Using companies from an industry defined by 2-digit SIC codes, you estimated the following accruals regression model: Y = A + BIX, + B2X2 + error, where Y is total accruals in the current year (i.e., current-year income before extraordinary items minus current-year cash flow from operations). X1 is the change in revenue from last year to the current year, and X2 is the gross amount of PP&E at the end of the current year. 8 All of these variables are scaled by total assets at the end of last year. The analysis provided the following information: 9 10 Regression Statistics Coefficientstandard Err t Stat P-value 12 Multiple R 0.071473 Intercept -0.029 0.019 1.517 0.132 13 R Square 0.005108 X1 0.009 0.020 0.478 0.634 14 Adjusted F -0.01134 X2 -0.017 0.025 -0.669 0.505 Standard E 0.089906 16 17 You also ran a model for the industry defined by 3-digit SIC codes and obtained the following: 18 19 Regression Statistics Coefficientstandard Err t Stat P-value 20 Multiple R 0.239403 Intercept 0.056 0.016 3.440 0.001 21 R Square 0.057314 X1 -0.047 0.018 -2.574 0.011 Adjusted F 0.041336 X2 0.027 0.022 1.227 0.222 Standard E 0.075114 24 25 The company you are investigating for fraud has the following data: 26 27 Income cash 28 Total before flow from 29 assets Revenue EI operations Gross PPE Receivables 30 last year 21 33 2 31 current yea 20 26 -1 0 w 5 32 33 Required: 34 (Q1) Accruals are generally the easiest portion of earnings to manipulate. Why? 85 (Q2) Is the 2-digit or 3-digit model more appropriate to use for a Discretionay Accruals analysis? Explain. 86 (Q3) Using the 2-digit model, calculate Discretionary Accruals for the company being investigated. Does your analysis indicate Fraudulent Financial Reporting (FFR)? Explain. 37 38A B C D E F G H Here are some data taken from a company's financial statements: F/S ITEMS Current y Last Year 4 A/R (net) 23.94 13.83 5 Total current assets 51.64 35.27 6 PPE (net) 8.37 6.61 7 Total assets 95.78 77.9 8 Current liabilities 26.14 15.11 9 Long term debt 13 13 10 Sales 226.35 157.94 11 COGS 143.03 95.24 12 Sell, gen, and admin exp 65.6 46.5 13 Depreciation expense 2.6 2.31 14 Income bef extr items 7.78 6.11 15 Cash flow from operations 1.98 3.53 16 17 18 Required: 19 (Q1) Calculate the M-Score for this company and interpret. 20 (Q2) Assuming that you decide to investigate for fraud, where does the model suggest that you should look? 21 22 23