Basic Accounting Interview Questions and Answers - 2

9. Is it good to have a large amount of working capital?

Not always. A large amount of working capital with a relatively small amount of cash indicates company could run into problems paying its bills and vendors. Limited cash indicates company is unable to move inventory or unable to recover receivables from customers. Extremely high net working capital may also mean the company is overly invested in inventory or slow to collect on debts, which could be indicative of diminishing sales or operational inefficiencies.

10. What’s the difference between deferred revenue and accounts receivable?

Deferred revenue represents cash received in advance from customers for services which have not yet been performed or goods which have not yet been delivered. Accounts receivable represents cash owing from customers for goods/services already provided.

11. When should purchases be capitalized?

If the purchase will be used in the business for more than one year, it is capitalized and depreciated.

12. What is Debt Capital and equity Capital?

Debt capital is acquired through the borrowing of funds to be repaid at a later date. Loans and credit are the common type of debt. Through Debt financing, the business acquires much needed fund for rapid growth. Moreover, payments on debt are generally tax-deductible. But it has its downside with total amount repaid exceeds the initial sum as lenders require the payment of interest. Also, payments on debt must be made regardless of business revenue.

In Equity financing, funds are generated by the sale of stock. Shareholders own a small stake in the business and funds need not be repaid. The company tries to maintain a healthy stock valuation and pay dividends.

Since equity financing is a greater risk to the investor than debt financing is to the lender, the cost of equity is often higher than the cost of debt.13. Which is cheaper source of financing debt or equity? Why?Debt capital is cheaper source of financing. The interest cost of debt is lower as compared to dividends since the debt has limited risks, paid before equity and ranks ahead on liquidation.

The dividends paid to equity holder are not tax-deductible. On the other hand, the interest expense is deducted while calculating the taxable profit of the company that reduces the tax liability significantly.

14. What Is Preference Capital?

Preference Capital carries preference over Equity capital at the time of Payment of dividend and at the time of winding up of the company.

15. What Is Secondary Market?

Secondary market refers to market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange.