No abstract

No abstract

Most business failure prediction models use accrual-accounting-based financial ratios; a few used cashflow-based measures. Comparison of the two approaches on the same dataset are rare. This study investigates the prediction accuracy of six accrual-accounting, six cash-flow-based, and the combined 12 ratios on companies' financial data collected during the 2008-2010 recession. Careful to avoid prior research pitfalls (Sharma, 2001), we perform many analyses on a matched set of 50 failed and 50 nonfailing companies. We propose that cash-flow-based measures are better predictors but find that a mixed model of two accrual-accounting-and two cash-flow-based ratios perform significantly better than other models.

This case uses a goodwill impairment setting to introduce intermediate and advanced accounting students to business valuation (that is, estimating the fair value of a business unit). Tombstone, Inc. previously acquired JH Outfitter's (JHO) and recorded $2.2 million of goodwill. In prior years, management utilized an outside service to provide fair value estimates of JHO for purposes of the goodwill impairment testing. The business valuation is to be done in-house this year. Three common valuation approaches are discussed in the case to provide students with a background that is sufficient to apply these methods to estimate the fair value of JHO for the goodwill impairment tests. Sufficient, yet conflicting, information is also provided to complete the basic requirements. As such, the case provides students an opportunity to apply the goodwill impairment model (as revised in 2017) where the fair value of a business unit is uncertain.

In this case, students are required to conduct an initial assessment of a potential audit client and provide a well-supported recommendation to the audit partner. Specifically, students are assigned a company and asked to gather and evaluate data on it and its upper management. Based on that information, students are to make an objective recommendation to the firm on whether to accept, accept and consider a risk-adjusted audit fee, or reject the client; they are also required to provide the reasoning or argument for the decision. This case has many learning objectives. First, students will demonstrate their research and critical thinking skills and apply those skills by evaluating the information to make a judgment similar to that required of audit professionals. Second, students will create a memorandum that concisely summarizes the obtained information and provide a well-supported recommendation. Third, students will understand and be able to communicate the various types of risk in the business environment. Finally, the case assists students in converting their perspective from that of an accountant to that of an evaluator or auditor. Moreover, the case can be used to introduce professional skepticism and the importance of maintaining objectivity when making a judgment.