Answers / Financial Due Diligence
How would you test revenue cut-off at period ends, and what manipulations does it catch?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Cut-off testing checks that revenue is recorded in the correct period — that sales near the period boundary belong where they're booked. You examine transactions in the days just before and after each period end: trace invoices to shipping/delivery evidence and contract terms to confirm the performance obligation was actually satisfied in the period recorded, and reverse — check that goods shipped/services delivered are recorded in the right period. You also review credit notes and returns issued just after period end (which may reverse aggressive pre-period-end sales), large or unusual late-period transactions, and post-period reversals. It catches classic manipulations: channel stuffing and pulling forward next period's sales to hit a target, booking revenue before delivery/acceptance, holding the books open past period end, and round-tripping. In an FDD context this directly affects the quality and trend of EBITDA — pulled-forward revenue inflates the period you're valuing and depresses the next — so cut-off issues are both a quality flag and a normalization adjustment.
WHAT INTERVIEWERS LISTEN FOR
- ✓Test transactions either side of period end vs delivery/contract evidence
- ✓Review post-period credit notes/returns and unusual late sales
- ✓Catches channel stuffing, early recognition, holding books open, round-tripping
- ✓Affects EBITDA trend/quality — a normalization and quality flag
COMMON MISTAKES
- ✗Only checking invoice dates not delivery/acceptance
- ✗Ignoring post-period credit notes/returns
- ✗Not linking cut-off to EBITDA trend
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