Exam 3 study guide

Altman's Z: X1

Working Capital/Total Assets Liquidity - Company's ability to pay its current bills

___________ show values of two variables each plotted on its own axis to exhibit potential ________. a. Scatter plots; trends b. Scatter plots; correlation c. Graphs; correlation d. Graphs; trends

b. Scatter plots; correlation

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

c. Operating income

A software program that automates certain repeatable tasks is called __________. a. Machine learning b. Automated task repetition c. Robotic process automation d. Predictive automation

c. Robotic process automation

An analysis of future events performed by the probability of those events and the potential outcomes is called _______. a. Prescriptive analytics b. Make-or-buy analysis c. Scenario analysis d. Sensitivity analysis

c. Scenario analysis

Scatter plots are more meaningful if they include a __________. a. Time series prediction b. Box plot c. Trend line d. Categorical variable

c. Trend line

The decision of what big project to invest in is traditionally called ________. a. Cash flow analysis b. Net present value analysis c. Internal rate of return d. Capital budgeting

d. Capital budgeting

According to Beneish, which of the following factors are predictive of financial statement fraud? a. Sales/Total assets b. Market value of stockholders' equity/Book value of total debt owed c. Net income/ Total Assets d. Decrease in depreciation expense

d. Decrease in depreciation expense

___________ are brief summaries (or factoids) of a data set that provide a representation of the data set as a whole. a. Predictive statistics b. Prescriptive statistics c. Diagnostic statistics d. Descriptive statistics

d. Descriptive statistics

Ratio Data

Numerical data with an equal and definitive ratio between each data point and absolute "zero" is the point of origin.

Time Series Data

Observations on values taken on by a variable at different points in time

Altman's Z: X2

Retained earnings/Total Assets Measure Long-term Profitability

Payback Period

The length of time required to earn back the amount of the initial investment For example: if $1,000 investment returns, $100, $300, and $600 n the first 3 years, then the payback period would be 3 years.

Histograms

1. Represent bins/intervals 2. Use numerical data 3. Show the count of observations

Bar Charts

1. Represent categories 2. Use categorical data 3. Variety of descriptive statistics

Excel What-if Analysis tools

1. Goal Seek - works with only one variable input value 2. Scenario Manager - up to 32 input values 3. Data Table - only one or two but can accept many different values for those variables

Beneish's Eight Factors for predicting Financial Fraud

1. Increased receivables 2. Decrease in gross margin 3. Decrease in Asset quality 4. Increase in Sales Growth 5. Decrease in Depreciation Expense 6. Decrease In SG&A 7. Increase in Debt 8. Higher Total accruals to total assets

Match the prescriptive analytics term to its example: Make-or Buy Analysis Scenario Analysis Marginal Analysis Sensitivity Analysis Financial Modeling Match the above terms to the below statements What is the impact of three different possible tariff outcomes with China? Should FedEx hire one more full-time driver or ask the existing drivers to work overtime? How sensitive is net income to a 2, 3, or 5 percent increase in GDP? Should GM Manufacture small cars or buy them from an automaker in China and sell them as GM cars? What is the financial impact of three different possible tax law changes on Cisco's earnings?

1. Make-or Buy Analysis: Should GM Manufacture small cars or buy them from an automaker in China and sell them as GM cars? 2. scenario analysis: What is the financial impact of three different possible tax law changes on Cisco's earnings. 3. Marginal analysis: Should FedEx hire one more full-time driver or ask the existing drivers to work overtime? 4. Sensitivity analysis: What is the impact of three different possible tariff outcomes with China? 5. Financial modeling: How sensitive is net income to a 2, 3, or 5 percent increase in GDP?

