Bankruptcy, Discriminant analysis, Financial ratios, Business failure

A substantial accounting research literature seeks to explain the existence of alternative accounting methods and management's willingness to expend efforts lobbying to defend alternate methods. This paper investigates the association between management lobbying on accounting for oil and gas producing activities and the effect that the method may have on firm cash flows and on accounting numbers that are restricted by the terms of firm contracts, Full cost companies that lobbied at different stages of the deliberations on oil and gas accounting are compared with those that did not. The models and their classificatory success rates were statistically significant. Also, the models developed at each stage of the rule-making process provided statistically significant predictions for the other stages. This suggests that the contract and cash flow effects were stable predictors of lobbying by managers.

[A substantial accounting research literature seeks to explain the existence of alternative accounting methods and management's willingness to expend efforts lobbying to defend alternate methods. This paper investigates the association between management lobbying on accounting for oil and gas producing activities and the effect that the method may have on firm cash flows and on accounting numbers that are restricted by the terms of firm contracts. Full cost companies that lobbied at different stages of the deliberations on oil and gas accounting are compared with those that did not. The models and their classificatory success rates were statistically significant. Also, the models developed at each stage of the rule-making process provided statistically significant predictions for the other stages. This suggests that the contract and cash flow effects were stable predictors of lobbying by managers.]

Reviews the book "Overhead: What It Is and How It Works," by Jack F. Fultz.

The article presents some empirical evidence of distributions of financial accounting ratios. Recent application of advanced statistical techniques to the traditional financial ratio analysis of companies has raised some question concerning the usefulness of these ratios for persons external to the firm. Melvin O'Connor's findings are of particular interest since he found that financial ratios provided little or no assistance in the determination of future rate of return rankings. Most of these studies have employed parametric statistical tools whose validity is somewhat dependent upon the nature of the underlying distribution of the data that is input to the model. The usefulness of studies that classify firms on the basis of accounting ratios can be enhanced considerably if the classification model can be used to make probability estimates about group membership for a particular firm. Such probability assessments are necessary inputs to expectation models. If the empirical distributions of financial accounting ratios were known, then a distribution function could be found for the linear combination of ratios that would be used in a classification model.

The impact of changes in reporting requirements for companies has long been a topic of interest for accountants and others involved in the evaluation of investment alternatives. Many recent papers have discussed the effect of different methods of determining earnings on the behavior of securities prices. For example, W.H. Beaver and R.E. Dukes have made inferences concerning the alternative accounting earnings model which the market appears to use for determining securities prices. Several authors have indicated that the market is not fooled in setting security prices when alternative accounting techniques are used. In each of these papers, the market was assumed to be able to adjust from one reporting method to another, thus, the market had both reported earnings and earnings under alternative reporting methods available to it for setting securities prices. There have been a few studies designed to assess the impact of changes in reporting requirements for a large number of companies, particularly when investors are unable to adjust from the prior method to the reporting method required under rules developed by some regulatory body. Such sweeping decisions that would be significant enough to impact on the behavior of securities prices in a manner that could be detected by statistical methods are rare.

Discusses how computer simulation could be used to provide management with a measure of the risk on a capital investment project. Simulation procedure; Details on the computer program used by managerial accounting students.

Subsequent to the issuance of FASB Statement 19 mandating the adoption of successful efforts accounting in the oil and gas industry, a number of full cost companies appealed to the SEC to permit the continued use of full cost accounting. One of the primary arguments raised by these full cost companies was that companies using each alternative method are so different that dual accounting methods are appropriate. The full cost companies argued that they were more aggressive in exploration, newer, and in greater need of external funds than successful efforts companies. An analysis of data for companies using each method indicated that full cost companies were not more aggressive in exploration than their successful efforts counterparts. Full cost companies were more highly leveraged. This result indicates a relatively greater use of outside capital, but the cause of this greater use could not be determined.

Reviews the book "Financial Reporting by the Oil and Gas Industry in Europe: A Survey Based on 1977 Annual Reports," by Kenneth S. Most and Charles W. Mulford.

The original article by the authors was designed to explore the use of regression techniques in an audit environment and to provoke interest in and discussion of alternative approaches to the use of these models. There are, several major issues that must be resolved before the applicability of regression models to auditing can be ascertained fully. Professors Kinney and Bailey have articulated further some of these concerns. Their expansion of the authors' discussion indicates that part of the authors' purpose has been attained. An auditor would most likely use several variables in constructing the regression equation. The regression results were tested for the common problems associated with applications of regression analysis. The Durbin-Watson test was used to test the significance of serial correlation in the residuals. The correlation matrix for the four regressors did indicate multi-colinearity, with correlations in some cases as large as .39. However, omission of any one of the four predictors resulted in substantially larger prediction errors. The major overlap in predictors appeared between the economic series and the growth series. In an audit situation, the appearance of an incorrect account requires the auditor to conduct further investigation to determine whether the reported balance or the auditors estimate of such balance is correct.