5 Trick Questions Frequently Asked in Accounting Job Interviews!

So

starting from question number five, which is the least tricky, the question goes, why is net income different from cash flow? And so the interviewer is asking you why, when you look at the income statement, net income doesn't equal cash flow, whether it's inflow, if you're making income like net income or net loss, cash outflow, What's the difference between the two? And the answer to that is that obviously there are certain items that are non-cash basis that go into the business and that's what makes net income different from cash flow.

Now, the only way for your net income and your cash flow to be equal is if you're running your accounting on cash basis.

There are two ways to run the accounting for a business.

If you're a very small business, you're most likely using cash accounting.

If you are a bigger business, you're most likely following US GAAP and you're running your business on accrual.

So there is cash accounting and accrual accounting.

In cash accounting, net income will always equal the cash flow so that you're recording the transactions only when the cash occurs.

So like if Cash comes in for revenue, that's when you record revenue.

And when cash goes out, that's when you record the expense.

And so in that case, cash flow will always equal your net income.

However, for businesses as they get bigger and mature, they follow US GAAP.

Usually the threshold is $5 million in revenue.

Once you go beyond that, you most likely wanna follow US GAAP, which is accrual accounting.

And in that case, net income is different from cash flow.

And the reason why that is is because Number one, for your sales, when you look at the income statement, the top line is gonna be sales and revenue.

That's gonna be most likely credit sales.

So you're selling your product or service on credit, and you are issuing an invoice and receiving the cash in the future, and so your revenue is not gonna equal cash because the cash comes in in the future.

now the second item here is that accrued expenses is an item that you account for when you're running accrual accounting and you want to account for expenses even though the cash has not been spent and so accrued expenses are recording is recording the expense in the period which the transaction or the service has been rendered even though you haven't received the invoice or spent the cash but you still record accrued expenses so these show up in the income statement and effective income, but there's no cash flow impact from them.

And the third item is non-cash items that are recorded on the income statement, such as depreciation and amortization.

And we all know that depreciation and amortization have no cash impact and so depreciation is just to record the cost of a fixed asset over the life so if you buy a machinery or equipment it will have a useful life of like five years as an example and you're amortized or depreciate the cost over five years there's no cash impact from it it's only affecting net income but not cash and then you have activities such as loans Obviously, if you're receiving a loan, this cash that's coming in, that's going to be cash flow, but it's not going to show up in the net income.

It may show up in a small way as an interest in the net income or the income statement.

However, the bulk of it, which is the loan itself, is going to be much bigger and that's going to be cash flow.

And the fifth item here is CapEx.

CapEx is obviously capital expenditure and that's the company investing in the future and buying fixed assets, machinery and equipment.