Altman's Z: X4

1. Market Value of stockholder's equity/BV of total debt owed Long-term Solvency - Can the company pay its debt when its due

Altman's Z: X5

1. Sales/Total Assets Asset Efficiency -how well assets are used

Linear Regression 1. Simple 2. Multiple

1. Simple - one independent variable (scatter Plot) 2. Multiple - multiple independent variable

Examples of Prescriptive Analytics

1. What-if Sensitivity Analysis 2. Evaluating Future Cash Flows using Various Analysis Techniques 3. Marginal Analysis (incremental) 4. Goal Seek Analysis 5. What-if Scenario Analysis

Goal Seek Analysis

A form of what-if analysis that tells us what will need to be done in order to reach the desired outcome, output, or result. The ability to calculate backwards to understand the input needed to achieve a certain output. Example: Breakeven

Time Series Analysis

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

Financial Modeling

A representation, or model, of the financial outcomes resulting form a decision or future event

What-if Scenario Analytics

Analysis of potential future events by considering potential outcomes

Descriptive Analytics

Analysis performed that characterizes, summarizes, and organizes features and properties of the data to facilitate understanding

Prescriptive Analytics

Analysis performed that identifies best possible options given constraints or changing conditions

Diagnostic Analytics

Analysis performed to investigate the underlying cause that cannot be answered by simply looking at the descriptive data

Predictive Analytics

Analytics performed to provide foresight by identifying patterns in historical data by judging likelihood or probability

Altman's Z: X3

Earnings before interest and taxes/Total Assets Measures Short-term Profitability

Regression

Predictive analytics technique used to estimate a specific dependent variable outcome based on independent variable inputs

Base Rates

Probability of some event occurring based on some historical average

Robotic Process Automation (RPA)

Software programs that automate certain repeatable tasks

Machine learning

The ability of a computer/ machine to automatically learn on its own with being explicitly programmed to do so.

Cost of Capital

The cost of available funds for a company; acts as a hurdle rate that the company must overcome to create value

What-if Sensitivity Analysis

The evaluation of the outcomes based on uncertainty regarding the inputs For example: if fuel prices increase by 10%, how will that impact UPS' net income?

Accounting Rate of Return (ARR)

The percentage rate of return expected on an asset compared the profits to the initial investment cost If $1,000 investment gives us an average of $100 profit each year, then ARR would be 10% (100/1,000)

Point of Indifference

The point at which it does not matter which alternative is chosen because the outcome is the same under either alternative

Net Present Value

The present value of the cash inflows LESS the present value of the cash outflows

Capital Budgeting

The process a company uses to evaluate potential, typically large, investments

What-if Analysis

The process of changing the value in various input cells to see how they might affect the output

Internal Rate of Return

The rate of return where the present value of cash outflows is exactly EQUAL to the present value of the cash inflows

Persistence

The repeatability and durability of the financial statement variables (sales, cash flows), or the strength of the relationship between the past and the future values of one financial statement variable

Base Rate Fallacy

The situation when the prediction places too little weight on the base rates of the past and instead uses different or new, recently received, information

An objective of financial accounting is to help present and potential investor and creditors and other users in assessing the _____________, ____________, and uncertainty of prospective cash receipts. a. Amounts; timing b. Risk; timing c. Risk; persistence d. Amounts; risk

a. Amounts; timing

In make-or-buy analysis, a key input to the decision is all but which of the following? a. Avoidable fixed costs b. Avoidable variable costs c. Cost by the contract manufacturer d. The sales price of the product being manufactured

a. Avoidable fixed costs

Not considering historical averages when making predictions of possible future events is known as ________. a. Base rate fallacy b. Base rate ignorance c. Historical rate fallacy d. Historical rate ignorance

a. Base rate fallacy

Diagnostic analytics includes which type of visualizations? a. Box plots b. Scatter plots c. Pivot charts d. Time series

a. Box plots

Pie charts lend themselves well to _________ data showing proportions. a. Categorical b. Numerical c. Diagnostic Predictive

a. Categorical

Predicting which companies are likely to be fraudulent/not fraudulent or likely to be bankrupt or not bankrupt are examples of _________. a. Classification b. Prediction c. regression d. time series analysis

a. Classification

All other things being equal, we would choose the investment with _______ payback period. a. Fastest b. Slowest

