MULTIVARIATE MODELS BASED ON PAST RESEARCH FOR RISK ASSESSMENT, FINANCIAL DISTRESS, EARNINGS M

Altman Z Altman's Z-Score bankruptcy prediction model for public companies

Altman Z - Private Altman's Model - Private Companies (Note: for your information do not use in ACCT
Zmijewski Zmijewski's Financial Condition Score (ZFC)
Zavgren Zavgren's Vulnerability to Financial Failure Model
Wilcox Wilcox's Gambler's Ruin Failure Prediction Model
Koh & Tan Koh and Tan's Prediction of Going Concern Neural Network Model
M-Score Beneish's Probabilty of Earnings Manipulation M-Score
Dechow_Dichev Dechow & Dichev Earnings Quality Models
Sloan Sloan Accrual Model
Jones Jones NonDiscretionary Accrual Model
Conclusion Your written conclusion of information you gathered from reading Form 10-K and other

YOUR NAME:

COMPANY NAME:

Three Annual Reports Dates Used:

Most recent
1 year prior
2 years prior

Additional resource:
Yahoo Finance http://finance.yahoo.com/ Use to get historical stock prices, such as to co
L DISTRESS, EARNINGS MANIPULATION POTENTIAL

mation do not use in ACCT 5340 project)

ading Form 10-K and other sources and results of the analytical models.

l stock prices, such as to compute the Market Value of Equity

ALTMAN'S MODEL WITH FOCUS ON PUBLIC COMPANIES 0
Return to Index Year: 0
Enter Input Variables
Total Assets <==
Total Liabilities <==
Retained Earnings <== Or accumulated deficit if negative
Working Capital <== Current Assets - Current Liabilities
EBIT* <==
Market Value of Equity <== Number of shares outstanding times individual share
Sales <== get share price from 10-K or yahoo finance.
* Earnings Before Interest and Taxes

#DIV/0! = working capital/total assets

#DIV/0! = retained earnings/total assets
#DIV/0! = earnings before interest and taxes (EBIT)/total assets
#DIV/0! = market value of equity/total liabilities
#DIV/0! = sales/total assets

Altman Re-estimated By Grice

972 Companies including
555 Industrial companies
Altman Original 148 distressed and 86 910 companies
Code 2000 - 3999)
bankrupt
coeff. Score coeff. Score coeff. Score coeff.
working capital/total assets = #DIV/0! 1.20000 #DIV/0! 0.05800 #DIV/0! -0.30100 #DIV/0! -0.38600
retained earnings/total assets = #DIV/0! 1.40000 #DIV/0! 1.50400 #DIV/0! 1.59900 #DIV/0! 2.06700
earnings before interest and taxes (EBIT)/total assets = #DIV/0! 3.30000 #DIV/0! 2.07300 #DIV/0! 2.62710 #DIV/0! 1.38500
market value of equity/total liabilities = #DIV/0! 0.60000 #DIV/0! -0.01400 #DIV/0! -0.03300 #DIV/0! -0.00500
sales/total assets = #DIV/0! 1.00000 #DIV/0! -0.05800 #DIV/0! -0.15700 #DIV/0! -0.06900
z-score Σ #DIV/0! Σ #DIV/0! Σ #DIV/0! Σ
CUT-OFF VALUES:
z value greater than or equal to 2.99 is considered safe
z value between 1.82 and 2.98 is gray area #DIV/0! #DIV/0! #DIV/0! #DIV/0!

z value below 1.81 is troubled company

g times individual share price
yahoo finance.

ce

55 Industrial companies (SIC

Code 2000 - 3999)

Score
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!

#DIV/0!
ALTMAN'S MODEL WITH FOCUS ON PRIVATE ENTITIES 0
Return to Index Year: 0
Enter Input Variables
Total Assets <==
Total Liabilities <==
Retained Earnings <==
Working Capital <==
EBIT* <==
Book Value of Equity** <==
Sales <==
* Earnings Before Interest and Taxes
** Total Assets - Total Liabilities
#DIV/0! = working capital/total assets
#DIV/0! = retained earnings/total assets
#DIV/0! = earnings before interest and taxes (EBIT)/total assets
#DIV/0! = book value of equity/total liabilities
#DIV/0! = sales/total assets

