Does Unearned Service Revenue Count As Revenue
Bookkeeping Interview Questions & Answers (Basic)
Here are the the near important Accounting concepts you need to know.
1. Walk me through the iii financial statements. "The 3 major financial statements are the Income Argument, Residue Sail and Cash Catamenia Statement. The Income Argument gives the company's revenue and expenses, and goes downwards to Net Income, the concluding line on the argument. The Balance Sheet shows the company'south Assets - its resources - such every bit Cash, Inventory and PP&E, as well as its Liabilities - such as Debt and Accounts Payable - and Shareholders' Equity. Avails must equal Liabilities plus Shareholders' Equity. The Cash Flow Statement begins with Net Income, adjusts for not-cash expenses and working capital changes, and and so lists greenbacks flow from investing and financing activities; at the cease, yous see the company'south net modify in cash." 2. Tin can you give examples of major line items on each of the fiscal statements? Income Statement: Revenue; Toll of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating Income; Pretax Income; Cyberspace Income. Balance Sheet: Cash; Accounts Receivable; Inventory; Plants, Belongings & Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt; Shareholders' Equity. Cash Flow Statement: Net Income; Depreciation & Amortization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Greenbacks Flow From Operations; Capital Expenditures; Cash Menses From Investing; Sale/Purchase of Securities; Dividends Issued; Greenbacks Menstruum From Financing. three. How exercise the 3 statements link together? "To necktie the statements together, Internet Income from the Income Statement flows into Shareholders' Equity on the Balance Sheet, and into the top line of the Cash Flow Statement. Changes to Balance Canvas items appear as working capital changes on the Cash Period Statement, and investing and financing activities impact Balance Sheet items such every bit PP&E, Debt and Shareholders' Equity. The Greenbacks and Shareholders' Equity items on the Residual Sail human action as "plugs," with Cash flowing in from the final line on the Cash Flow Statement." 4. If I were stranded on a desert island, just had 1 statement and I wanted to review the overall health of a company - which argument would I use and why? You would utilise the Cash Catamenia Statement because information technology gives a true flick of how much cash the company is actually generating, independent of all the non-cash expenses you might have. And that's the #1 matter yous care about when analyzing the overall fiscal health of any concern - its cash period. v. Allow'southward say I could only await at 2 statements to assess a visitor's prospects - which 2 would I apply and why? You would pick the Income Statement and Rest Sheet, considering you tin can create the Cash Flow Statement from both of those (assuming, of class that you take "before" and "after" versions of the Rest Sheet that stand for to the same menstruum the Income Argument is tracking). half dozen. Walk me through how Depreciation going upwardly by $x would affect the statements. Income Statement: Operating Income would decline by $ten and bold a 40% tax rate, Net Income would go downwardly by $6. Cash Flow Statement: The Net Income at the top goes down by $6, simply the $10 Depreciation is a not-cash expense that gets added back, so overall Cash Flow from Operations goes upwards past $4. In that location are no changes elsewhere, and so the overall Net Change in Cash goes up by $4. Balance Sail: Plants, Holding & Equipment goes down by $10 on the Assets side because of the Depreciation, and Greenbacks is up by $4 from the changes on the Cash Flow Argument. Overall, Assets is downwardly by $vi. Since Net Income vicious by $six likewise, Shareholders' Equity on the Liabilities & Shareholders' Equity side is downwardly by $6 and both sides of the Balance Canvass residue. Annotation: With this type of question I ever recommend going in the order: This is then yous can check yourself at the cease and make certain the Balance Sheet balances. Remember that an Nugget going upwards decreases your Cash Period, whereas a Liability going up increases your Cash Flow. 7. If Depreciation is a not-cash expense, why does it affect the cash balance? Although Depreciation is a not-cash expense, it is revenue enhancement-deductible. Since taxes are a cash expense, Depreciation affects cash by reducing the amount of taxes you pay. 8. Where does Depreciation usually show upwards on the Income Argument? It could be in a separate line item, or it could be embedded in Cost of Appurtenances Sold or Operating Expenses - every company does it differently. Notation that the finish result for accounting questions is the same: Depreciation ever reduces Pre-Taxation Income. 9. What happens when Accrued Compensation goes up by $10? For this question, ostend that the accrued compensation is now being recognized every bit an expense (as opposed to but irresolute non-accrued to accrued compensation). Bold that's the case, Operating Expenses on the Income Statement become upwardly past $x, Pre-Taxation Income falls past $x, and Internet Income falls by $6 (assuming a 40% revenue enhancement rate). On the Cash Flow Statement, Cyberspace Income is down by $6, and Accrued Bounty will increment Greenbacks Flow by $ten, and so overall Cash Menses from Operations is upwardly by $4 and the Net Change in Cash at the lesser is up by $4. On the Remainder Sheet, Cash is up by $iv as a effect, so Assets are up by $4. On the Liabilities & Equity side, Accrued Compensation is a liability and then Liabilities are upwards by $x and Retained Earnings are down past $half dozen due to the Net Income, so both sides residue. 