Consider the following linear equation model regarding an accountant's judgements regarding the likelihood of business failure:
Likelihood of Insolvency/Solvency= constant + 0.1 Net profit + 0.3 Cash flow + 0.15 Acid test ratio + 0.25 Debt to Equity ratio + other information cues + error
According to the model which of the following statements is correct?
A)The accountant considers the debt to equity ratio to be a relatively more important information cue regarding insolvency than the cash flow
B)The Acid test ratio has a higher beta weight than net profit
C)The accountant will only consider net profit,cash flow,acid test ratios and debt to equity ratios when making judgements on business solvency
D)The acid test ratio is the least important information cue for the accountant in making his solvency judgement

Question

Quizplus · Accepted Answer

The beta weights indicate the relative importance of each variable in the model. A higher beta weight means that the variable has a stronger impact on the outcome. Therefore, according to the model, the Acid test ratio has a higher beta weight than net profit, which means it is considered to be more important in predicting business failure.

Note that none of the other statements can be inferred from the model. It is possible that the accountant considers other information cues besides the ones listed in the model, and the error term accounts for other factors that may affect the likelihood of insolvency/solvency.

Consider the Following Linear Equation Model Regarding an Accountant's Judgements