Class 06

Question 1

what are beneish model’s 8 factors?

Answer 1

1. day sales receivable index
2. gross margin index
3. asset quality index
4. sales growth index
5. depreciation index
6. SG&A index
7. total accruals to total assets
8. leverage index

Question 2

what is day sales receivable index (DSRI)?

Answer 2

time to convert accounts to cash

DR = (receivables / sales) * 365
= DR (c) / DR (p)

Question 3

what is gross margin index (GMI)?

Answer 3

deteriorating earnings

GM = (sales - COG) / sales
= GM (c) /GM (p)

Question 4

what is asset quality index (AQI)?

Answer 4

easier to manipulate intangibles

AQ = (TA - (CA + PPE) / TA
= AQI (c) / AQI (p)

Question 5

what is sales growth index (SGI)?

Answer 5

manipulate to meet targets

= SGI (c) /SGI (p)

Question 6

what is depreciation index (DI)?

Answer 6

ratio > 1 means DP slowed

DP = DP / (PPE + DP)
= DI (c) / DI (p)

Question 7

what is SG&A index (SGAI)?

Answer 7

related to cuts like staff + ads

SGAI = SG&A exp. / sales
= SGAI (c) / SGAI (p)

Question 8

what is total accruals to total assets (TATA)?

Answer 8

NI from extraordinary items - cash from operations

= total accruals / total assets

Question 9

what is leverage index (LVGI)?

Answer 9

high leverage > more bank loans > more owed

LV = (LT debt + current L) / TA
= LVGI (c) / LVGI (p)

Question 10

what is a flag for fraud?

Answer 10

a value > -1.78

Question 11

what are the beneish model pitfalls?

Answer 11

1. neglects industries i.e. biotech which doesn’t rely on sales revenue
2. detection lag time
3. can manipulate numbers to model
4. neglects other variables
5. detects large fraud

Question 12

what is benford’s law?

Answer 12

states numbers 1 to 9 appear in nature as first digit in percentages

Question 13

what are benford’s law steps?

Answer 13

1. LEFT (abs (cell * 1000) ,1)
2. COUNTIF (all numbers, each number #1-9)
3. COUNTIF (yr range, leading digit)
4. ABS (actual - expected)
5. KS requires we MAX these values + compare to cut off
6. IF KS > 1.36 then fraud