10. What happens when Inventory goes up past $x, assuming you pay for it with cash? No changes to the Income Statement. On the Greenbacks Flow Statement, Inventory is an asset so that decreases your Cash Menstruum from Operations - information technology goes down past $x, as does the Net Change in Cash at the lesser. On the Balance Sheet nether Assets, Inventory is up past $10 but Cash is down by $10, so the changes cancel out and Assets withal equals Liabilities & Shareholders' Equity. 11. Why is the Income Argument not afflicted by changes in Inventory? This is a common interview mistake - incorrectly stating that Working Uppercase changes show up on the Income Statement. In the case of Inventory, the expense is but recorded when the goods associated with it are sold - so if information technology'south just sitting in a warehouse, it does non count as a Toll of Good Sold or Operating Expense until the company manufactures information technology into a product and sells it. 12. Let'due south say Apple is ownership $100 worth of new iPod factories with debt. How are all 3 statements affected at the offset of "Year 1," before anything else happens? At the start of "Twelvemonth one," earlier anything else has happened, at that place would be no changes on Apple's Income Statement (still). On the Cash Menstruum Statement, the additional investment in factories would bear witness up nether Cash Flow from Investing every bit a cyberspace reduction in Cash Period (so Cash Flow is down by $100 so far). And the boosted $100 worth of debt raised would show up as an addition to Greenbacks Menses, canceling out the investment activity. So the cash number stays the same. On the Balance Sheet, there is now an additional $100 worth of factories in the Plants, Property & Equipment line, so PP&E is up past $100 and Assets is therefore upwardly by $100. On the other side, debt is up by $100 as well and and so both sides rest. 13. At present let'southward get out one yr, to the beginning of Twelvemonth ii. Presume the debt is loftier-yield so no chief is paid off, and assume an interest rate of ten%. Too assume the factories depreciate at a charge per unit of 10% per year. What happens? Afterward a twelvemonth has passed, Apple must pay interest expense and must record the depreciation. Operating Income would decrease by $10 due to the x% depreciation charge each year, and the $x in additional Interest Expense would subtract the Pre-Tax Income by $20 altogether ($ten from the depreciation and $10 from Interest Expense). Assuming a tax charge per unit of 40%, Net Income would fall by $12. On the Greenbacks Menstruum Statement, Net Income at the top is down past $12. Depreciation is a non-cash expense, so you lot add together it back and the finish result is that Greenbacks Flow from Operations is downwards past $2. That'southward the only change on the Cash Flow Statement, then overall Cash is down by $2. On the Balance Sheet, under Assets, Greenbacks is down by $2 and PP&E is down by $10 due to the depreciation, so overall Assets are downwardly by $12. On the other side, since Internet Income was downwards past $12, Shareholders' Equity is also down by $12 and both sides residue. Think, the debt number under Liabilities does not change since we've causeless none of the debt is actually paid back. fourteen. At the offset of Year 3, the factories all break downward and the value of the equipment is written down to $0. The loan must also be paid back now. Walk me through the 3 statements. Later ii years, the value of the factories is now $eighty if we go with the ten% depreciation per yr assumption. Information technology is this $eighty that we will write down in the 3 statements. Showtime, on the Income Statement, the $fourscore write-downwardly shows up in the Pre-Tax Income line. With a 40% tax rate, Net Income declines past $48. On the Cash Flow Argument, Net Income is downwardly past $48 but the write-down is a notcash expense, so we add together it back - and therefore Cash Menstruation from Operations increases past $32. There are no changes under Cash Flow from Investing, simply under Cash Flow from Financing there is a $100 accuse for the loan payback - then Cash Flow from Investing falls past $100. Overall, the Net Change in Cash falls by $68. On the Remainder Sheet, Cash is at present down by $68 and PP&E is down past $fourscore, so Assets have decreased by $148 altogether. On the other side, Debt is downward $100 since information technology was paid off, and since Net Income was down past $48, Shareholders' Equity is down past $48 equally well. Altogether, Liabilities & Shareholders' Equity are down past $148 and both sides residuum. 15. Now let's wait at a different scenario and assume Apple tree is ordering $10 of additional iPod inventory, using cash on hand. They gild the inventory, merely they have not manufactured or sold anything all the same - what happens to the 3 statements? No changes to the Income Statement. Cash Flow Statement - Inventory is up by $10, so Cash Flow from Operations decreases by $ten. There are no further changes, so overall Cash is down past $10. On the Remainder Sheet, Inventory is up by $10 and Greenbacks is down by $10 so the Avails number stays the aforementioned and the Balance Sheet remains in balance. 