Private Model Four Variable Model

coeff. Score coeff. Score

working capital/total assets = #DIV/0! 0.71700 #DIV/0! 6.56000 #DIV/0!
retained earnings/total assets = #DIV/0! 0.84700 #DIV/0! 3.26000 #DIV/0!
earnings before interest and taxes (EBIT)/total assets = #DIV/0! 3.10700 #DIV/0! 6.72000 #DIV/0!
book value of equity/total liabilities = #DIV/0! 0.42000 #DIV/0! 1.05000 #DIV/0!
sales/total assets = #DIV/0! 0.99800 #DIV/0! Omitted Omitted
z-score Σ #DIV/0! Σ #DIV/0!

#DIV/0! #DIV/0!

CUT-OFF VALUES: CUT-OFF VALUES:

z value > 2.90 is >2.60 is considered safe

considered safe
z value between 1.20 and z value between 1.10 and 2.59
2.89 is gray area is gray area
z value < 1.20 is troubled z value < 1.10 is troubled
company company
ZMIJEWSKI'S MODEL 0 Year: 0
Return to Index Enter Input Variables
Current Assets <==
Total Assets <==
Current Liabilities <==
Total Debt* <== *Total debt is probably not total liabilities. Total debt refers to debt i
Net Income <== and includes: current portion of long-term debt, long-term debt, obl
under capital leases, obligations under account purchase agreeme
#DIV/0! = Net Income / Total Assets short term debt.
#DIV/0! = Total Debt / Total Assets
#DIV/0! = Current Assets / Current Liabilities

Zmijewski Original Zmijewski Model Re-estimated By Grice

Weighted Original
Unweighted Original 1,048 companies 761 industrial companies
840 companies
Probit Score Score Score
Adjust- Score Adjusted Adjusted for Adjusted for Adjusted for
ment coeff. for Probit coeff. Probit coeff. Probit coeff. Probit
Net Income / Total Assets = #DIV/0! 1.8138 -4.51300 #DIV/0! -3.59900 #DIV/0! -4.34100 #DIV/0! -4.32500 #DIV/0!
Total Debt / Total Assets = #DIV/0! 1.8138 5.67900 #DIV/0! 5.40600 #DIV/0! 2.10600 #DIV/0! 2.19400 #DIV/0!
Current Assets / Current Liabilities = #DIV/0! 1.8138 0.00400 #DIV/0! -0.10000 #DIV/0! 0.09200 #DIV/0! 0.07700 #DIV/0!
CONSTANT 1.8138 -4.33600 -7.86463680 -4.80300 -8.71168140 -2.55900 -4.64151420 -2.48100 -4.50003780
Σ #DIV/0! Σ #DIV/0! Σ #DIV/0! Σ #DIV/0!
Pr(Bkrpt) #DIV/0! Pr(Bkrpt) #DIV/0! Pr(Bkrpt) #DIV/0! Pr(Bkrpt) #DIV/0!
Cutoff guidance: A probability (Pr(Bkrpt)) of .5 (rounding result to the
#DIV/0! #DIV/0! #DIV/0! #DIV/0!
first decimal) and above is classified as bankrupt .
 otal debt refers to debt instruments
debt, long-term debt, obligations
count purchase agreement

imated By Grice
990 companies

Score
Adjusted for
coeff. Probit
-4.07600 #DIV/0!
1.92100 #DIV/0!
0.99100 #DIV/0!
-2.65400 -4.81382520
Σ #DIV/0!
Pr(Bkrpt) #DIV/0!
#DIV/0!
ZAVGREN'S MODEL
Return to Index 0 Note: These two years are optional
Years Prior to Bankruptcy
Enter Input Variables
0 0 0 -1 -2
Cash
Marketable Securities
Beginning Receivables
Ending Receivables
Beginning Inventory
Ending Inventory
Current Assets
Net Land, Property, Plant, & Equipment
Net property & plant (omit land)
Intangibles
Current Liabilities
Long-Term Liabilities
Short-Term Debt
Long-Term Debt
Total Liabilities & Equities
Net Working Capital
Stockholders' Equity
Net Sales
IBDOEI*
* Income before discontinued operations and extraordinary items
0 (x100) 0 (x100) 0 (x100) -1 (x100) -2
Average Inventories/Net Sales #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Average Receivables/Average Inventories #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

