The Ultimate Guide to Acing Investment Banking Technical Interviews

When it comes to landing a job in investment banking, technical questions play a crucial role in assessing a candidate’s knowledge and passion for the field. Even if the interviewers like your personality and fit, a poor performance on the technical component can hurt your chances. In this blog, we’ll provide an overview of preparing for technical questions in investment banking interviews, focusing on two primary types of questions: Accounting and Valuation.

The Importance of Technical Questions: Technical questions are designed to evaluate your conceptual understanding of financial concepts, which is essential in the world of investment banking. Demonstrating proficiency in these areas not only showcases your expertise but also your ability to analyze and make critical financial decisions. Let’s delve into some key aspects of technical questions you should be prepared for.

Top Accounting Concepts to Know:

The Three Financial Statements: The three fundamental financial statements are the Income Statement (IS), Cash Flow Statement (CFS), and Balance Sheet (BS).

Understanding Changes: You should know how changes in individual items on each financial statement affect one another and why. For example, if revenue increases, what impact does it have on other line items?

Line Items: Familiarize yourself with individual line items on the statements, such as Goodwill, Shareholders’ Equity, and others.

Accounting Methods: Understand different accounting methods, like cash-based vs. accrual, and when to recognize revenue and expenses.

Expense vs. Capitalization: Learn when to expense something and when to capitalize it, as this can significantly impact financial statements.

The Three Financial Statements: Let’s take a closer look at each of the three financial statements:

Income Statement (IS):

• The IS shows a company’s revenue, expenses, taxes, and after-tax profit over a specific period.
• It provides insights into a company’s performance.

Balance Sheet (BS):

• The BS displays a company’s assets, liabilities, and equity at a specific point in time.
• It follows the fundamental equation: Assets = Liabilities + Equity.

Cash Flow Statement (CFS):

• The CFS tracks changes in a company’s cash balance over time.
• It serves two primary purposes: adjusting non-cash items from the IS and showing additional cash inflows and outflows.

Primary Questions on the Three Financial Statements: During your interview, you might encounter questions like:

• Walk me through the three financial statements?
• How do the three financial statements link together?
• If you had to choose only one statement to assess a company’s health, which one would you use and why?
• If you could use only two statements, which two would you choose and why?

Remember to articulate your answers clearly and concisely.

Analyzing Changes on the Three Financial Statements: Technical questions often involve scenarios where you need to assess the impact of specific changes on financial statements. For example:

• How would an increase in depreciation by $10 affect the three statements?

Follow a systematic approach:

Income Statement (IS): Begin by examining the IS. In the case of increased depreciation, operating income and pre-tax income would both decline by $10. This decrease in income results in a tax shield of +$2, leading to a net income decrease of -$8.

Cash Flow Statement (CFS): Proceed to the CFS. Start with the net income from the IS, which now stands at -$8. However, depreciation is a non-cash expense, so you add it back (+$10). As a result, cash flow from operations (CFO) increases by $2. No other changes occur in this scenario, leading to a net cash flow change of +$2.

Balance Sheet (BS): Conclude by analyzing the BS. Since depreciation represents a decrease in the value of a company’s assets, it reduces the value of Property, Plant, and Equipment (PPE) by $10 on the asset side. Meanwhile, the increase in cash flow from the CFS by $2 reflects positively in the cash line item. As a result, assets decrease by $8. Additionally, since net income decreased by -$8, shareholders’ equity on the Liabilities and Equity side also declines by the same amount. With these adjustments, the Balance Sheet remains balanced.

Mastering technical questions in investment banking interviews is pivotal to demonstrating your knowledge and passion for the field. By comprehending the three financial statements, understanding their intricate connections, and analyzing the impact of changes, you can confidently navigate these questions. Remember that practice and preparation are your allies in this competitive landscape. Your ability to handle technical questions adeptly will set you on the path to success in the dynamic world of investment banking. Best of luck with your interviews!