16. Now let's say they sell the iPods for acquirement of $20, at a cost of $10. Walk me through the 3 statements under this scenario. Income Argument: Revenue is up by $xx and COGS is upward past $10, and then Gross Profit is up by $10 and Operating Income is up by $10 too. Bold a 40% revenue enhancement rate, Cyberspace Income is up by $6. Greenbacks Flow Statement: Net Income at the top is up by $6 and Inventory has decreased by $10 (since nosotros simply manufactured the inventory into real iPods), which is a cyberspace addition to greenbacks flow - and then Cash Flow from Operations is upward by $16 overall. These are the only changes on the Cash Period Statement, so Cyberspace Change in Greenbacks is upward past $16. On the Balance Canvas, Cash is upwardly by $16 and Inventory is down by $x, so Assets is up past $half dozen overall. On the other side, Net Income was upwards past $6 and so Shareholders' Equity is up by $6 and both sides balance. 17. Could you ever end upwardly with negative shareholders' equity? What does it mean? Yes. It is mutual to see this in 2 scenarios: Information technology doesn't "hateful" annihilation in particular, just it can be a cause for concern and perchance demonstrate that the company is struggling (in the second scenario). Note: Shareholders' disinterestedness never turns negative immediately subsequently an LBO - information technology would only happen following a dividend recap or continued cyberspace losses. 18. What is working capital? How is information technology used? Working Capital = Current Assets - Electric current Liabilities. If information technology'southward positive, it means a company can pay off its short-term liabilities with its short-term assets. It is often presented every bit a financial metric and its magnitude and sign (negative or positive) tells y'all whether or not the company is "sound." Bankers expect at Operating Working Capital letter more than commonly in models, and that is defined as (Current Assets - Cash & Cash Equivalents) - (Current Liabilities - Debt). 19. What does negative Working Capital hateful? Is that a bad sign? Non necessarily. It depends on the type of visitor and the specific state of affairs - here are a few different things information technology could mean: twenty. Recently, banks have been writing downwards their avails and taking huge quarterly losses. Walk me through what happens on the 3 statements when there'southward a writedownwardly of $100. First, on the Income Argument, the $100 write-down shows up in the Pre-Tax Income line. With a 40% tax rate, Cyberspace Income declines past $60. On the Cash Flow Statement, Cyberspace Income is down by $60 but the write-down is a nongreenbacks expense, so nosotros add information technology back - and therefore Greenbacks Period from Operations increases by $twoscore. Overall, the Net Change in Greenbacks rises by $xl. On the Balance Sheet, Greenbacks is now up past $40 and an nugget is down by $100 (information technology'southward not articulate which asset since the question never stated the specific asset to write-down). Overall, the Avails side is down by $60. On the other side, since Net Income was down by $threescore, Shareholders' Equity is also down past $60 - and both sides rest. 21. Walk me through a $100 "bailout" of a company and how it affects the 3 statements. First, confirm what type of "bailout" this is - Debt? Equity? A combination? The almost mutual scenario here is an equity investment from the government, so here's what happens: No changes to the Income Argument. On the Cash Flow Statement, Greenbacks Period from Financing goes upward by $100 to reflect the regime'southward investment, so the Net Modify in Greenbacks is upwardly by $100. On the Residual Sheet, Cash is upward by $100 so Assets are up by $100; on the other side, Shareholders' Equity would become up by $100 to make it residue. 22. Walk me through a $100 write-downwardly of debt - as in OWED debt, a liability - on a company's balance sail and how information technology affects the 3 statements. This is counter-intuitive. When a liability is written down you record it equally a gain on the Income Statement (with an nugget write-down, it'due south a loss) - so Pre-Tax Income goes up past $100 due to this write-downwardly. Assuming a 40% tax rate, Cyberspace Income is upwards by $60. On the Cash Menstruation Argument, Internet Income is up by $60, just we demand to subtract that debt write-downwardly - and then Greenbacks Menstruation from Operations is down by $twoscore, and Internet Alter in Cash is down by $40. On the Balance Sheet, Cash is down by $40 and then Avails are down by $forty. On the other side, Debt is downward past $100 but Shareholders' Equity is up by $sixty considering the Cyberspace Income was up by $60 - so Liabilities & Shareholders' Equity is downward by $twoscore and information technology balances. If this seems strange to you, you're not solitary - come across this Forbes article for more than on why writing down debt actually benefits companies bookkeeping-wise: http://www.forbes.com/2009/07/31/fair-value-bookkeeping-markets-equities-fasb.html 23. When would a visitor collect cash from a client and not record information technology equally revenue? Three examples come to mind: Companies that agree to services in the time to come ofttimes collect cash upfront to ensure stable revenue - this makes investors happy besides since they tin better predict a company's performance. Per the rules of GAAP (Mostly Accustomed Bookkeeping Principles), y'all only tape revenue when you actually perform the services - so the visitor would non tape everything equally revenue right abroad. 24. If cash collected is not recorded equally revenue, what happens to it? Normally information technology goes into the Deferred Revenue balance on the Balance Sheet under Liabilities. Over time, every bit the services are performed, the Deferred Revenue residuum "turns into" existent revenue on the Income Statement. 25. What'southward the difference between accounts receivable and deferred revenue? Accounts receivable has not withal been collected in greenbacks from customers, whereas deferred revenue has been. Accounts receivable represents how much acquirement the visitor is waiting on, whereas deferred revenue represents how much it is waiting to record as revenue. 26. How long does it unremarkably take for a visitor to collect its accounts receivable balance? Generally the accounts receivable days are in the 40-50 day range, though it'southward higher for companies selling loftier-finish items and information technology might be lower for smaller, lower transaction-value companies. 27. What'south the difference betwixt cash-based and accrual accounting? Greenbacks-based accounting recognizes revenue and expenses when cash is actually received or paid out; accrual bookkeeping recognizes revenue when collection is reasonably certain (i.due east. afterwards a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are paid out in cash. Most large companies employ accrual accounting considering paying with credit cards and lines of credit is then prevalent these days; very small businesses may use cash-based accounting to simplify their financial statements. 28. Let'south say a customer pays for a TV with a credit card. What would this look like under cash-based vs. accrual accounting? In cash-based accounting, the revenue would not show up until the visitor charges the client's credit card, receives potency, and deposits the funds in its depository financial institution business relationship - at which point it would show up as both Acquirement on the Income Argument and Cash on the Balance Sheet. In accrual bookkeeping, information technology would show up as Revenue right away but instead of appearing in Cash on the Balance Sheet, information technology would become into Accounts Receivable at beginning. And then, once the cash is actually deposited in the company's bank account, it would "turn into" Cash. 29. How exercise you decide when to capitalize rather than expense a purchase? If the asset has a useful life of over 1 year, it is capitalized (put on the Residual Sheet rather than shown as an expense on the Income Statement). Then it is depreciated (tangible avails) or amortized (intangible assets) over a certain number of years. Purchases like factories, equipment and land all last longer than a yr and therefore show up on the Residue Canvass. Employee salaries and the cost of manufacturing products (COGS) only cover a short period of operations and therefore show upwards on the Income Statement as normal expenses instead. 30. Why do companies report both GAAP and not-GAAP (or "Pro Forma") earnings? These days, many companies have "non-cash" charges such every bit Acquittal of Intangibles, Stock-Based Compensation, and Deferred Revenue Write-down in their Income Statements. As a result, some argue that Income Statements under GAAP no longer reflect how profitable most companies truly are. Non-GAAP earnings are most always college because these expenses are excluded. 31. A company has had positive EBITDA for the by x years, but it recently went bankrupt. How could this happen? Several possibilities: Remember, EBITDA excludes investment in (and depreciation of) long-term assets, interest and one-time charges - and all of these could end up bankrupting the visitor. 32. Commonly Goodwill remains abiding on the Balance Canvass - why would information technology be dumb and what does Goodwill Damage mean? Commonly this happens when a visitor has been acquired and the acquirer re-assesses its intangible assets (such equally customers, brand, and intellectual property) and finds that they are worth significantly less than they originally idea. It ofttimes happens in acquisitions where the buyer "overpaid" for the seller and tin result in a large net loss on the Income Statement (see: eBay/Skype). Information technology can also happen when a company discontinues part of its operations and must impair the associated goodwill. 33. Under what circumstances would Goodwill increase? Technically Goodwill can increase if the visitor re-assesses its value and finds that it is worth more than, but that is rare. What usually happens is ane of 2 scenarios:
- Big-3 Vacancies
- Large-four Vacancies
- Goldman Sachs Vacancies
Source: https://finexecutive.com/en/news/accounting_interview_questions__answers_basic_2_4_2015
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