Assume you worked in either buy-side or sell-side equity research, and you were looking to hire a new associate with 0-3 years of work experience. You want to give them a one-hour accounting exam. What are some questions that you could reasonably expect to ask and have them answer?
I’m trying to compile a database of possible questions and hope that this will help other users on AF in the process. As a heads up, I am not interviewing for my fund, but rather trying to create a resource for anyone that ends up getting an accounting test as part of their hiring process. Below are also some questions I would ask of potential candidates when I was working in private equity or sell-side research.
Here are some that I know I would ask:
If a company incurs $10 (pretax) of depreciation expense, how does that affect the three financial statements?
A company makes a $100 cash purchase of equipment on Dec. 31. How does this impact the three statements this year and next year?
How do you calculate enterprise value?
What discount rate do you use in your XXX calculations?
I’m not in research (…yet. That’s a WHOLE other story) but how about something like straight line vs. double declining depreciation? How does that impact earnings in earlier years vs. later years and how does one method compare against the other in terms of total depreciation expense?
A good one for demonstrating a solid understanding would be “What are three ways a company might fudge reported EPS?”
Answers would be things along the lines of different depreciation methods, goodwill allocation from acquisitions, inventory valuations, etc, all of which effect reported net income.
A company’s revenue and EBITDA is growing year over year when all of a sudden it declares bankruptcy. Explain what could have happened.
How do you feel when CFI is positive?
What are some reasons why AR turnover and DSO changes? Explain a good change and a questional change.
They say Worldcomm capitalized all of their expenses. What does this mean?
They say Enron recognized revenue far too early. What does this mean?
Say you are the CFO of a small micro cap company that is just about to release earnings. Explain several ways you can push the envelope to window dress the figures.
(Numi, can you explain levered and unlevered beta calculation? I know this was in L2, but for the life of me cannot remember what it is nor how to calculate it)
Not Numi but this stuff is still fresh in my head from Level II:
You identify a public company similar to the company you’re trying to value and calculate its beta. Then you take take that beta and multiply it times (1/(1+(D/E of public co). So youre using the debt to equity levels of the public co to unlever its beta.
Calculate the debt to equity ratio of valuation company. Its beta equals unlevered beta times (1 + (D/E of value) So you’re relevered based on the value companies own debt levels.