8 Accounting Interview Questions Every Investment Banking Candidate Should Know

The core accounting questions that come up in almost every investment banking technical interview — how the three financial statements connect, and how to actually explain it out loud.

8 Accounting Interview Questions Every Investment Banking Candidate Should Know

Every investment banking technical interview eventually gets to accounting, and almost every version of that question is really asking one thing: do you actually understand how the three financial statements connect, or did you just memorize a flowchart? Interviewers can tell the difference immediately, because the follow-up question is always "walk me through what happens if—" and then they change one input.

Here are the questions that come up constantly, and how to actually think through them — not just recite an answer.

1. How are the three financial statements linked?

This is the single most common technical question in investment banking recruiting, and it's worth being able to say cleanly, without notes:

Net income from the income statement flows into retained earnings on the balance sheet, and also becomes the starting line on the cash flow statement under cash flow from operations. Changes in working capital — accounts receivable, inventory, payables — affect cash flow from operations. Capital expenditures on the cash flow statement reduce (and then, through depreciation, further reduce) PP&E on the balance sheet. Finally, the ending cash balance from the cash flow statement becomes the cash line item on the balance sheet, which is what ties the whole loop together.

Once you can say that in under 30 seconds without stumbling, you're ready for the follow-ups — which is where the interview actually gets interesting.

2. What happens to the three statements if depreciation increases by $10?

- Income statement: Depreciation expense rises by $10, reducing EBIT by $10. At a 40% tax rate, net income falls by $6.

- Cash flow statement: Net income is down $6, but depreciation is a non-cash expense, so it gets added back — cash flow from operations actually increases by $4.

- Balance sheet: Cash rises by $4, PP&E falls by $10, and retained earnings drop by $6. Assets fall by $6, equity falls by $6 — it still balances.

The pattern to notice: a change that looks like it should only hurt you (higher depreciation, lower net income) can still increase cash, because depreciation isn't a real cash outflow. That distinction is the whole point of the question.

3. What happens if a company buys $100 of new equipment?

No income statement impact yet (assuming depreciation hasn't started). On the cash flow statement, it's a $100 outflow under investing activities. On the balance sheet, cash drops $100 and PP&E rises $100 — total assets stay the same, nothing else moves.

4. What happens if accounts receivable increases by $10?

No income statement change, since the revenue was already recorded. Cash flow from operations decreases by $10, because more cash is now tied up in receivables instead of collected. On the balance sheet, receivables (an asset) go up $10 and cash goes down $10 — total assets unchanged.

5. What happens if a company issues $100 in new debt?

No immediate income statement impact. Cash flow from financing increases by $100. On the balance sheet, cash rises $100 and debt rises $100 — both sides move together, so it balances.

6. What happens if a company writes down $20 of inventory?

The write-down hits the income statement as a $20 expense, reducing pre-tax income by $20. At a 40% tax rate, net income falls by $12. On the cash flow statement, net income is down $12, but the write-down is non-cash, so it's added back — cash flow from operations rises by $8. On the balance sheet, inventory falls $20, cash rises $8, and retained earnings fall $12.

7. What is working capital, and why does it matter?

Working capital is current assets minus current liabilities. It matters because it measures short-term liquidity — whether a company can fund daily operations, cover payroll, and pay suppliers on time without relying on expensive short-term borrowing.

8. What's the difference between accrual and cash accounting?

Accrual accounting recognizes revenue and expenses when they're earned or incurred, regardless of when cash actually changes hands. Cash accounting recognizes them only when cash moves. Nearly every company of any real size uses accrual accounting, which is exactly why the income statement and the cash flow statement can — and usually do — tell different stories in the same period.

The pattern behind all of these

Notice that almost every answer above follows the same shape: something moves on one statement, a non-cash item gets added back or backed out on the cash flow statement, and the balance sheet absorbs the difference so both sides still match. Once you can trace that logic on your own, instead of memorizing each individual scenario, you can answer a version of this question you've never explicitly seen before — which is exactly what the interview is actually testing.

**This is one section out of eleven full modules on accounting, valuation, and interview preparation in [Break Into Investment Banking] (https://financefriendhq.com/courses) — including the DCF, comps, precedent transactions, and full LBO build. Built by a current IB Director who broke in from a non-target school.