(Cash+Marketable Securities)/Short-Term
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
assets + Long-Term assets + Intangibles

(Cash+Marketable Securities)/Current
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Liabilities
IBDOEI/Long-Term Liabilities +
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Stockholders' Equity
Long-Term Debt/(Total Equities - Short-Term
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Debt)
Net Sales/(Fixed Assets+Net Working
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Capital)

Years Prior to Failure

Year 1 Year 2 Year 3 Year 4 Year 5
Intercept -0.238830 Intercept -2.610600 Intercept -1.511500 Intercept -5.945700 Intercept
Average Inventories/Net Sales 0.00108 #DIV/0! 0.04185 #DIV/0! 0.06257 #DIV/0! 0.09157 #DIV/0! 0.08835

Average Receivables/Average 0.01583 #DIV/0! 0.02215 #DIV/0! 0.00829 #DIV/0! 0.01667 #DIV/0! 0.00692
Inventories
(Cash+Marketable Securities)/Short-Term 0.10780 #DIV/0! 0.11231 #DIV/0! 0.42480 #DIV/0! 0.05917 #DIV/0! 0.15786
assets + Long-Term assets + Intangibles
(Cash+Marketable Securities)/Current -0.03074 #DIV/0! -0.02690 #DIV/0! -0.01549 #DIV/0! -0.00410 #DIV/0! 0.00018
Liabilities
IBDOEI/Long-Term Liabilities + -0.00486 #DIV/0! -0.01440 #DIV/0! 0.00519 #DIV/0! 0.01950 #DIV/0! -0.02301
Stockholders' Equity
Long-Term Debt/(Total Equities - Short- 0.04350 #DIV/0! 0.04464 #DIV/0! 0.01822 #DIV/0! 0.04100 #DIV/0! 0.04371
Term Debt)
Net Sales/(Fixed Assets+Net Working -0.00110 #DIV/0! 0.00063 #DIV/0! 0.00002 #DIV/0! 0.00363 #DIV/0! 0.00798
Capital)
Σ #DIV/0! Σ #DIV/0! Σ #DIV/0! Σ #DIV/0! Σ
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Cutoff guidance: A probability (Pr(Bkrpt))

of .5 (rounding result to the first decimal) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
and above is classified as bankrupt .
 Note: These two years are optional
Years Prior to Bankruptcy
-2

(x100)
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

Years Prior to Failure

Year 5
-6.876600
 #DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!
#DIV/0!

#DIV/0!
WILCOX'S GAMBLER RUIN MODEL 0
Return to Index Year: 0
Enter Input
Enter Input Variables Variables
Cash (beginning) <== Net Income <==
Cash (ending) <== Capital Expenditures <== Look in statement of cash flows enter as a positive amount
Marketable Securities <== Depreciation* <== *Note: most balance sheets combine depreciation
Current Assets (beginning) <== Dividends <== and amortization. Read the footnotes for information
Current Assets (ending) <== Stock Issued In Merger <== that will allow you to separate depreciation from
Long-Term Assets (beginning) <== or Acquisition** <== amortization. If you cannot find sufficient
Long-Term Assets (ending) <== information to do so then just enter the combined
Liabilities & Contingencies <== amount.
** Examine the statement of shareholder equity and
the footnotes.

x coeff
Cash including Marketable Securities = $0 1.0 0
Current Assets Other Than Cash = $0 0.7 0
Long-Term Assets = $0 0.5 0
Liabilities, including Contingencies = $0 -1.0 0
Adjusted Cash Position 0

Net income - dividends = $0 1.0 0

Period-to-period increase in non-cash current assets = $0 -0.3 0
Period-to-period increase in long-term assets = $0 -0.5 0
Stock issued in a merger or acquisition = $0 1.0 0
Adjusted Cash Flow 0

