Aug 13, 2008

Oracle Apps Financials: Some Interview questions

I am giving below some of the interview questions relating to Oracle Financials that I have come across.

1. Oracle financials talk of Set of Books. However at the beginning of an implementation, when you talk of set of books to the CFO, he will most likely tell you that 'He has just an accounting book for the organization'. So he feels that he does not need 'Set of Books'. How can you reconcile the above two statements?

Ans: 'Set of Books' (or 'Ledger' in R12) are nothing but that, 'Set'. This means that one Set of books can contain multiple 'Accounting Books'. In the Chart of accounts in Oracle, there is a segment known as 'Company Segment'. Each value of the Company Segment represents one Accounting Book. The answer to the CFOs question is that 'if he is having only one book, then we will have only one value for the Company Segment, normally '01'. As and when his company expands and creates new companies with their own accounting book, we will add more values to the 'Company Segment'.

For example, SAIL (Steel Authority of India, my erstwhile employer) has multiple Factories. While SAIL as a company has its own Accounting Book, each Factory will have its own Accounting Books. In this case I can either:

Create each Factory as a separate value in 'Company Segment' (Durgapur 01, Bhilai 02 etc) and consolidate at the level of SAIL or,

Create SAIL as a value in the Company Segment and create each of the factories as Profit Centers.

Each option above has its own advantages and disadvantages. I will cover some of it in my article 'How to guide to Solution Design in ERP'

2. What is meant by 'Top Line' and 'Bottom Line'?

In the 'Vertical format' of P&L (Profit and Loss) statement of a company, the first line in the statement is 'Gross Revenue (Sales)'. From the gross revenue various expenses like Cost of Materials, Sales and Administrative Expenses, Depreciation, Interest and Taxes are deducted to arrive at Net Profit, which is the last line in the statement. Hence Gross Revenue is called as the Top Line and Net Profit is called as the Bottom Line.

3. In P&L, what is 'Gross Profit', EBIDTA, EBIT /  'Operating Profit', EBIT, EBT and EAT?

Gross Profit is the first level of profit in the P&L statement. This is arrived by using the formula (Gross Sales  + Other Income - Cost of Materials - Cost of Direct Overheads).

Next comes the Operating Profit. This is calculated by using the formula (Gross Profit - Selling, General and Administrative (SG&A) expenses). SGA will include all expenses including Indirect Overheads, Salaries and Wages, Depreciation, Marketing & advertisement, Sales commission etc)

EBDITA stands for Earnings Before Depreciation, Interest and Taxes. This is calculated by removing Depreciation from the SGA Expenses and tracking the same separately.

EBIT stands for Earnings Before Interest and Taxes. This is calculated by the formula (EBIDTA - Depreciation). As you can see, EBIT is nothing but the Operating Profit.

There are two more concepts. One is EBT (Earnings Before Taxes). This is calculated by the formula (EBIT - Interest) and

EAT / PAT (Earnings After Taxes / Profit After Tax or Net Profit or Bottom Line) which is calculated as (EBT - Taxes).

So your typical vertical P&L Statement will look as follows:

Gross Revenue 
(Less: Excise Duty applicable in India)
Net Revenue
Add: Other Income
Total Income
Less: Cost of Goods Sold
Less: Direct Overheads
Gross Profit
Less: SG&A Expenses (Excluding Depreciation)
Less: Depreciation
EBIT (Operating Profit)
Less: Interest
Less: Taxes

4. What is 'Cash Profit'?

Ans: Cash Profit is not an Accounting Terminology. It is a terminology coined by Investment Managers to calculate the Cash Accumulating to the company. The Cash Profit realizes that while depreciation expenses tend to lower the Net Profit (PAT / EAT) of the company, they are not a cash outflow. Also, for new companies, since the Assets are relatively new, the Depreciation figures can be very high and hence the Net Profit may look to be abnormally low. This may give a false picture of the health of the company from an Earnings Perspective.

To overcome the above, they coined the term Cash Profit. This is calculated by using the formula (EAT + (1-Tax rate)*Depreciation.

Normally while valuing startups, the investment managers realize that in the initial years, the net profit may be down due to high depreciation. Hence Cash Profit, which excludes Depreciation, is a better criteria than Net profit to value such companies

5. What is the concept of 'Bill in Advance' and 'Bill in arrears' in AR?

6. What is profitability? How do you map 'segment wise profitability' in Oracle?

Ans: Checkout my article on 'Segment wise profitability' in my blog

7. Explain the accounting flow in P2P Cycle, O2C cycle etc
8. Foreign currency accounting: Explain conversion, revaluation, translation and remeasurement

9. How do you get the account description in FSG reports?

10. What is mass allocation?

11. Suppose I am paying rent regularly on the premises that I occupy. The amount and the account is the same for each month. What are the two ways in which I can map this requirement in Oracle so that the data entry is simplified. Which approach would you prefer? Why?

12. What are the different ways in which you can map intercompany transactions in apps? which one you prefer and why?

13. What is a ledger in R12? What are the four Cs of a ledger?

14. Is profit an 'Asset' or 'Liability'?

Ans: This is a paradox questions. From our intuitive concept of Assets and Liability, Profit should be an asset. However Profit is the amount the company is liable to the Owners of the company. As per the Entity concept of Accounting, a company is an entity separate from its owners. The owners put in the investment, company uses the resources and generate the profit which the company is liable to return to the shareholders.  Hence Profit is a liability of the company to its shareholders.

15. What is the difference between 'Periodic' accounting and 'Perpetual' accounting?

Ans: This is an important question and is applicable to accounting of inventory. In traditional accounting, the purchase of inventory is initially debited to the Profit and Loss Account. Inventory is recognized at the end of the month using the formula (Closing Inventory = Opening Inventory + Purchases - Cost of goods sold). Since Inventory is recognized at the end of the period, this is known as 'Periodic Accounting of Inventory'.

Why do the organizations use Periodic Accounting?

The reason is that the material transactions are large in number and are difficult to value at the time of transaction. Hence it makes sense to account for Purchases during the period, do a physical count at the end of the month and transfer the purchase cost to the inventory (Capitalization of expenses).

So what is perpetual accounting?

This is one of the major benefits that accrues to Organization due to ERP Implementation. ERP is able to track each inventory transaction and the corresponding accounting transactions. This means that whenever a purchase receipt is generated in the system, the Quantity, Costing and Accounting impact takes place simultaneously. Since accounting takes place for each and every transaction, this concept of accounting is called 'Perpetual Accounting'. The corresponding Quantity transactions process is called 'Perpetual Inventory'. 


Anonymous said...

Anybody having the answers ???

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