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

Altman Z
Altman Z - Private
Zmijewski
Zavgren
Wilcox
Koh & Tan
M-Score
Dechow_Dichev
Sloan
Jones
Conclusion

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

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

YOUR NAME:
COMPANY NAME:
Three Annual Reports Dates Used:
Most recent
1 year prior
2 years prior

Additional resource:
Yahoo Finance

[Link]

Use to get historical stock prices, such as to c

NANCIAL DISTRESS, EARNINGS MANIPULATION POTENTIAL

public companies
your information do not use in ACCT 5340 project)

al Network Model

ed from reading Form 10-K and other sources and results of the analytical models.

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

ALTMAN'S MODEL WITH FOCUS ON PUBLIC COMPANIES

0
Year:
0
Enter Input Variables

Return to Index
Total Assets
Total Liabilities
Retained Earnings
Working Capital
EBIT*
Market Value of Equity
Sales

<==
<==
<==
<==
<==
<==
<==

Or accumulated deficit if negative

Current Assets - Current Liabilities

Number of shares outstanding times individual sha

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
= market value of equity/total liabilities
#DIV/0! = sales/total assets
Altman Re-estimated By Grice
Altman Original

working capital/total assets =

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

#DIV/0!

z-score
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
z value below 1.81 is troubled company

coeff.
1.20000
1.40000
3.30000
0.60000
1.00000

Score
#DIV/0!

#DIV/0!

#DIV/0!

972 Companies including

148 distressed and 86
bankrupt
coeff.
0.05800
1.50400
2.07300
-0.01400
-0.05800

Score
#DIV/0!

#DIV/0!

#DIV/0!

910 companies
coeff.
-0.30100
1.59900
2.62710
-0.03300
-0.15700

Score
#DIV/0!

#DIV/0!

#DIV/0!

555 Industrial compan

Code 2000 - 399
coeff.
-0.38600
2.06700
1.38500
-0.00500
-0.06900

#DIV/0!

g times individual share price

ahoo finance.

55 Industrial companies (SIC

Code 2000 - 3999)
Score
#DIV/0!

#DIV/0!
#DIV/0!

ALTMAN'S MODEL WITH FOCUS ON PRIVATE ENTITIES

0
Year:
0
Enter Input Variables

Return to Index
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
= book value of equity/total liabilities
#DIV/0! = sales/total assets

Private Model

working capital/total assets =

retained earnings/total assets =
earnings before interest and taxes (EBIT)/total assets =
book value of equity/total liabilities =
sales/total assets =

#DIV/0!

z-score

coeff.
0.71700
0.84700
3.10700
0.42000
0.99800

Four Variable Model

Score
#DIV/0!

#DIV/0!
CUT-OFF VALUES:

#DIV/0!

coeff.
6.56000
3.26000
6.72000
1.05000
Omitted

Score
#DIV/0!

Omitted
#DIV/0!
#DIV/0!

CUT-OFF VALUES:

z value > 2.90 is considered >2.60 is considered safe

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

company

z value < 1.10 is troubled

company

ZMIJEWSKI'S MODEL

Year:
Enter Input Variables

Return to Index
Current Assets
Total Assets
Current Liabilities
Total Debt*
Net Income

0
<==
<==
<==
<==
<==

#DIV/0! = Net Income / Total Assets

#DIV/0! = Total Debt / Total Assets
#DIV/0! = Current Assets / Current Liabilities
Zmijewski Original
Weighted Original
Unweighted Original
840 companies

Net Income / Total Assets =

Total Debt / Total Assets =
Current Assets / Current Liabilities =

#DIV/0!

CONSTANT

Probit
Adjustment
1.8138
1.8138
1.8138
1.8138

Cutoff guidance: A probability (Pr(Bkrpt)) of .5 (rounding result to the

first decimal) and above is classified as bankrupt .

Score Adjusted
coeff.
for Probit
-4.51300
#DIV/0!
5.67900
0.00400
-4.33600
-7.86463680

#DIV/0!
Pr(Bkrpt)
#DIV/0!
#DIV/0!

*Total debt is probably not total liabilities. Total debt refers to deb
and includes: current portion of long-term debt, long-term debt, o
under capital leases, obligations under account purchase agreem
short term debt.

Zmijewski Model Re-estimated By Grice

1,048 companies

761 industrial companies

Score
Score
Score
Adjusted for
Adjusted for
Adjusted for
coeff.
Probit
coeff.
Probit
coeff.
Probit
-3.59900
#DIV/0! -4.34100
#DIV/0! -4.32500
#DIV/0!
5.40600
2.10600
2.19400
-0.10000
0.09200
0.07700
-4.80300 -8.71168140 -2.55900 -4.64151420 -2.48100 -4.50003780

#DIV/0!

#DIV/0!

#DIV/0!
Pr(Bkrpt)
#DIV/0! Pr(Bkrpt)
#DIV/0! Pr(Bkrpt)
#DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

tal debt refers to debt instruments

ebt, long-term debt, obligations
ount purchase agreement

imated By Grice
990 companies
Score
Adjusted for
coeff.
Probit
-4.07600
#DIV/0!
1.92100
0.99100
-2.65400 -4.81382520

#DIV/0!
Pr(Bkrpt)
#DIV/0!
#DIV/0!

ZAVGREN'S MODEL

Return to Index

Enter Input Variables

Note: These two years are optional

Years Prior to Bankruptcy

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)

(x100)

(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
assets + Long-Term assets + Intangibles

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

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

0.01583

#DIV/0!

0.02215

#DIV/0!

0.00829

#DIV/0!

0.01667

#DIV/0!

0.00692

(Cash+Marketable Securities)/Short-Term
assets + Long-Term assets + Intangibles

0.10780

#DIV/0!

0.11231

#DIV/0!

0.42480

#DIV/0!

0.05917

#DIV/0!

0.15786

(Cash+Marketable Securities)/Current
Liabilities

-0.03074

#DIV/0!

-0.02690

#DIV/0!

-0.01549

#DIV/0!

-0.00410

#DIV/0!

0.00018

IBDOEI/Long-Term Liabilities +
Stockholders' Equity

-0.00486

#DIV/0!

-0.01440

#DIV/0!

0.00519

#DIV/0!

0.01950

#DIV/0!

-0.02301

Long-Term Debt/(Total Equities - ShortTerm Debt)

0.04350

#DIV/0!

0.04464

#DIV/0!

0.01822

#DIV/0!

0.04100

#DIV/0!

0.04371

Net Sales/(Fixed Assets+Net Working

Capital)

-0.00110

#DIV/0!

0.00063

#DIV/0!

0.00002

#DIV/0!

0.00363

#DIV/0!

0.00798

#DIV/0!

Cutoff guidance: A probability (Pr(Bkrpt))

of .5 (rounding result to the first decimal)
and above is classified as bankrupt .

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

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

Return to Index

0
0

Year:
Enter Input Variables
<==
<==
<==
<==
<==

Cash (beginning)
Cash (ending)
Marketable Securities
Current Assets (beginning)
Current Assets (ending)
Long-Term Assets (beginning)
Long-Term Assets (ending)

<==
<==

Liabilities & Contingencies

<==

Enter Input
Variables
Net Income
Capital Expenditures
Depreciation*
Dividends

<==
<== Look in statement of cash flows enter as a positive amount
*Note: most balance sheets combine depreciation
<==
and amortization. Read the footnotes for information
<==
that will allow you to separate depreciation from
<==

Stock Issued In Merger

or Acquisition**

amortization. If you cannot find sufficient

information to do so then just enter the combined
amount.

<==

** Examine the statement of shareholder equity and

the footnotes.
x coeff
1.0
0.7
0.5
-1.0
Adjusted Cash Position

0
0
0
0
0

$0
$0
$0
$0

1.0
-0.3
-0.5
1.0
Adjusted Cash Flow

0
0
0
0
0

$0
$0
$0
$0

1.0
-0.5
-0.3
1.0
Adjusted Cash Flow Alternative

0
0
0
0
0

Cash including Marketable Securities =

Current Assets Other Than Cash =
Long-Term Assets =
Liabilities, including Contingencies =

$0
$0
$0
$0

Net income - dividends =

Period-to-period increase in non-cash current assets =
Period-to-period increase in long-term assets =
Stock issued in a merger or acquisition =

Net income =
Capital Expenditures-Depreciation =
Increase in Other Current Assets =
Dividends =

Data Alternatives (see note)

0.00 Consider Using 5 years

Mean Adjusted Cash Flow

Mean Adjusted Cash Flow2
Variance of adjusted cash flow
Cut-Off Guidance
X< zero
indicated distress
X> zero
indicated health

a=[(mean adjusted cash flow)2+variance of adjusted cash flow]1/2

N=Adjusted Cash Position/a
X=mean adjusted cash flow/a

Pr(failure)=1 if X<0
Pr(failure) if X>0=((1-X)/(1+X))N

0
0 Consider Using 5 years
0.0000
#DIV/0!
#DIV/0!

#DIV/0!

#DIV/0!

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

Return to Index

0
Year:

0
Enter Input Variables
<==
<==
<==
<==

Cash
Marketable Securities
Accounts Receivable
Total Assets
Current Liabilities

<==

Total Liabilities

<==

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

Input Values

Node 1
Quick assets
to current
liabilities
#DIV/0!

Weights to Hidden Fit

Input Values Multiplied by

Weights to Hidden Fit

Node 2
Market value of
equity to total
assets
#DIV/0!

Enter Input Variables

<==
<== see explanation in Altman Z model
<== look in statement of cash flows if not in income statement
<== earnings before interest and taxes

Retained Earnings
Market Value of Equity
Interest Payments
EBIT
Net Income

<==

= Quick Assets to Current Liabilities

= Market Value of Equity to Total Assets
= Total Liabilities to Total Assets
= Interest Payments to Earnings Before Interest and Tax
= Net Income to Total Assets
= Retained Earnings to Total Assets
Node 3
Node 4
Node 5
Node 6
Total
Retained
Interest payments Net income to
liabilities to
earnings to
to EBIT
total assets
total assets
total assets
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

Node 1
-1.7131
2.409
-4.7666
2.4481
-1.8592
2.3792
-0.3777
0.7749
0.1082
-1.4331
-1.069
-3.4508
1.586
Node 1

Node 2
-0.7445
0.4731
-0.6464
1.5166
0.832
-1.6206
-1.9838
0.068
-2.7006
-3.8039
1.174
1.6278
-1.8089
Node 2

Node 3
1.0923
0.9675
-0.4594
-1.9108
0.5539
0.9388
4.7112
-3.0032
0.8004
1.5506
1.8209
1.5102
1.3851
Node 3

Node 4
0.7894
1.4973
1.1811
-1.0374
-0.3472
0.9583
0.3435
-0.903
2.8183
-1.5812
3.2994
-1.2572
3.2692
Node 4

Node 5
-1.219
1.5736
-3.0948
3.4716
-3.8518
0.5343
-4.162
3.8518
-1.4552
-1.5487
1.9189
-1.474
-0.9288
Node 5

Node 6
1.4748
0.0608
1.1088
-1.7151
1.0478
-1.4635
0.2471
2.9925
-1.5489
1.68
-1.3918
-3.2479
-1.7903
Node 6

#DIV/0!