a. Fastest

The decision of whether to add an additional part-time employee or a full-time employee would be considered to be _______. a. Marginal analysis b. Make-or-buy analysis c. Scenario analysis d. Financial modeling

a. Marginal analysis

_______ is the present value of cash inflows less the present value of cash outflows. a. Net present value b. Internal rate of return c. Capital budgeting Marginal analysis

a. Net present value

An outlier showing on a box plot will typically appear _________ the maximum or minimum value within the expected range. a. Outside b. Inside

a. Outside

Correlations, scatter plots, regression results, and time series analysis are generally associated with ______ analytics. a. Predictive b. Prescriptive c. Diagnostic d. Descriptive

a. Predictive

__________ analytics is defined as analysis performed to provide foresight by identifying patterns in historical data by judging likelihood or probability. a. Predictive b. Data c. Prescriptive d. Diagnostic

a. Predictive

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

a. Regression

We call the analysis of deciding whether to outsource certain aspects of producing a product or service _______. a. Sensitivity analysis b. Make-or-buy analysis c. Scenario analysis Financial modeling

b. Make-or-buy analysis

The persistence of _______ as compared to _________ is consistent with GAAP requiring the use of accrual accounting for financial reporting purposes. a. Sales; operating income b. Operating income; cash flows from operating activities c. Sales; cash flows from operating activities d. Cash flows from operating activities; sales

b. Operating income; cash flows from operating activities

Predicting future operating income would be an example of which type of predictive analytics? a. Time series b. Regression c. Classification

a. Time series

Classification analysis to decide on client acceptance or rejection is most important for ________. a. Lenders b. Auditors c. Audit regulators d. Investors

b. Auditors

Line chars should only be shown in _______ order to emphasize ____________. a. Descending; trend b. Chronological; trend c. Alphabetical; proportion d. Ascending; proportion

b. Chronological; trend

Predictive analytics technique to separate a sample (or population) into one or more groups or classes is called _______. a. Regression b. Classification c. Time series d. Forecasting

b. Classification

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

b. Classification

According to the text, ________ prefers __________-basis accounting since it is better at forecasting future performance. a. GAAP, cash b. GAAP, accrual c. Tax accounting, cash d. Tax accounting, accrual

b. GAAP, accrual

If a company has an Altman Z-score of 2.8, the company would be classified in the __________. a. Distress zone, or at significant risk of bankruptcy b. Gray zone, or at risk of bankruptcy c. Safe zone, not currently at risk of bankruptcy

b. Gray zone, or at risk of bankruptcy

All other things being equal, we would choose the investment with the accounting rate of return. a. Lowest b. Highest c. Equivalent

b. Highest

_________ is calculated to be the point where the present value of cash inflows is equal to the present value of cash outflows. a. Net present value b. Internal rate of return c. Capital budgeting d. Marginal analysis

b. Internal rate of return

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

b. Less bankrupt

Accounting figures and money are most likely to be shown as __________. a. Interval data b. Ratio data c. Nominal data d. Ordinal data

b. Ratio data

All of the following are factors used by Altman's Z in predicting bankruptcy expect: a. Sales/total assets b. Market value of stockholders' equity/Book value of total debt owned c. Retained Earnings/ Total Assets d. Income/Total assets

d. Income/Total assets

Evaluating the outcomes based on uncertainty regarding the inputs is called _____ a. Prescriptive analytics b. Financial modeling c. Scenario analysis d. Sensitivity analysis

d. Sensitivity analysis

___________ are observations on values taken on by a variable at different points in time. a. Cross-sectional data b. Categorical data c. Numerical data d. Time series data

d. Time series data

Dashboards

have filters available so that it is easy for decision makers to hone on a particular time period, category or product. Example: Amazon could display both Net income and Sales charts over one another

Classification

predictive analytics technique to separate or classify a sample (or population) into one or more groups/classes

Data Visualization

presents the results of analysis in an accessible way through charts or graphs. Charts and graphs for structured data typically display the following components