Accounting & Finance Interview Questions and Answers

Profit is an accounting measure of performance over a period, while cash flow is the movement of actual money.

Profit follows accrual accounting: revenue is recognised when it is earned, not when cash arrives, and expenses are matched to the period they relate to. So a company can be profitable on paper while running out of cash if customers pay slowly or if it has spent heavily on inventory or equipment.

Cash flow comes from the cash flow statement and splits into operating, investing and financing activities. Operating cash flow is the most important for judging whether the core business generates cash.

A practical example: a business invoices 100,000 in December on sixty day terms. It records the sale and the profit, but no cash arrives until February. If payroll is due in January, profitability will not pay it. You have to manage both.

The three statements are the income statement, the balance sheet and the cash flow statement, and they are linked.

The income statement shows revenue and expenses over a period, ending in net profit. That profit feeds into the balance sheet as retained earnings, increasing equity. The balance sheet is a snapshot of assets, liabilities and equity at a point in time.

On the cash flow statement, net profit is the starting point for operating cash flow, then adjusted for non cash items such as depreciation and for changes in working capital. Capital expenditure appears under investing, and loans or share issues under financing. The closing cash on the cash flow statement must equal the cash line on the balance sheet.

The key relationship is that the balance sheet must balance: assets equal liabilities plus equity. If it does not, something is misstated.

Cash accounting records transactions only when money changes hands. Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of payment timing.

Accrual gives a truer picture of performance because it matches revenue to the costs of earning it in the same period. That is why accounting standards such as IFRS and US GAAP require accrual accounting for most businesses, and why public companies report on that basis. Cash accounting is simpler and is often allowed for very small businesses, but it can distort results. A big sale in December with payment in January looks like a January event, and a large annual insurance premium hits one month hard.

Under accrual we use adjusting entries such as accrued expenses, prepayments and deferred revenue. The trade off is complexity and more judgement, but the benefit is comparability and a more faithful view.

Variance analysis compares actual results with the budget or forecast and explains the gap.

I start by calculating the variance in absolute terms and as a percentage, then split it into volume and price effects where relevant. For example, revenue ten percent below budget could come from selling fewer units, selling at a lower price, or a mix shift toward cheaper products. Each has a different cause and a different response.

I separate controllable from uncontrollable variances. A rise in raw material prices is largely external; excessive overtime is internal. I also distinguish timing differences, where revenue simply slipped into the next month, from permanent shortfalls.

I focus on material variances, usually above a threshold, and I write a short explanation and an action for each. The report goes to budget owners, not just finance, because they can act on it. Then I track whether previous actions worked.

I look at profitability, liquidity, leverage and cash generation together, because any single ratio can mislead.

Profitability: gross and net margin, and the trend over several periods. Liquidity: the current and quick ratios, and whether working capital is positive. Leverage: debt to equity and interest cover, to see how much shock the business can absorb. Cash: operating cash flow and free cash flow, and whether profit converts into cash.

I compare these against the company's own history and against industry peers, since benchmarks vary widely. I also read the quality of earnings. Are profits driven by one off items or aggressive revenue recognition?

Beyond the numbers I consider customer concentration, contract length and competitive position. A company can look fine for a year and still be fragile if it depends on one client or one product. Trend and context matter more than any single figure.