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

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

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

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

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

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

>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =
>>> Sum =

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

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

Node 1
Node 2
Node 3
Node 4
Node 5
Node 6
Node 7
Node 8
Node 9
Node 10
Node 11
Node 12

-0.2511
0.2906
-1.9166
2.4069
-1.036
1.145
-4.027
4.5182
-0.7421
-2.4982
1.3286
-3.545

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

Sum Nodes 1 to 6

Hidden Output
=1/(1+EXP(-sum))

Weights x
Hidden Output
Weights
Hidden Outputs

exp (-sum) =
A typical cutoff interpretation would be a
probability (Pr(Going Concern)) of <.5 is
classified as distressed.

Prediction: 1/(1+exp(-sum)) =
#DIV/0!

#DIV/0!
#DIV/0!

[Link]

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A
Spreadsheet to implement the Beneish (1999)*
earnings manipulation model
Return to Index
Data Items:

Year:

0
Enter Data Here
0
0

Cash
Receivables
Inventory
Current Assets
Current Liabilities
Total Assets
Net Property, Plant,and Equipment
Sales
Depreciation Expense*
Cost of Goods Sold
Current Portion of Long-Term Debt
Amortization Expense*
Income Taxes Payable
Long Term Debt
SG&A Expense

Predictor Ratios:

Formula:

M-Score

1. Days Sales

#DIV/0!

#DIV/0!

2. Gross Margin Index

#DIV/0!

#DIV/0!

3. Asset Quality Index

#DIV/0!

#DIV/0!

4. Sales Growth Index

#DIV/0!

#DIV/0!

5. Depreciation Index

#DIV/0!

#DIV/0!

6. SG&A Index

#DIV/0!

#DIV/0!

7. Working Capital Accruals to

Total Assets

#DIV/0!

#DIV/0!

8. Leverage Index

#DIV/0!

#DIV/0!

Manipulation Index

#DIV/0!
#DIV/0!

#DIV/0!
#DIV/0!

Based on Beneish, Messod. 1999.

"The Detection of Earnings Manipulation"
Financial Analysts Journal 55(5): 24-36.
(Note: at least two annual reports are needed)

M-Score:

*Note: most balance sheets combine depreciation

and amortization. Read the footnotes for information
that will allow you to separate depreciation from

Greater than -2.22

Page 15

Evaluation:

Manipulation likely

Dechow & Dichev Quality of Earnings

Return to Index

0
Enter Input Variables
0

Operating cash flow

Current assets
Current Liabilities
Net income
Total Assets

Dechow & Dechiv Quality of Earnings:

working capital
Dechow & Dechiv Quality of Earnings

0
$0

0
Net income
Dechow & Dichev Earnings

$0
0

$0
$0

$0
$0

Dechow & Dichev Accrual Quality

0
Net income
Dechow & Dichev Accrual Quality

- $
#DIV/0!

Net income
Dechow &
Dichev
Earnings

0
#DIV/0!

-1

0
$0
0
$0
$0

0
$

#DIV/0!

Net income
Dechow & Dichev
Accrual Quality

Sloan Accrual Model

Return to Index
0
Enter Input Variables
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

Current operating assets

Current net operating assets

$0
$0
$0

$0
$0
$0

Implied cash component

Accrual component
Net income

0
$0
$0
$0

0
$0
$0
$0

-1

$0
$0
$0
0
$0
$0
$0

$0
$0
$0

Implied cash
component
Accrual component
Net income

ed cash
ponent
ual component
ncome

Jones NonDiscretinary Accruals

Return to Index

0
Enter Input Variables
0

Total Assets
Revenue
Property, Plant, & Equipment (Gross)
Net income
Calculations
(1/TA py)

0
#DIV/0!

(Rev cy - Rev py)/TA cy

PPE cy/TA py

#DIV/0!
#DIV/0!
0

Nondiscretionary Accruals
Discretionary Accruals

#DIV/0!
#DIV/0!

0
#DIV/0!

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

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-1

Nondiscretionary
Accruals
Discretionary
Accruals

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.
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CONCLUSION:

ts in terms of the relative financial health of the company.