Knowledge that Transforms

Abstract ABSTRACT: The risk classification of commercial bank loans is performed by loan officers, bank controllers, auditors, and bank examiners. Despite the importance of this classification decision, little empirical research has been performed to explain this subjective evaluation procedure. In this paper, a simple linear model is developed which reproduces most of the lending officer's classification decisions. Two variables, a debt-to-total-assets ratio and a funds-flow-to-fixed-commitments ratio, provided most of the explanatory power, but a sales trend variable was also significant. For some of the loans for which the model and the actual classification differed, the model's classification was found to be an advance indicator of a subsequent reclassification by the lending officer. The simple three-variable linear model provided much better predictions of loan risk classification than did two popular bankruptcy prediction models.

Abstract Reviews the book "Financial Planning and Evaluation for the Nonprofit Organization," by Anthony J. Gambino and Thomas J. Reardon.

Abstract Reviews the book "The Federal Income Tax: Its Sources and Applications, 1982" by Clarence F. McCarthy, D. Larry Crumbley and P. Michael Davis.

Abstract ABSTRACT: To draw conclusions about the information content of audit reports, one must isolate the effects of information conveyed specifically by audit-report components of aggregate signals. To do so, the information conveyed by other components of the aggregates must be controlled. This paper argues that, for most types of audit reports, the necessary control cannot be exercised with security-price research methods Accordingly, some inappropriate inferences have been drawn about the information content of certain types of opinions. Research strategies to provide and implement the necessary control are suggested.

Abstract Reviews the book "Internal Accounting Control Evaluation and Auditor Judgment," by Theodore J. Mock and Jerry L. Turner.

Abstract Reviews the book "Understanding Inflation Accounting," by Tomothy S. Lucas.

Abstract Reviews the book " The Prediction of Corporate Earnings," by Michael F. Van Berda.

Abstract ABSTRACT: The ability of accounting risk measures to aid in explanations and predictions of systematic risk (β) has been studied extensively, and successive studies have reached conflicting conclusions. An element of research design that has varied across studies is the selection of a security market index to serve as a proxy for the unobservable "market portfolio" defined by the underlying capital asset pricing theory. This paper demonstrates empirically that the choice of a market index can have a substantial effect upon the research findings, and offers a partial reconcilation of the apparently contradictory results of earlier studies.

Abstract Reviews the book "Federal Taxes and Management Decisions," 3rd ed., by Ray M. Sommerfeld.

Abstract ABSTRACT: This classroom laboratory study compares the effects of two methods of teaching the Statement of Changes in Financial Position and two homework assignment strategies on student performance, time spent, and attitudes. The results indicate that students exposed to the direct teaching method scored higher on objective examination questions, spent more time on homework problems and examination problems, and perceived greater levels of understanding than students exposed to the add-back teaching method. Also, students assigned cash-basis homework problems showed higher levels of satisfaction with their instructor than students assigned working capital-basis homework problems. No interaction effects were significant.