Cash Flow from Investing, we account for capital expenditures (like purchases of PP&E) and investment activities (buying or selling marketable securities).
Cash Flow from Financing includes debt and equity transactions, such as issuing or repurchasing stock, raising or repaying debt, and paying dividends.
The net change in cash from all three sections of the Cash Flow Statement is then used to update the cash balance on the Balance Sheet for the next period.
Finally, the Balance Sheet is updated to reflect changes in cash, debt, equity, PP&E, and other items that were adjusted on the Cash Flow Statement.

This linkage ensures that the three statements form a self-reinforcing system that reflects both the company’s performance and how that performance impacts its financial position and liquidity.

Note for Interviewer

The most important aspects to focus on in the answer are:

Net Income Flow: The candidate should clearly explain that Net Income from the Income Statement is the starting point for the Cash Flow Statement.
Cash Impact on the Balance Sheet: The candidate should explain how the cash calculated in the Cash Flow Statement is reflected on the Balance Sheet as changes to the cash balance.
Non-Cash Adjustments: The candidate should mention non-cash items like depreciation and how changes in working capital (e.g., accounts receivable, accounts payable) affect all three statements.

If you had only one financial statement...

If you could only look at one financial statement to assess a company’s performance and financial health, which one would you choose and what makes it the most informative?

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And if you had two financial statements...

And if you had two financial statements to assess a company’s performance and financial health, which one would you choose and why?

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Beginner Single Step Scenario

Suppose a company records $25k more in depreciation expense this quarter. How does that flow through the Income Statement, Cash Flow Statement, and Balance Sheet?

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Let’s walk through how a $25,000 increase in depreciation expense affects all three financial statements:

Effects on the Income Statement

Depreciation is recorded as an expense, so it reduces Operating Income (EBIT) by $25,000.
That lower operating income leads to a lower pre-tax income.
With a 20% tax rate, the company saves $5,000 in taxes. This is often called a tax shield.
So overall, Net Income decreases by $20,000 (–$25,000 in EBIT + $5,000 in tax savings).

Key takeaway: Depreciation reduces profits, but also reduces the tax bill.

Effects on the Cash Flow Statement

The Net Income at the top goes down by $20,000, reflecting the lower profit.
But depreciation is a non-cash expense, meaning the company didn’t actually spend that $25,000 in cash. It’s just an accounting adjustment, so, depreciation gets added back, which increases cash flow by $25,000.
Overall, the Cash Flow from Operations increases by $5,000 (–$20,000 Net Income + $25,000 add-back).

Key takeaway: Even though net income went down, cash actually went up because depreciation is non-cash.

Effects on the Balance Sheet

On the Assets side:

Cash increases by $5,000, from the Cash Flow Statement.
Property, Plant & Equipment (PPE) decreases by $25,000, because of the added depreciation.
So, total assets decrease by $20,000.

On the Liabilities & Equity side:

There’s no change to liabilities.
Shareholders’ Equity (specifically retained earnings) goes down by $20,000, due to the lower net income.
That matches the change in assets, so the Balance Sheet remains balanced.

Key takeaway: Lower net income reduces equity, and lower PPE + higher cash affects total assets, but both sides still match.

Note for Interviewer

Focus on these top three points to evaluate the answer:

Income Statement: The candidate should clearly explain that depreciation reduces operating income and pre-tax income, with a tax shield reducing the overall impact on net income.
Cash Flow Statement: The candidate should highlight that depreciation is a non-cash expense and should be added back to net income in the Cash Flow from Operations (CFO) section, increasing cash flow.
Balance Sheet: The candidate should mention that PPE decreases by $25k due to depreciation and cash increases by the tax shield amount, affecting both assets and equity.

Advanced Multi Step Scenario - Step 1

Tesla builds a $100 million battery production facility, fully financed with new debt.

At the start of Year 1, how are all three financial statements affected?

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At this point, Tesla hasn’t earned or spent anything operationally. The company is simply investing in a new asset (the factory) and financing it with debt.

Income Statement:

No changes yet. Buying a factory is a capital investment, not an expense, so it does not show up on the Income Statement.
No depreciation or interest expense has been incurred yet.

Cash Flow Statement:

Investing Activities: –$100M due to capital expenditure for building the factory.
Financing Activities: +$100M from taking on new debt to fund the factory.
Cash Flow from Operations: No change yet.
Net change in cash = $0 → Money goes out to build the factory, but comes in from debt, so they cancel each other out.

Balance Sheet:

Assets: PPE (Property, Plant & Equipment) increases by $100M.
Liabilities: Debt increases by $100M.
Equity: No change yet (no income or retained earnings impact).
Both sides increase by $100M → The Balance Sheet stays balanced.

