Walk me through the three financial statements
Theme: Financial Analysis Role: Investment Banker Function: Finance
Interview Question for Investment Banker: See sample answers, motivations & red flags for this common interview question. About Investment Banker: Advises clients on financial investments and deals. This role falls within the Finance function of a firm. See other interview questions & further information for this role here
Sample Answer
Example response for question delving into Financial Analysis with the key points that need to be covered in an effective response. Customize this to your own experience with concrete examples and evidence
- Income Statement: The income statement, also known as the profit and loss statement, provides a summary of a company's revenues, expenses, and net income or loss for a specific period. It starts with the company's total revenues, which include sales, fees, and other income. Then, it deducts the cost of goods sold (COGS) to calculate the gross profit. Operating expenses, such as salaries, rent, and marketing costs, are then subtracted from the gross profit to determine the operating income. Other income and expenses, such as interest income and expenses, are added or subtracted to arrive at the pre-tax income. Finally, taxes are deducted to calculate the net income or loss
- Balance Sheet: The balance sheet provides a snapshot of a company's financial position at a specific point in time. It consists of three main sections: assets, liabilities, and shareholders' equity. The assets section includes current assets, such as cash, accounts receivable, and inventory, as well as long-term assets like property, plant, and equipment. Liabilities include current liabilities, such as accounts payable and short-term debt, as well as long-term liabilities like bonds and mortgages. Shareholders' equity represents the residual interest in the company's assets after deducting liabilities. It includes common stock, retained earnings, and additional paid-in capital
- Cash Flow Statement: The cash flow statement shows the inflows and outflows of cash during a specific period. It is divided into three sections: operating activities, investing activities, and financing activities. The operating activities section includes cash flows from the company's core operations, such as cash received from customers and cash paid to suppliers. The investing activities section includes cash flows from buying or selling long-term assets, such as property or investments. The financing activities section includes cash flows from raising or repaying capital, such as issuing or repurchasing stock or paying dividends. The net change in cash is calculated by summing the cash flows from each section and adding it to the beginning cash balance
Underlying Motivations
What the Interviewer is trying to find out about you and your experiences through this question
- Knowledge of financial statements: Assessing your understanding of the basic financial statements and their components
- Analytical skills: Evaluating your ability to analyze and interpret financial data
- Communication skills: Assessing your ability to effectively explain complex financial concepts in a clear and concise manner
Potential Minefields
How to avoid some common minefields when answering this question in order to not raise any red flags
- Lack of knowledge: Not being able to explain the purpose and content of each financial statement accurately
- Inconsistencies: Providing conflicting or contradictory information about the financial statements
- Omission of key components: Leaving out important elements or failing to mention the interrelationships between the statements
- Inability to analyze: Being unable to interpret the financial statements or identify potential issues or trends
- Vague or generic answers: Providing general statements without specific examples or details
- Lack of understanding of ratios: Not being able to explain the significance of key financial ratios or their implications for the business
- Failure to address red flags: Ignoring or dismissing potential red flags or warning signs in the financial statements