How to Answer Accounting Questions in IB Interviews
8 min read
Why Accounting Questions Matter
Accounting is the foundation of every IB technical interview. If you cannot walk through the three financial statements and explain how they link, you will not make it past the first round. There is no ambiguity here — these questions have correct answers, and interviewers expect you to deliver them quickly and confidently.
The Three-Statement Linkage
The income statement shows revenue, expenses, and profitability over a period. The balance sheet shows assets, liabilities, and equity at a point in time. The cash flow statement reconciles net income to actual cash movement.
The three statements are linked through these critical connections:
- Net income from the IS flows into retained earnings on the BS and is the starting point of the CFS
- D&A reduces PP&E on the BS and is added back on the CFS (non-cash charge)
- Capex increases PP&E on the BS and appears as an investing outflow on the CFS
- Working capital changes on the BS flow through the operating section of the CFS
- Ending cash on the CFS equals cash on the BS
Scenario Walk-Through: Depreciation Increases by £10M
This is the single most frequently tested accounting question. Here is how to answer it, assuming a 25% tax rate:
Income Statement: EBIT falls by £10M. Tax falls by £2.5M (25% of £10M). Net income falls by £7.5M.
Cash Flow Statement: Net income is down £7.5M, but D&A is added back (+£10M). Operating cash flow increases by £2.5M. This is the tax shield — depreciation creates a real cash benefit.
Balance Sheet: PP&E falls by £10M (accumulated depreciation increases). Cash increases by £2.5M. Retained earnings falls by £7.5M. Assets change by -£7.5M net; equity changes by -£7.5M. The balance sheet balances.
Scenario Walk-Through: £10M Inventory Write-Down
Income Statement: An impairment charge of £10M hits the IS. At a 25% tax rate, net income falls by £7.5M.
Cash Flow Statement: Net income is down £7.5M. The write-down is non-cash, so it is added back (+£10M). Inventory falling by £10M is a source of cash in working capital. The net cash impact is zero — no actual cash moved.
Balance Sheet: Inventory falls by £10M. Retained earnings falls by £7.5M. A deferred tax asset of £2.5M is created. The balance sheet balances.
Common Follow-Up Questions
- "What if the company is loss-making?" — There is no tax benefit. Net income falls by the full £10M, and the tax shield does not apply until the company is profitable again (tax loss carryforward).
- "Walk me through a £50M cash acquisition." — No IS impact at acquisition. BS: cash falls £50M, assets acquired increase by fair value, goodwill fills the gap. CFS: investing outflow of £50M.
- "What happens when accounts receivable increases?" — Revenue was recognised but cash was not collected. This is a use of cash — operating cash flow decreases.
Three Mistakes That Reveal Weak Candidates
1. Forgetting the tax effect. When depreciation increases by £10M, net income does not fall by £10M. It falls by £7.5M (at 25% tax). The £2.5M tax shield is the whole point.
2. Not checking if the balance sheet balances. After walking through any scenario, always confirm: "Assets changed by X, and liabilities plus equity changed by X. The balance sheet balances." This shows rigour.
3. Treating non-cash charges as cash outflows. Depreciation, amortisation, and write-downs do not involve cash leaving the business. They are added back on the CFS. If you subtract them from cash, your answer is wrong.
Take Your Preparation Further
Download our free Accounting Cheat Sheet for a complete reference covering the three statements, scenario walk-throughs, EBITDA adjustments, and key ratios. For comprehensive interview preparation with model answers across all technical areas, see the IB Interview Bible.
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