A financial analyst researches macroeconomic and microeconomic conditions along with company fundamentals to make business, sector and industry recommendations and can recommend a course of action, such as to buy or sell a company’s stock based upon its overall current and predicted strength.
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Outlined below are the answers to some of the most frequently asked Financial Analyst interview questions for the position of a financial analyst:
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) statement shows 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
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.
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.
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.