Question 1

Predicting the possible existence of fraud is a classification predictive analysis.

Accepted Answer

Classification predictive analysis is used to categorize data into classes, and predicting the possible existence of fraud involves categorizing transactions into fraudulent or non-fraudulent, which is a classification task.

Question 2

According to the text, __________ does not prefer __________-basis accounting since it is inferior at forecasting future performance.
A) GAAP, cash
B) GAAP, accrual
C) tax accounting, cash
D) tax accounting, accrual

Accepted Answer

GAAP (Generally Accepted Accounting Principles) does not prefer cash-basis accounting because it is considered less effective at forecasting future performance compared to accrual-basis accounting.

Question 3

According to Altman's Z, the __________ amount of long-term profitability generally leads to __________ risk of bankruptcy.
A) greater; greater
B) greater; lower
C) lesser; lower
D) lesser; no

Accepted Answer

Greater long-term profitability typically leads to a lower risk of bankruptcy, as it indicates that a company is financially healthy and capable of meeting its long-term obligations.

Question 4

We would expect a positive (+) relationship between loan acceptance and employment length.

Accepted Answer

Longer employment length typically indicates more stable income and job security, making individuals more likely to be approved for loans due to perceived lower risk by lenders.

Question 5

The balance in the cash account is deterministic as compared to being probabilistic.

Accepted Answer

The balance in the cash account is deterministic because it reflects the actual amount of cash held by a company at any given time, based on specific transactions and not on probabilities or estimations.

Question 6

Predicting whether financial statements are fraudulent or not is an example of classification.

Accepted Answer

Predicting whether financial statements are fraudulent or not involves categorizing them into fraudulent or non-fraudulent, which is a typical example of a classification problem in machine learning and data analysis.

Question 7

All of the following are factors used by Altman's Z in predicting bankruptcy except:
A) Working capital/Total assets
B) Market value of stockholders' equity/Book value of total debt owed
C) Retained Earnings/Total assets
D) Income/Total equity

Accepted Answer

Altman's Z-score model uses the following ratios: Working capital/Total assets, Retained Earnings/Total assets, Earnings before interest and taxes/Total assets, Market value of stockholders' equity/Book value of total debt owed, and Sales/Total assets. Income/Total equity is not part of the model.

Question 8

Which predictive analytics technique would be used to predict whether a firm is likely to have a material misstatement in the coming year?
A) Regression
B) Classification
C) Benford's law
D) Monetary unit sampling

Accepted Answer

Classification is the correct predictive analytics technique for predicting categorical outcomes, such as whether a firm is likely to have a material misstatement (yes or no) in the coming year.

Question 9

The higher the expected risk, the lower the expected return.

Accepted Answer

Typically, the higher the expected risk, the higher the expected return, as investors demand more return for taking on more risk.

Question 10

Which predictive analytics technique would be used to predict the interest rate given from a lender (bank) to a borrower?
A) Regression
B) Cross-tabulation
C) Looking for anomalies and outliers
D) Time-series analysis

Accepted Answer

Regression is used to predict a continuous outcome variable (such as an interest rate) based on one or more predictor variables.

Question 11

Predicting whether it will rain tomorrow or next week is more deterministic than reporting the rain that happened yesterday.

Accepted Answer

Predicting future weather, such as rain tomorrow or next week, involves uncertainty and is based on probabilistic models, whereas reporting past weather events, like rain that happened yesterday, is deterministic and based on observed data.

Question 12

A good first step in a bankruptcy prediction is to know how many companies go bankrupt each year (as a percentage of total firms) to understand how prevalent bankruptcy is as a whole.

Accepted Answer

Understanding the annual bankruptcy rate among companies provides a baseline for assessing the risk and prevalence of bankruptcy, which is crucial for accurate prediction and analysis.

Question 13

If a company has an Altman Z-score of 1.7, 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
D) green zone, no risk of bankruptcy

Accepted Answer

The Altman Z-score is a formula used to predict the likelihood of a company going bankrupt. A score below 1.8 indicates the company is in the distress zone, meaning it is at significant risk of bankruptcy.

