Finance and Accounting
Finance questions test whether you can read the story in the numbers. Know the three statements and how they link: net income flows into retained earnings, depreciation is added back in the cash flow statement, and working capital movements consume or release cash. Distinguish accrual from cash accounting, and profit from cash. Ratios: current and quick ratios for liquidity; debt-to-equity and interest cover for solvency; gross, operating and net margin for profitability; asset turnover; and the DuPont decomposition of ROE as margin times turnover times leverage. For investment appraisal, payback ignores the time value of money, NPV is the primary decision rule, and IRR can mislead with non-conventional cash flows or differing project scale. Use incremental cash flows, ignore sunk costs, and include opportunity costs and working capital.
Traps: EBITDA is not cash flow, because it ignores capex, interest, tax and working capital. Depreciation is non-cash but not irrelevant - it is a tax shield. A high ROE may be pure leverage. Book value is not market value. Never mix financing flows into project cash flows.
Worked rule: break-even units equal fixed costs divided by price minus variable cost per unit. Fixed costs of 50,000, price 20 and variable cost 12 give a contribution of 8 and a break-even of 6,250 units.
Example: spending 100 today to receive 110 in one year at a 10% discount rate gives NPV of 110 divided by 1.10 minus 100, which is zero - value-neutral at that hurdle rate.