The finance manager is one of the top-level jobs in any organization or any of the corporate houses. This enables the particular person or individual to take care after all the matters of the company. Furthermore, If you want this job then these finance manager interview questions and answers are for you.
What differences do you find between the cash flow(net) and the net income?
Answer: This is the most important finance manager interview questions. Net cash flow is the difference of the cash outflow and the cash inflow. We deduct all expenses incurred in cash from all cash income to calculate net cash flow. It differs from net income in a way that net income is the difference between revenues and expenditure that includes all cash and non-cash items.
For example, depreciation is a non-cash expense. We deduct depreciation in calculating net income. However, depreciation is not deducted while calculating net cash flow. Therefore, if only a non-cash item of a firm is depreciation that net cash flow is always equal to net income plus depreciation.
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Why cash flow statement is needed to be prepared?
The cash flow statement is a statement showing the changes in the financial position or cash position of a firm during two balance sheet dates. This statement shows the cash inflow and outflow of a firm during a period.
Similarly, The cash flow statement is basically prepared to analyze the causes of changes in the cash position of the firm during two regular balance sheet dates. Therefore, cash flow is prepared to identify the best results of the cash inflows along with the cash outflows.
Above all, The activities that result in cash inflow are called sources of cash, and the activities that result in cash outflow are called uses of cash. Moreover, there are three basic activities resulting in changes in the cash position of a firm.
What are the basic needs for preparing a Cash Flow Statement?
To identify the cash flow operating activities:
Operating activities are associated with day to day ongoing operation of a firm. These activities are considered to be the major sources of internally generated cash. Cash inflow from operating activities includes all the cash that is received from sales and which are further collected from customers.
So the cash flow statement is prepared to know the net cash position resulted from the ongoing operation of the firm.
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To analyze the cash flow from investing activities:
Investing activities refer to the activities concerned with the purchase and sale of fixed assets and long-term investment. Cash inflows from investing activities include the cash from sales of fixed assets and investment and cash outflows include the purchase of fixed assets and investment.
The cash flow statement is prepared to identify how much cash has been tied up in long- term investment and acquisition of new fixed assets of the firm.
To identify the changes in cash brought about by financing activities:
Financing activities refer to the activities that result in cash inflow by the way of issuing shares of common stock, preferred stock, long-term loans, notes payables, and so on. It also includes the activities that involve cash outflows in terms or repayment of the loan and preferred stock and payment of common and preferred dividends.
The cash flow statement needs to be prepared to identify the changes in cash position brought about by financing activities.
To analyze the changes in net cash position:
The changes in the net cash position of a firm during the year as compared to the previous year is the joint result of the changes in cash position brought about by operating, investing, and financing activities.
The cash flow statement is prepared to know the net change in the cash position of a firm and also to know how much of such changes in net cash position are contributed by operating, investing and financing activities.
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What is free cash flow? Why is it required for managerial decision making?
Free cash flow is the cash flow that remained after satisfying investments in fixed assets, new products, and working capital necessary to sustain ongoing operations.
It is defined as the net operating profit after (NOPAT) tax minus investment in working capital and fixed assets necessary o sustain the business. It is calculated as:
The net cash flows cannot be maintained over time because a firm has to replace its depreciating fixed assets and also has to develop new products. Hence, the firm is not completely free to use the net cash flows.
The firm is required to use some of its cash flow to satisfy the investment in operating capital. Thus, free cash flow is the amount of cash flow left after meeting the investment need of new operating capital.
In financial decision making, the financial manager should rely on free cash flow to determine the value of the firm. In other words, the value of the firm depends on all the future expected free cash flows (FCF).
Higher the future expected free cash flow higher will be the value of the firm. Thus free cash flow is required for every managerial decision.
However, it should be noted that a firm might have a positive net operating profit after tax but negative free cash flow. It may be due to high investments in operating assets needed to support growth.
In such a case, the firm is supposed to rely on external financing to satisfy the part of investment not covered by net operating profit after taxes. Such a situation is not bad. On the other hand, FCF may be negative because of negative NOPAT. If this is so, the firm is probably experiencing operating problems and hence a need for improvement in the firm’s operation is necessary.
Finance manager interview questions and answers
What does the financial statements include?
A firm prepares various types of financial statements for the purpose of reporting about the financial affairs of the firm. There are four basic financial statements- the balance sheet, the income statement, the statement of stockholder’s equity, and the statement of cash flow. This is the important finance manager interview questions and answers.
These financial statements contain basic financial information about revenues, expenses, assets, liabilities, and cash flows during a specified period. They are briefly described below:
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What do you understand by the term “Balance sheet”?
The balance sheet is a summary of assets, liabilities, and equity of a firm at a given point in time. Assets refer to the resources used by carrying out their business. For example, cash and marketable securities accounts receivable and inventories are current assets. Fixed assets are the long- term assets that have more than one year of life.
They include plant and equipment, land and building, furniture, and so on. On the other hand, liabilities are the amount to be paid to outsiders. They are also of two types – current liabilities and long term liabilities. Current liabilities are the financial obligations to be paid within one year. They include accounts payable, notes payable, and accruals.