Question 14

If a company has an Altman Z-score of 3.1, 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
D) green zone, no risk of bankruptcy

Accepted Answer

The Altman Z-score is a formula used to predict the likelihood of a company going bankrupt. A score above 2.99 suggests that the company is in the "safe zone," meaning it is not currently at risk of bankruptcy. Therefore, with a score of 3.1, the company would be classified in the safe zone.

Question 15

The persistence of operating income as compared to cash flows from operations is consistent with GAAP requiring the use of __________ accounting for financial reporting purposes.
A) cash-basis
B) accrual-basis
C) tax-basis
D) cost-basis

Accepted Answer

The persistence of operating income as compared to cash flows from operations is consistent with GAAP (Generally Accepted Accounting Principles) requiring the use of accrual-basis accounting for financial reporting purposes. Accrual accounting records income and expenses when they are earned or incurred, regardless of when cash is exchanged, providing a more accurate picture of a company's financial health than cash-basis accounting.

Question 16

Increase in receivables as compared to last period is a factor predicting financial statement fraud.

Accepted Answer

An increase in receivables compared to the last period can indicate that a company is recording revenues that have not been earned or are not collectible, which is a red flag for potential financial statement fraud.

Question 17

Which is more persistent in predicting future amounts of the variable based on current amounts of that same variable?
A) Sales
B) Cash flows from investment activities
C) Operating income
D) Cash flows from financing activities

Accepted Answer

Sales are more persistent in predicting future amounts of the variable based on current amounts of that same variable because they are a measure of the company's core business activities.

Question 18

Predicting which companies are likely to have misstated financial statements is an example of __________ in predictive analytics.
A) classification
B) prediction
C) regression
D) time series analysis

Accepted Answer

Classification is used in predictive analytics to categorize data into different classes. Predicting which companies are likely to have misstated financial statements involves classifying companies into two groups: those likely to have misstated financial statements and those not likely. This is a classic example of a classification problem.

Question 19

We would expect a positive relationship (+) between loan acceptance and the debt-to-income ratio.

Accepted Answer

A higher debt-to-income ratio typically indicates a higher risk of default, making lenders less likely to accept a loan application, thus suggesting a negative relationship between loan acceptance and the debt-to-income ratio.

Question 20

We would expect that sales forecasts would be more accurate than forecasts of operating income.

Accepted Answer

Sales forecasts typically involve fewer variables and uncertainties compared to forecasts of operating income, which must account for both revenues and a wide range of expenses.

Quiz 8: Perform the Analysis: Predictive Analytics

Predicting the possible existence of fraud is a classification predictive analysis.

According to the text, does not prefer -basis accounting since it is inferior at forecasting future performance.

According to Altman's Z, the amount of long-term profitability generally leads to risk of bankruptcy.

We would expect a positive (+) relationship between loan acceptance and employment length.

The balance in the cash account is deterministic as compared to being probabilistic.

Predicting whether financial statements are fraudulent or not is an example of classification.

All of the following are factors used by Altman's Z in predicting bankruptcy except:

Which predictive analytics technique would be used to predict whether a firm is likely to have a material misstatement in the coming year?

The higher the expected risk, the lower the expected return.

Which predictive analytics technique would be used to predict the interest rate given from a lender (bank) to a borrower?

Predicting whether it will rain tomorrow or next week is more deterministic than reporting the rain that happened yesterday.

A good first step in a bankruptcy prediction is to know how many companies go bankrupt each year (as a percentage of total firms) to understand how prevalent bankruptcy is as a whole.

If a company has an Altman Z-score of 1.7, the company would be classified in the __________.

If a company has an Altman Z-score of 3.1, the company would be classified in the __________.

The persistence of operating income as compared to cash flows from operations is consistent with GAAP requiring the use of __________ accounting for financial reporting purposes.

Increase in receivables as compared to last period is a factor predicting financial statement fraud.

Which is more persistent in predicting future amounts of the variable based on current amounts of that same variable?

Predicting which companies are likely to have misstated financial statements is an example of __________ in predictive analytics.

We would expect a positive relationship (+) between loan acceptance and the debt-to-income ratio.

We would expect that sales forecasts would be more accurate than forecasts of operating income.