Chapter 8

Bankruptcy classification

-If Z<1.80, significant risk of bankruptcy DISTRESS ZONE -If Z>=1.80 and <3.00, risk of bankruptcy, GRAY ZONE -If Z>3.00, SAFE ZONE

Bankruptcy Classification: Altman's Z

-Working capital/total assets -retained earnings/total assets -earnings before interest and taxes/total assets -market value of stockholder's equity/book value of total debt owed -sales/total assets

Which predictive analytics technique would be used to predict whether a firm is likely to go bankrupt in the coming year? -Regression -Classification -Benford's law -Monetary unit sampling

Classification

According to Beneish, which of the following factors are predictive of financial statement fraud? -Sales/Total assets -Market value of stockholders' equity/Book value of total debt owed -Net Income/Total assets -Decrease in depreciation expense

Decrease in depreciation expense

According to the text, _______ prefers _______ -basis accounting since it is better at forecasting future performance. -GAAP, cash -GAAP, accrual -tax accounting, cash -tax accounting, accrual

GAAP, accrual

All of the following are factors used by Altman's Z in predicting bankruptcy except: -Sales/Total assets -Market value of stockholders' equity/Book value of total debt owed -Retained Earnings/Total assets -Income/Total assets

Income/Total assets

Would a greater amount of working capital/total assets lead to more bankrupt or less bankrupt firms? -More bankrupt -Less bankrupt

Less bankrupt

Which is more persistent in predicting future amounts of the variable based on current amounts of that same variable? -Cash flows from operating activities -Cash flows from investment activities -Operating income -Cash flows from financing activities

Operating income

Which predictive analytics technique would be used to predict the interest rate given from a lender (bank) to a borrower? -Regression -Classification -Benford's law -Monetary unit sampling

Regression

Predicting future operating income would be an example of which type of predictive analytics? -Time series -Regression -Classification

Time series

Machine Learning

ability of a computer or machine to automatically learn on its own without being explicitly programmed to do so ex: robotic process automation- software programs that automate certain repeatable tasks

Deterministic Models

all events are known beforehand

Classification analysis to decide on client acceptance or rejection is most important for ______. -lenders -auditors -audit regulators -investors

auditors

Not considering historical averages when making predictions of possible future events is known as _______. -base rate fallacy -base rate ignorance -historical rate fallacy -historical rate ignorance

base rate fallacy

Predicting which companies are likely to be fraudulent/not fraudulent or likely to be bankrupt or not bankrupt are examples of _______. -classification -prediction -regression -time series analysis

classification

Predictive analytics technique to separate a sample (or population) into one or more groups or classes is called _______. -regression -classification -time series -forecasting

classification

If a company has an Altman Z-score of 2.8, the company would be classified in the _______. -distress zone, or at significant risk of bankruptcy -gray zone, or at risk of bankruptcy -safe zone, not currently at risk of bankruptcy

gray zone, or at risk of bankruptcy

Probabilistic Models

judging the likelihood and probability of a future event or outcome occurring always an element of chance of whether or not it will happen

The persistence of _______ as compared to _______ is consistent with GAAP requiring the use of accrual accounting for financial reporting purposes. -sales; operating income -operating income; cash flows from operating activities -sales; cash flows from operating activities -cash flows from operating activities; sales

operating income; cash flows from operating activities

Regression

predictive analytics technique that allows the accountant to estimate a specific dependent variable outcome value based on independent variable inputs

Classification

predictive analytics technique used to separate or classify a sample or population into two or more groups or classes

Base rates

probability of an event occurring based on a related historical average

Persistance

repeatability or continuity and durability of the FS variables over time it estimates if the trend of the past financial performance continue will into the future

A software program that automates certain repeatable tasks is called _______. -machine learning -automated task repetition -robotic process automation -predictive automation

robotic process automation

Time series analysis

tool/technique used to predict future values based on past values of the same variable

Base Rate Fallacy

when the prediction places too little weight on the base rates of the past and instead uses different or new information