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