Accounting Interview Questions

Net income increases $40mm, cash increases $140mm, and total assets and shareholders' equity each increase $40mm. The gain is $50mm: the $150mm sale price less the $100mm book value, which is what the asset is carried at on the balance sheet after accumulated depreciation. At a 20% tax rate that gain adds $40mm to net income and sends $10mm out the door as tax. Cash picks up the full $150mm of proceeds less that $10mm. The balance sheet still balances, because cash is up $140mm while the PP&E line comes off at its $100mm book value.

At inception the income statement doesn't move: you borrow $500 and spend it on the stand, so on the balance sheet PP&E (property, plant and equipment, the long-lived physical assets) goes up $500 and debt goes up $500. In Year 1, $100 of depreciation and $50 of interest cut pre-tax income by $150. After a 25% tax rate that is $112.50. Assuming the loss saves taxes now, cash falls only $12.50, because depreciation is a non-cash expense and gets added back.

Calendarization converts a company's fiscal-year financials into calendar-year (January to December) figures. You weight the part of each fiscal year that falls inside the calendar year. A fiscal year is the 12-month period a company uses for its own reporting, and it often ends in a month other than December. Bankers calendarize so companies with different fiscal year-ends get compared over the same period. It comes up most in comparable companies analysis, which values a company off the multiples its peers trade at.

CapEx down 10 has the biggest impact: free cash flow rises by the full 10. At a 25% tax rate, revenue up 10 adds only 7.50 after tax. Depreciation down 10 lowers free cash flow by 2.50, because the business loses a tax deduction.

Valuation rises, assuming the accelerated schedule applies for tax and the company pays taxes. Total depreciation over the asset's life stays the same. Accelerated depreciation moves more of it into the early years, so the tax savings arrive sooner, and cash received sooner is worth more in present value. Reported net income is lower in the early years, but cash flow is higher, and a DCF values cash flow, not net income.

You subtract the increase in net working capital because NOPAT, the after-tax operating profit FCFF starts from, is an accrual number. It records revenue when earned and costs when incurred, regardless of when cash changes hands. Net working capital (NWC) is operating current assets, such as receivables and inventory, minus operating current liabilities, such as payables. When NWC rises, the business has cash tied up that earnings never showed. FCFF is the cash available to both debt and equity holders, so it takes that amount out. When NWC falls, the same line adds cash back.

NOI, or net operating income, is a property's rental and other operating revenue less its operating expenses: property taxes, insurance, utilities, repairs and maintenance, and property management. Depreciation is excluded. NOI is an unlevered, pre-tax, cash-based measure of what the asset itself earns. Non-cash charges like depreciation stay out of it, and so do items that belong to the capital structure or the owner rather than to operations: debt service, income taxes, and capital expenditures.

Assume $100 for each item and a 25% tax rate. An inventory write-down (cutting the recorded value of inventory that is damaged, obsolete or worth less than it cost) is a $100 non-cash expense. Net income falls $75, cash rises $25 from the tax saving, inventory falls $100 and retained earnings (the profits a company has kept, part of shareholders' equity) fall $75. A $100 dividend and a $100 debt buyback at face value both skip the income statement. Each lowers cash from financing (the cash flow section for money raised from or returned to owners and lenders) and cash by $100. Retained earnings fall $100 for the dividend; debt falls $100 for the buyback.

Valuation rises. When accounts payable (AP) days move from 60 to 90, the company pays its suppliers 30 days later. The AP balance steps up and releases cash once, in the year the change happens. That one-time lift to unlevered free cash flow (the cash the business makes before any payments to lenders or shareholders) increases the present value. Once days hold at 90, the extra cash does not repeat each year.

Net income falls by $40. The $50 pre-tax expense is offset by a $10 tax saving: $50 × (1 − 20%). Cash rises by $10, because you add the $50 of depreciation back on the cash flow statement: −$40 + $50 = +$10. Depreciation is a non-cash expense. No cash leaves the business when it is recorded, so the only cash effect is the lower tax bill.

Under the standard treatment, nothing changes on any of the three financial statements. Debt is carried at amortized cost: the amount borrowed, adjusted over time for any issuance discount or premium. The price the bonds trade at does not enter that number. The fall in market value matters for valuation. It creates no gain, no change in interest expense and no cash movement until the company actually buys the debt back.

Take it in four steps. First, read the history: revenue growth split into new stores versus same-store sales, the margin trend, and how well profit converts into cash. Second, check the balance sheet for debt capacity. That tells you whether a dividend recap is possible. Third, ask whether the cash flow and balance sheet can fund acquisitions. Fourth, test the forecast against that history. In a dividend recap the company borrows new debt and pays it out to the owners as a dividend. It suits a coffee chain with stable cash flow and low leverage, but only if leverage still looks low once you count leases as debt and coverage stays healthy at 2025 interest rates.