Long-term liabilities are the financial obligations having more than one year of maturity. They include long-term loans, bonds, debentures, and so on. Finally, equity refers to the ownership capital supplied by shareholders and includes paid-up capital, paid-in capital, and retained earnings. The balance sheet balances the assets against liabilities and equity.
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What does the Income statement include?
The income statement summarizes the revenues and expenditures of a firm during an accounting year. The income statement reports the number of net sales at the top. This question is asked as one of the most asked finance manager interview questions and answers. Various items of costs are deducted from sales to obtain the net income available to common stockholders.
These items of costs include cash operating costs, depreciation and amortization, interest expenses, and tax payments. The income statement also includes a report on earnings per share, dividend per share, book value per share, and cash flow per share at the bottom.
What do you mean by the statement of cash flow?
The statement of cash flows shows the changes in the financial position of a firm in terms of cash flow during two balance sheet dates. It is a statement that shows the causes which bring changes in cash position between two balance sheet dates. This answers one of the finance manager interview questions.
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Activities that result in cash inflow are referred to as sources of cash and the activities that result in cash outflow are referred to as uses of cash. For the purpose of preparing the statement of cash outflows, the firm’s and activities resulting in inflow and outflow of cash are classified into three categories: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
Cash from operating activities include cash inflows and outflows resulted in day to day operation of the business. Cash from investing activities refers to the cash inflows and outflows resulted from the purchase and sale of fixed assets and long-term investment.
Finally, cash from financing activities includes cash inflows and outflows resulted due to the purchase and sale of shares, debentures, raising and repayment of a loan, dividend payment, and so on.
What is the meaning of the statement of stockholder’s equity?
The statement of share holder’s equity shows the change in the equity position of a firm during a year as compared to the previous year. It reports all equity accounts such as common stock, paid-in capital, retained earnings, and dividends that affect the ending balance of equity.
In this statement, the beginning equity is reported at the top. Any new investments by shareholders along with net income for the year are added to the beginning equity. Then, dividend payment and net losses are subtracted to obtain the ending balance of equity. This statement is prepared after the income statement and balance sheet.
Financial statements report what happened to the firm in terms of sales, assets, liabilities, dividends, and so on over the period. They provide input to shareholders, creditors, and other investors to form an expectation about the required return and risk associated with the firm’s financial affairs.
Interview questions for finance manager
What difference do you find between asset management ratios and debt management ratios?
Assets management ratios:
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- Assets management ratios are used to evaluate the productive power of the firm’s investment in different assets.
- Similarly, asset management ratios show whether the firm has held an adequate investment in productive assets.
- Moreover, asset management ratios show the productivity of assets.
- Therefore, asset management ratios show the qualitative liquidity position of the firm’s investment in inventories and receivables.
- Above all, asset management ratios show the efficiency of the asset structure invested by the firm. This is the best finance manager interview questions and answers.
Debt management ratios:
- Debt management ratios are used to assess the use of debt capital of the firm.
- Above all, Debt management ratios show the extent of the use of debt capital to finance the total assets.
- Furthermore, Debt management ratios show the long-term solvency position of the firm.
- Debt management ratios show the firm’s debt serving and fixed charge coverage capacity.
- Similarly, Debt management shows the efficiency of capital structure employed by the firm.
How is perpetuity different from annuity?
Perpetuity refers to the equal payment at each equal, interval of time until the indefinite time period while an annuity refers to the equal payment at each equal interval of time until the definite time period. In other words, there is a fixed number of equal payments in an annuity. Further these will help you to answer finance manager interview questions and answers.
Discuss the factors affecting the firm’s stock price.
However, there is an alternate goal to profit maximization called stock price maximization. Further, it is considered to be a better goal than profit maximization.
Generally, there is a high correlation between earnings per share, cash flow, and stock price. Thus, in some cases, profit maximization may lead to stock price maximization.
For example, if a firm’s reported profit is higher in several years. It is perceived favorably by the market participants that the firm has large potential.
Along with reinvestment opportunity that generates higher expected cash flows. As a result, this is positively reflected in stock price.
However, stock prices depend not just on today’s earnings and cash flows but also on the future cash flows. and riskiness of the future earnings stream.
A firm’s stock price is determined by a number of factors. Any financial decisions that affect the level, timing, and. the riskiness of expected cash flows will have an impact on the stock price.
For example, investment decisions, financing decisions, and dividend decisions. Also, they are likely to affect the level, timing. And riskiness of the firm’s cash flows, and therefore the price of its stock.
Stock prices are also affected by external factors such as legal constraints. The general state of the economy, tax laws. Interest rates and the condition is the stock market.
Recognition of risk:
Stock price maximization is based on the consideration of risk involved in financial decisions. The level of risk associated with cash flow streams is reflected. By selecting the appropriate required rate of return to determine the present value.
Summing it up,
These were some of the finance manager interview questions and answers that will help you to get along with the interview and get the job that you want.
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