Ch. 5 Perform the Analysis

Define normal distribution curve

Bell-shaped curve

What are some tools used in Descriptive analytics?

Counts, Mins., Max, Medians, Totals, Sums, Averages Graphs, Histograms, Ratio Analytics(Return on assets, return on sales(profit margin), Vertical and horizontal analysis.

What are some specific tools used for Diagnostic Analytics?

-Drill-downs and roll-ups (Uncovers details by summarizing data in layers. -Pivot Tables -Correlation/Regression ( How are R&D expenses related to future firm profit?) -Hypothesis Testing

What are the two broad types of Diagnostic Analytics?

1. Identifying Outliers/Anomalies 2. Finding previously unknown patters or relationships between variables.

What are the 7 test approaches for finding anomalies/outliers?

1. Internal controls testing 2. Fuzzy Matching 3. Sequence checks and analytics 4. Duplicate transactions 5. Benford's Law 6. Variance analytics 7. Cash/bank reconciliation

What four questions are asked in the, Perform the Analysis, portion of the AMPS Model?

1. What happened? Ex. " Did we make a profit?" "How much did we pay in taxes last year?" -Descriptive Analytics 2. Why did it happen? Ex. "Why did overall tax increase even though net income did not?" -Diagnostic Analytics 3. Will it happen in the future? Ex. " What is the chance the company will go bankrupt?" "Can we predict when the financial statements might be misstated?" 4. What should we do, based on what we expect will happen? Ex. "What is the level of sales that will allow us to breakeven?" "Should the company make its products or outsource to other producers?"

Define Alternative Hypothesis

A hypothesis used in hypothesis testing that is opposite of the null hypothesis, or a potential result that the analyst may expect HA: We expect that there greater sales returns during the holiday season as compared to the non-holiday season.

What is Regression?

A predictive analytics technique used to predict a specific dependent variable outcome value based on independent variable inputs.

What is Forecasting using Time Series Analytics?

A predictive analytics technique used to predict future values based on past values of the same variable.

What is Classification?

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

What is capital budgeting, and why is it considered to be part of prescriptive analytics?

Capital budgeting uses net present value and internal rate of return to evaluate future cash flow. This allows a company to know what to expect and improve.

What are the 3 broad categories of Predictive analytics?

Classification Regression Forecasting using Time Series Analytics

Define Descriptive Analytics

Descriptive analytics asks the question what happened or what is happening? Analytics performed which characterizes, summarizes, and organizes features and properties of the data to facilitate understanding.

Define Diagnostic Analytics.

Diagnostic Analytics asks the questions of "Why did it happen?" Diagnostic analytics explores the underlying cause of a problem that can't be found using descriptive data.

Define Uniform Distribution

Every outcome equally likely

What are tools used in Prescriptive analytics?

Goal Seek What-if-scenario Sensitivity analytics (Evaluation of outcomes based on uncertainty regarding inputs). Marginal or incremental analytics Capital Budgeting (Evaluating future cash flows).

What question does Sequence checks/analytics address?

It addresses the question, "Are any checks or purchase orders missing? Does it signify errors or fraud or can they be explained?"

What question does Benford's Law address?

It addresses the question, "Is the distribution of the first digit of a dataset different than expected?"

What question does Cash/Bank reconciliation address?

It addresses the question, "What are the reconciling items (Outliers or anomolies) needed to adjust the bank and general ledger cash balance?" This essentially compares general ledger cash account to what is reported at the bank.

What question does Fuzzy Matching address?

It addresses the question, "Why are some addresses of approved vendors similar to the addresses of those employees that work at the company?" This just checks addresses of employees and vendors and to see if they are similar...We don't want employees sending product to their house on the company's expense.

What question does Duplicate Transactions address?

It addresses the question, "Why are there duplicates of some transactions in the financial reporting records? Are they fraud or errors?"

What question does Variance Analytics address?

It addresses the question, "Why is labor rate and labor variance for direct labor at the manufacturing plant unfavorable?"

What question does Internal Controls testing address?

It addresses the question, "Why were some large cash disburesements not approved by senior management, and do they represent a violation of a company's internal controls?" This just checks that disbursement of cash was done by appropriate authorization.

What question does Predictive Analytics ask and how is it defined?

It asks the question, "Will it happen in the future," or, "What is the probability something will happen." Predictive analytics is analytics performed to provide foresight by identifying patterns in historical data and assessing likelihood or probability

How would summing the total net income over the past 4 years be considered descriptive analytics?

It utilizes the total and sum tools of descriptive analytics which allows users to measure performance of a company.

Define Poisson Distribution

Low mean and being highly skewed to the right; mean number of events per interval of space or time

What questions does Prescriptive Analytics ask, and what is its definition?

Prescriptive analytics is defined as, analytics performed which identifies best possible options given constraints or changing conditions. Its asks the question, "What should we do based on what we expect will happen?" and "How do we optimize our performance based on potential constraints?".

Define parameter

a characteristic of a population (μ)

Define statistic

a characteristic of a sample (x-bar, or x ̅)

What is a population?

a group of phenomenon having something in common

What is a sample?

a subset of members of a population selected to represent that population

Define Null Hypothesis

assumes the hypothesized relationship does not exist, that there is no significant difference between two samples or populations H0: We expect that there is no difference in sales returns between holiday and non-holiday season.