Exam 2 - Chapter 6 - Descriptive Analytics

Question 1

What is the largest source of accounting data for performing descriptive analytics?

Answer 1

The annual report that contains:

• Balance Sheet
• Income Statement
• Statement of stockholder’s equity
• Statement of cash flows
• Footnotes

Question 2

What is contained within the footnotes of financial statements?

Answer 2

Details on the following:

• Expected annual cash payments for LT debt and leases
• Accounting policies chosen
• Pension plan assumptions
• Segment performance
• Stock market performance

Question 3

The 10-k contains some information beyond the annual report;

What is this additional infomration?

Answer 3

• Management compensation (stock options/ownership)
• Board compensation
• Biographies of board
• Board committee membership

Question 4

What are descriptive statistics?

• What are the two main groups?

Answer 4

Tools for descriptive analysis:

Brief summaries of a data set that provide a representation of the data as a whole

Two groups:

• Measures of central tendency
• Measures of variability

Question 5

Measures of central tendency (descriptive statistics) include:

Answer 5

Mean

median: most useful when there are extreme or skewed observations)

Mode

Question 6

Measures of variability (descriptive statistics) include:

Answer 6

Minimums and maximums: measures of extreme values

Standard deviations: Measure that shows the variability for the sample of population

Quartiles: Division of data observations into four defined intervals

Deciles: Division of data observations into 10 defined intervals

Question 7

Beyond measures of central tendency and variability, what other tools are used for descriptive analysis?

Answer 7

• Counts:
• Totals, subtotals
• Graphs:
• Percentage change:
• Pivottables
• Histogram
• Ratio analysis
• Vertical analysis
• Horizontal analysis

Question 8

What is the difference between:

• Vertical Analysis
• Horizontal Analysis

Answer 8

Vertical Analysis

Express financial information in relations to some figure as a base

(what is interest expense in relation to net sales, etc…)

Horizontal Analysis

Provide comparitive changes of financial statement items over time

(what is % increase in A/R from prior period to this period, etc…)

Question 9

How can pivottables/charts be used to measure accounts receivable aging?

Answer 9

Each item past due can be placed into buckets (groups like 1-30, 31-60, etc…) using a pivot table.

Charts can then illustrate the various aged receivables

Question 10

After the accountant creates descriptive analytics of aging accounts receivable, how might they create diagnostic analytics to further make sense?

Answer 10

Use CRM system that collects nearly all info about customer:

• Determine if customer has dispute with products
• Determine if customer is continuing to purchase
• Develop statistical models based on customer profitability debt, and credit

Question 11

What is DuPont Ratio Analysis?

Answer 11

Used to decompose performance (return on equity) into three component parts:

• Profitability (profit margin)
• Activity (asset turnover)
• Solvency ratios (financial leverage)

Question 12

What is the equation for DuPont’s return on equity?

Answer 12

ROE = Profit margin * asset turnover * financial leverage

Question 13

What are the equations for:

Profit margin

Asset turnover

Financial leverage

Answer 13

Profit margin = Net profit / sales

Asset turnover = Sales/total assets

Financial leverage = Total assets/Equity

Question 14

What exactly is return on equity?

What is the simple equation?

Answer 14

Measure of profitability generated for each dollar of stocholder’s investment

Simple Equation = Net Income / Stockholder’s equity

Question 15

What is DuPont’s analysis for Return on Assets (ROA)?

Answer 15

Measure of profitability for each dollar of assets:

ROA = Profit margin * Asset turnover