Net income = $0 1.0 0

Capital Expenditures-Depreciation = $0 -0.5 0
Increase in Other Current Assets = $0 -0.3 0
Dividends = $0 1.0 0
Adjusted Cash Flow Alternative 0
Data Alternatives (see note)
Mean Adjusted Cash Flow 0.00 Consider Using 5 years
Mean Adjusted Cash Flow2 0
Variance of adjusted cash flow 0 Consider Using 5 years
Cut-Off Guidance a=[(mean adjusted cash flow)2+variance of adjusted cash flow]1/2 0.0000
X< zero N=Adjusted Cash Position/a #DIV/0!
indicated distress X=mean adjusted cash flow/a #DIV/0!
X> zero
indicated health
Pr(failure)=1 if X<0
#DIV/0! #DIV/0!
Pr(failure) if X>0=((1-X)/(1+X))N

Note:
Mean adjusted cash flow is the statistical mean over a number of observations of the adjusted cash flow, while the variance is intended likewise.
Six years of balance sheet and five years of earnings data are suggested.

Empirically, net income includes special or extraordinary, dividends refer only to cash, and other stock issues or redemptions are ignored beyond merger or acquisition issuances.
Koh and Tan's Neural Network 0
Return to Index Year: 0
Enter Input Variables Enter Input Variables
Cash <== Retained Earnings <==
Marketable Securities <== Market Value of Equity <== see explanation in Altman Z model
Accounts Receivable <== Interest Payments <== look in statement of cash flows if not in income statement
Total Assets <== EBIT <== earnings before interest and taxes
Current Liabilities <== Net Income <==
Total Liabilities <==

#DIV/0! = Quick Assets to Current Liabilities

#DIV/0! = Market Value of Equity to Total Assets
#DIV/0! = Total Liabilities to Total Assets
#DIV/0! = Interest Payments to Earnings Before Interest and Tax
#DIV/0! = Net Income to Total Assets
#DIV/0! = Retained Earnings to Total Assets

Node 1 Node 2 Node 3 Node 4 Node 5 Node 6

Quick assets Market value of Total Retained
Interest payments Net income to
to current equity to total liabilities to earnings to
Input Values to EBIT total assets
liabilities assets total assets total assets

#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Node 1 Node 2 Node 3 Node 4 Node 5 Node 6

-1.7131 -0.7445 1.0923 0.7894 -1.219 1.4748
2.409 0.4731 0.9675 1.4973 1.5736 0.0608
-4.7666 -0.6464 -0.4594 1.1811 -3.0948 1.1088
2.4481 1.5166 -1.9108 -1.0374 3.4716 -1.7151
-1.8592 0.832 0.5539 -0.3472 -3.8518 1.0478
2.3792 -1.6206 0.9388 0.9583 0.5343 -1.4635
Weights to Hidden Fit
-0.3777 -1.9838 4.7112 0.3435 -4.162 0.2471
0.7749 0.068 -3.0032 -0.903 3.8518 2.9925
0.1082 -2.7006 0.8004 2.8183 -1.4552 -1.5489
-1.4331 -3.8039 1.5506 -1.5812 -1.5487 1.68
-1.069 1.174 1.8209 3.2994 1.9189 -1.3918
-3.4508 1.6278 1.5102 -1.2572 -1.474 -3.2479
1.586 -1.8089 1.3851 3.2692 -0.9288 -1.7903 Hidden Output Hidden Output Weights x
Sum Nodes 1 to 6
Node 1 Node 2 Node 3 Node 4 Node 5 Node 6 =1/(1+EXP(-sum)) Weights Hidden Outputs
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 1 -0.2511 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 2 0.2906 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 3 -1.9166 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 4 2.4069 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 5 -1.036 #DIV/0!
Input Values Multiplied by #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 6 1.145 #DIV/0!
Weights to Hidden Fit #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 7 -4.027 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 8 4.5182 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 9 -0.7421 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 10 -2.4982 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 11 1.3286 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 12 -3.545 #DIV/0!
#DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! >>> Sum = #DIV/0! #DIV/0! Node 13 0.4856 #DIV/0!
#DIV/0!

exp (-sum) = #DIV/0!

