Module 3: Accounting
Recruiting | Behaviorals | Accounting | Enterprise Value / Comparables | DCF | M&A | LBO| Market questions | Brain teasers
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Slide Deck 2 includes 27 slides, and delves into the core questions an interviewee might face with regards to financial accounting. It outlines the essentials of the three key financial statements—the income statement, balance sheet, and cash flow statement—and their interconnections. It covers accounting procedure, how the statements are intrinsically linked, and includes a series of example accounting questions with full work shown.
- Walk me through the 3 financial statements.
- If you could only use one financial statement, which would you use to evaluate an investment?
- What is net working capital?
- How do changes in net working capital affect the three statements?
- Why do changes in inventory affect the income statement?
- What is the difference between accrual and cash accounting?
- What are two ways the cash fl ow statement can be displayed? Which one is better?
- And many more!
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Income Statement
Whether you’re analyzing a company’s performance or preparing for technical interviews, mastering the income statement is a foundational skill in investment banking. This lesson walks through how it works, what it tells you, and how it connects to broader financial analysis.
In this Lesson:
What the Income Statement Shows
The income statement (also called the profit & loss statement) summarizes a company’s revenues, expenses, and profits over a period of time. It shows how much money a business made and how efficiently it operated.Key Line Items to Know
You’ll learn how to interpret revenue, cost of goods sold (COGS), gross profit, SG&A, R&D, EBITDA, operating income (EBIT), growth rates, interest, taxes, and net income. Understanding each line is critical to analyzing performance.Why It Matters
The income statement is central to financial modeling, valuations, and deal analysis. It’s one of the first places bankers look to assess company health and deal potential.
Cash Flow Statement
While the income statement shows profitability, the cash flow statement reveals what really matters—how much cash a company generates and where it goes. This lesson breaks down how to read and analyze the cash flow statement, and why it’s essential for investment banking and valuation work.
In this Lesson:
What the Cash Flow Statement Shows
The cash flow statement tracks actual inflows and outflows of cash over a period. The cashflow statement bridges net income to change in cash.Three Main Sections
You’ll learn how to break it down into operating, investing, and financing activities. Each section tells a different story about business performance, growth strategy, and capital structure.Cash Flow from Operations (CFO)
This section starts with net income and adjusts for non-cash items and changes in working capital. Represents cash tied up in the operations of the business. A/R, A/P, Inventory. Depreciation, Losses/Gains on Sale, PIK interest, and Changes in net working capitalCash Flow from Investing (CFI)
Investing cash flow reflects purchases or sales of assets, including capital expenditures (CapEx), Acquisition, Proceeds from sale of PP&E. High CapEx may signal growth, but also requires careful analysis of return on investment.Cash Flow from Financing (CFF)
This includes debt raised or repaid, equity issued or repurchased, and dividends paid. It reveals how a company funds its operations and returns capital to shareholders. Borrowing/Repayments of debt, Equity Issuances, Dividends, & Share Buybacks.Link to Other Statements
The cash flow statement ties directly to the income statement and balance sheet—starting with net income and ending with changes in cash on the balance sheet.Why It Matters in IB
In banking, cash flow drives valuation methods like DCF and helps assess debt capacity and liquidity. It’s often more reliable than net income when analyzing a company’s true financial health.
Property Plant and Equipment (PP&E)
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Net Working Capital #1
The balance sheet is a snapshot of a company’s financial position at a specific point in time—what it owns, what it owes, and what’s left for shareholders. This lesson covers how to read the balance sheet, understand its structure, and see how it connects to the rest of the financial statements.
In this Lesson:
Net Working Capital Schedule
We start with Net Working Capital Schedule. Operating Current Assets, Operating Current Liabilites. A/R & A/P. How To calculate AR Days, AP Days, and Inventory Days – and use that to forcast future changes in net working capital.
Balance Sheet - Assets, Liabilities, and Shareholders Equity
The balance sheet is a snapshot of a company’s financial position at a specific point in time—what it owns, what it owes, and what’s left for shareholders. This lesson covers how to read the balance sheet, understand its structure, and see how it connects to the rest of the financial statements.
What the Balance Sheet Shows
The balance sheet shows a company’s assets, liabilities, and equity. It follows the core equation: Assets = Liabilities + Shareholders’ Equity.Structure and Format
It’s divided into three main sections—assets (what the company owns), liabilities (what it owes), and shareholders’ equity (what belongs to owners). Each section is organized in order of liquidity or maturity.Current vs. Non-Current
You’ll learn the difference between current (short-term) and non-current (long-term) items. For example, cash and accounts receivable are current assets, while property, plant, and equipment are non-current.Liabilities
Accounts payable, Debt,Shareholders Equity – Shareholders Equity
Key Line Items to Know
Important balance sheet items include cash, accounts receivable, inventory, PP&E, accounts payable, debt, and retained earnings. Understanding how these move over time is essential for modeling and valuation.
Net Working Capital #2 - Deferred Revenue, Prepaid Expenses, Accrued Expenses
Understanding how working capital items like deferred revenue, prepaid expenses, and accrued expenses affect the financial statements is critical in financial modeling and deal analysis. This lesson breaks down each item’s definition, real-world examples, and their 3-statement impact.
In this Lesson:
What Is Deferred Revenue?
Deferred revenue is cash received before delivering a product or service—like a subscription paid upfront. It’s recorded as a liability and gradually recognized as revenue over time.Deferred Revenue: Statement Impact
In Year 0, deferred revenue increases cash and liabilities, with no income statement effect. In future years, revenue is recognized, taxes are applied, and deferred revenue decreases.What Are Prepaid Expenses?
Prepaid expenses are payments made before receiving a service—such as insurance or rent paid in advance. They’re recorded as assets and expensed over time as the service is consumed.Prepaid Expenses: Statement Impact
In Year 0, cash decreases while prepaid assets rise—no income statement effect. In later periods, part of the prepaid expense is recognized, reducing assets and impacting net income.What Are Accrued Expenses?
Accrued expenses are costs incurred but not yet paid and without an invoice, like unpaid wages or vacation. They’re recorded as liabilities and impact the income statement when the service is received.Accrued Expenses: Statement Impact
When incurred, expenses reduce net income and increase liabilities, with a partial tax offset to cash. This reflects the timing mismatch between service consumption and payment.
Shareholders Equity (Coming Soon)
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