Ace Your Private Equity Accounting Interview: The Top Questions You Need to Know

Landing a job in private equity is extremely competitive, with thousands of candidates vying for a limited number of positions each year. That’s why it’s absolutely essential to come prepared to showcase your skills during the recruiting process.

For candidates from accounting backgrounds, this means mastering the likely technical and accounting interview questions that will come up While you may have sterling academic credentials and work experience, the interview is make-or-break in determining whether you have what it takes to thrive in the high-stakes world of private equity

In this comprehensive guide, we’ll cover the 25 most common private equity accounting interview questions you’re likely to encounter. Mastering these questions will help you tackle case studies, technical tests, and any curveballs thrown your way during the recruiting process.

Here’s a preview of the key types of private equity accounting interview questions we’ll cover

Technical Accounting Concepts – Testing your knowledge of core accounting principles and standards. This includes questions on GAAP, revenue recognition, depreciation, impairment, M&A accounting, consolidation, etc.

Accounting Judgment – Assessing your ability to apply accounting concepts to real-world situations. These questions deal with gray areas requiring judgment calls.

Transaction Experience – Drawing on your experience with deals and transactions in investment banking, audit, or other roles

Valuation – Gauging your financial modeling skills and how you value companies and assets.

Investment Analysis – Testing your commercial acumen and ability to assess investment opportunities.

Firm and Culture Fit – Determining how well you’d align with the firm’s approach and team dynamics.

Let’s get right to it and explore examples of the top accounting interview questions for private equity!

Technical Accounting Concepts

These private equity accounting interview questions aim to test your conceptual knowledge of core accounting standards and principles. They expect you to recall key definitions and mechanics from your educational background.

Some examples include:

• What are the three key financial statements and what is the purpose of each?

  The three key financial statements are:

  • Income Statement – Reports revenue, expenses, and net income over a period of time.

  • Balance Sheet – Snapshot of assets, liabilities, and equity at a point in time.

  • Cash Flow Statement – Depicts inflows and outflows of cash.

  You need all three statements to assess the performance, health, and liquidity of a business.

• Walk me through the accounting for a basic acquisition under the purchase method.

  Under the purchase method, the acquirer records assets and liabilities of the target at fair value. Any excess purchase price over the net fair value of assets/liabilities is recorded as goodwill. The target company’s financials are incorporated into the acquirer’s financial statements going forward.

• Explain the difference between capital and operating leases.

  In a capital lease, the lessee acquires substantially all risks and rewards of ownership, so the leased asset and lease obligation appear on the balance sheet. An operating lease is accounted for as an expense on the income statement with no balance sheet impact.

• What is the difference between GAAP and IFRS accounting standards?

  GAAP refers to Generally Accepted Accounting Principles in the U.S. whereas IFRS refers to International Financial Reporting Standards. Key differences include treatment of development costs, inventory valuation, and depreciation. IFRS does not permit LIFO inventory valuation.

Brush up on your technical accounting knowledge before interviews to avoid getting tripped up on basic concepts. Resources like CFI’s accounting courses can provide a thorough refresher.

Accounting Judgment

While getting the technical definitions correct is important, private equity firms also want to assess your ability to apply accounting concepts judiciously. Accounting often involves gray areas open to interpretation and judgment calls.

Some examples of judgment-based interview questions include:

• When does it make sense to impair goodwill or intangible assets?

  Goodwill impairment testing involves estimating the fair value of a business unit and comparing it to its book value. Impairment charges should be recorded when fair value is estimated to be materially below book value and the declines in value are expected to be permanent.

• How would you evaluate if deferred tax assets are realizable and should remain on the balance sheet?

  Factors to assess include historical profitability, forecasts of future taxable income, tax planning strategies, and potential limits on using tax assets. Deferred tax assets facing expiration periods or related to businesses with sustained losses should be evaluated for impairment.

• Is it ever acceptable to shift revenues between periods or defer expenses to smooth earnings?