Note for Interviewer

The top three aspects to focus on are:

Accurate Treatment of the Income Statement: The candidate should explain that no immediate impact is seen on the Income Statement at the start since the purchase of the facility is a capital expenditure (CapEx) and doesn’t affect the expenses yet (only depreciation will in subsequent years).
Clear Explanation of the Cash Flow Statement: The candidate should mention that the Cash Flow from Investing section will show –$100 million for the CapEx (factory purchase), and the Cash Flow from Financing will show + $100 million for the new debt issuance.
Correct Reflection on the Balance Sheet: The candidate should explain that the Balance Sheet will show an increase in assets (under PPE) by $100 million and an equal increase in liabilities (under debt), with no immediate impact on equity.

Advanced Multi Step Scenario - Step 2

In Year 2, assume the debt is high-yield with no principal repayments and a 10% interest rate. The facility depreciates at 10% per year. What is the impact across the statements?

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In Year 2, the facility’s depreciation and interest expense will affect Tesla’s financial statements, with changes to net income, cash flow, and asset values. The following breakdown will examine the impact on the Income Statement, Cash Flow Statement, and Balance Sheet in detail.

Effect on the Income Statement

The increase in depreciation reduces operating income, and the interest expense from the high-yield debt reduces pre-tax income, ultimately lowering net income.

Depreciation expense reduces operating income by $10M.
Interest expense reduces pre-tax income by another $10M.
Total pre-tax income drops by $20M.
At a 20% tax rate, taxes are reduced by $4M (a tax shield).
Net income falls by $16M.

Effect on the Cash Flow

The net income decreases due to the combined effects of depreciation and interest expense, but since depreciation is a non-cash expense, it will be added back to the cash flow from operations, leading to a net increase in cash flow.

Net Income = –$16M
Depreciation = +$10M (added back because it’s a non-cash expense)
Cash Flow from Operations = –$6M
No change in Investing or Financing activities in Year 2.
Net change in cash = –$6M

Effect on the Balance Sheet

PPE decreases due to the depreciation, and cash increases from the operating cash flow. At the same time, equity decreases as a result of the lower net income, ensuring the balance sheet stays in balance.

Assets:
- Cash = –$6M (from the Cash Flow Statement)
- PPE = –$10M (due to depreciation)
- Total Assets decrease by $16M
Liabilities: Debt remains unchanged (no repayment yet).
Equity: –$16M from the lower net income (affecting retained earnings).
Balance Sheet remains balanced.

Note for Interviewer

Let's take a look at what exactly is expected of the candidate:

Understanding of the Income Statement Impact: The candidate should explain how depreciation reduces operating income and interest expense reduces pre-tax income, ultimately leading to a decrease in net income. Calculations of the depreciation and interest effects on net income are expected.
Correct Treatment on the Cash Flow Statement: The candidate should highlight that depreciation is a non-cash expense and should be added back to net income in the Cash Flow from Operations, leading to a net increase in cash flow. The candidate should quantify the impact on cash flow due to depreciation adjustments.
Impact on the Balance Sheet: The candidate should explain how PPE decreases due to depreciation, cash increases due to operating cash flow, and equity decreases from lower net income. The candidate is expected to calculate the changes in these line items and ensure the balance sheet remains balanced.

Advanced Multi Step Scenario - Step 3

At the end of Year 2, the facility is damaged and written down to $0, and Tesla repays the entire loan in full. Walk through the impact on all three financial statements from the start to the end of Year 2 only.

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At the end of Year 2, the facility is written down to $0 due to damage, and Tesla repays the full loan. This results in impacts across all three financial statements, including adjustments to the Income Statement, Cash Flow Statement, and Balance Sheet.

Effect on the Income Statement

Depreciation for Year 2 = $10M (as before)
Write-down of $80M = recorded as an expense, which lowers operating income
Interest expense = $10M (same as before)
Total Pre-Tax Income = –$100M
Taxes saved = $20M (20% of $100M)
Net Income = –$80M

Effect on the Cash Flow Statement

Net Income = –$80M
Add back depreciation = +$10M (non-cash)
Add back $80M write-down (also non-cash)
Cash Flow from Operations = +$10M
Cash Flow from Financing = –$100M (loan repayment)
Net change in cash = –$90M

Effect on the Balance Sheet

Assets:
- Cash = –$90M
- PPE = –$90M (from $10M depreciation + $80M write-down)
- Total Assets = –$180M
Liabilities:
- Debt = –$100M (repaid in full)
Equity:
- –$80M from net income
Liabilities + Equity = –$180M → Balance Sheet balances.

Note for Interviewer

Here, you can find the top three aspects to focus on in the answer of the candidate:

Income Statement Impact: The candidate should explain that the write-down reduces operating income, with no impact from the loan repayment. Correct calculations of impairment and its effect on net income are expected.
Cash Flow Statement Impact: The candidate should clarify that net income is reduced by the write-down, but the non-cash write-down is added back in CFO, and the loan repayment is reflected as a cash outflow in CFF. Correct calculations of the net impact on cash flow are expected.
Balance Sheet Impact: The candidate should explain that PPE is reduced to $0, cash decreases by the loan repayment, debt decreases by the loan amount, and equity is affected by the impairment and lower net income. Correct calculations of the changes to assets, liabilities, and equity are necessary.

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