A typical cutoff interpretation would be a Prediction: 1/(1+exp(-sum)) = #DIV/0!

probability (Pr(Going Concern)) of <.5 is
classified as distressed. #DIV/0!
 400133058.xlsx

A B C D E F G H
1 Spreadsheet to implement the Beneish (1999)*
2 earnings manipulation model
3 Return to Index 0
4 M-Score
5 Data Items: Enter Data Here Predictor Ratios: Formula:
6 Year: 0 0 0
7
8 Cash 1. Days Sales #DIV/0! #DIV/0!
9 Receivables
10 Inventory 2. Gross Margin Index #DIV/0! #DIV/0!
11 Current Assets
12 Current Liabilities 3. Asset Quality Index #DIV/0! #DIV/0!
13 Total Assets
14 Net Property, Plant,and Equipment 4. Sales Growth Index #DIV/0! #DIV/0!
15 Sales
16 Depreciation Expense* 5. Depreciation Index #DIV/0! #DIV/0!
17 Cost of Goods Sold
18 Current Portion of Long-Term Debt 6. SG&A Index #DIV/0! #DIV/0!
19 Amortization Expense*
20 Income Taxes Payable 7. Working Capital Accruals to #DIV/0! #DIV/0!
21 Long Term Debt Total Assets
22 SG&A Expense
23 8. Leverage Index #DIV/0! #DIV/0!
24
25 Based on Beneish, Messod. 1999.
26 "The Detection of Earnings Manipulation"
27 Financial Analysts Journal 55(5): 24-36.
28
29 (Note: at least two annual reports are needed) M-Score: Manipulation Index #DIV/0! #DIV/0!
30 #DIV/0! #DIV/0!
31 *Note: most balance sheets combine depreciation
32 and amortization. Read the footnotes for information Evaluation:
33 that will allow you to separate depreciation from Greater than -2.22 Manipulation likely

Page 15
Dechow & Dichev Quality of Earnings 0
Return to Index
Enter Input Variables
0 0
Operating cash flow
Current assets
Current Liabilities
Net income
Total Assets

Dechow & Dechiv Quality of Earnings: 0 0

D working capital $0 $0
Dechow & Dechiv Quality of Earnings
0 0
Net income $0 $0
Dechow & Dichev Earnings $0 $0

Dechow & Dichev Accrual Quality

0 0
Net income $ - $ -
Dechow & Dichev Accrual Quality #DIV/0! #DIV/0!

$1 $1
$1
$1 $1
$1
$1 $1
$1
$1 $1
$1
$1 $1
Net income $1
$1 $1
Dechow & Dichev $1
$0 $0 Earnings
$0
$0 $0
$0
$0 $0
$0
$0 $0
$0
$0 $0
0 0 0 $-
0
 0 -1

0
$0

0
$0
$0

0
$ -
#DIV/0!

$1 1200%
$1
1000%
$1
$1
800%
$1 Net income
$1 600%
Dechow & Dichev Accrual
$0 Quality
400%
$0
$0
200%
$0
$- 0%
0 0 0
Sloan Accrual Model
Return to Index
0

Enter Input Variables

0 0
Net Income
Current liabilities
Short term debt
Current portion of long-term debt
Income taxes payable
Current assets
Cash & cash equivalents

Computations:
Current operating liabilities $0 $0
Current operating assets $0 $0
Current net operating assets $0 $0

0 0
Implied cash component $0 $0
Accrual component $0 $0
Net income $0 $0
0 -1
$1
$1
$1
$1
$1
Implied cash component
$1
Accrual component
$0 Net income
$0 $0
$0 $0 $0
$0 $0 $0
$0
0
$0 $0
$0 0 0 0
$0
d cash component
al component
come
Jones NonDiscretinary Accruals
Return to Index 0

Enter Input Variables

0 0
Total Assets
Revenue
Property, Plant, & Equipment (Gross)
Net income

Calculations 0 0
(1/TA py) #DIV/0! #DIV/0!
(Rev cy - Rev py)/TA cy #DIV/0! #DIV/0!
PPE cy/TA py #DIV/0! #DIV/0!
0 0
Nondiscretionary Accruals #DIV/0! #DIV/0!
Discretionary Accruals #DIV/0! #DIV/0!
0 -1
12.00

10.00

0 8.00
#DIV/0!
Nondiscretionary
#DIV/0! Accruals
6.00
#DIV/0!
Discretionary
0 Accruals
#DIV/0! 4.00
#DIV/0!
2.00

0.00
0 0 0
After you complete the prediction models write an overall conclusion according to the model results in terms of the relative finan
Enter you conclusion in the highlighted box.

Return to Index

CONCLUSION:
sults in terms of the relative financial health of the company.