  Revenue should be recognized when earned based on GAAP principles. Deferring expenses to future periods is improper as well unless following acceptable accounting methods like deferred contract costs. Materially shifting revenues/costs between periods solely to smooth volatility is earnings manipulation and unethical.

• When does it make sense to classify an investment as held-to-maturity vs. available-for-sale?

  Held-to-maturity is for assets the company intends and has the ability to hold to maturity. Any sales would “taint” the portfolio and revoke this classification. Available-for-sale offers more flexibility to sell but assets are marked to market value each period.

By probing judgment calls, private equity firms assess analytical skills beyond basic technical competence.

Transaction Experience

Leveraging your experience with transactions is key for accounting candidates. Interviewers will probe your exposure to deals from investment banking, audit, corporate finance roles, or other backgrounds.

Some examples include:

• Walk me through the most complex deal you’ve worked on.

  Tailor this answer to highlight accounting considerations and judgments you wrestled with. Discuss the transaction background, timeline, financials, and how you navigated key accounting issues. Share lessons learned.

• Describe how you’ve analyzed the quality of earnings of a target company.

  Quality of earnings analysis examines non-recurring items, adequecy of reserves, sustainability of performance metrics, and other factors affecting future profitability. Share frameworks used and how you flagged risks.

• How have you modeled acquisitions and conducted purchase price allocation (PPA)?

  Discuss PPA processes, from verifying net assets to valuing intangibles to risk adjustments. Share examples of PPAs conducted and key decisions made in determining asset valuations.

• What analyses have you performed to assess goodwill impairment?

  Share approaches used to forecast cash flows and weigh inputs to fair value assessments. Discuss quantitative analysis as well as qualitative factors weighed in making judgments. Provide examples if possible.

Leveraging deal-specific examples demonstrates your ability to apply technical knowledge.

Valuation

Private equity firms will expect accounting candidates to possess strong valuation skills and financial modeling capabilities.

Some examples of valuation interview questions include:

• How would you value the equity of a private company?

  Valuation methods for private company equity include discounted cash flow analysis, comparable public companies/transactions, and precedent transactions. Weighing multiples from each method to determine a valuation range.

• What are the key inputs and assumptions in a DCF model?

  Key inputs include revenue growth rates, profit margins, capex, depreciation, taxes, and working capital. The discount rate and terminal assumptions are also critical. Base case assumptions should be justifiable and scenario analysis used.

• How would you assess the reasonableness of a valuation?

  Benchmarking key valuation metrics to industry/market levels provides a reasonableness check. Analyzing historical performance vs. projections and assessing operating leverage are important as well. Sensitivity analysis around key inputs also helps gauge valuation reasonableness.

• How is EBITDA adjusted in valuations and what common add-backs do you see?

  Adjustments include removing non-recurring or extraordinary items and adding back non-cash expenses like D&A. Common add-backs are one-time restructuring charges, stock comp, and unrealized gains/losses. Adjustments should be normalized and justified.

Solid financial modeling and valuation skills are mandatory for PE investment professionals. Brush up if needed.

Investment Analysis

In addition to technical skills, softer business judgment is crucial to succeed in private equity. Firms will probe your commercial acumen and ability to assess potential deals.

Some examples include:

• How would you evaluate if a business is a good acquisition target?

  Factors to examine include market position, growth prospects, customer base, competitive threats, barriers to entry, pricing power, operating leverage, and cash generation. Strategic fit and synergies with acquirer matter as well.

• What are early warning signs that an investment may be underperforming?

  Red flags include missing budget, market share losses, lower margins, high executive turnover, governance issues, low employee morale, vendor problems, working capital spikes, and compliance/regulatory challenges.

• How would you assess risks for an investment in a cyclical industry?

  Analyze historical performance through business cycles, simulate downturn scenario impacts in models, focus on flexible cost structure, ensure sufficient liquidity, and test ability to restrict dividends during downturns.

• How would you evaluate strategic alternatives for a struggling business unit?

  Options include operational improvement plans, additional investment, divestitures of poor-performing assets, JVs to reduce exposure,