Collection of financial statement data financial

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Collection of Financial Statement Data Financial-statement data of the failed firms were obtained from Moody's for five years prior to failure. The "first year before failure" is defined as that year included in the most recent financial statement prior to the date that the firm failed. Another condition also had to be fulfilled—the financial statements could not be more than six months old at the date of failure. The "second year before failure" is the fiscal year preceding the first year. The third, fourtb, and fifth years are simi- larly defined. The financial statements of the nonfailed firms were ob- tained for the same fiscal years as those of their failed mates. The financial-statement data were then grouped according to year before failure. For example, if two firms failed in 1964 and 1954, re- spectively, and their most recent financial statements were prepared on December 31, 1963 and 1953, respectively, the first year before failure would include the 1963 statements of the former and the 1953 state- ments of the latter. The fifth year before failure would include the 1959 and 1949 statements. Since the firms failed from 1954 to 1964, inclusive, the first year before failure includes financial statements from an eleven-year period, 1953 through 1963, while the fifth year includes 1949 through 1959. The financial-statement data of the nonfailed firms were also strati- fied into years before failure, corresponding to the years that were as- signed to their failed mates. For example, the 1963 (1953) statements of the nonfailed mate to the first (second) firm mentioned above would be assigned to the first year before failure. Similarly, the 1959 (1949) state- ments would be assigned to the fifth year before failure. Because financial-statement data were not available for every year before failure the number of observations decreases as the time period before failure increases. The sample size is largest in the first year before failure—158 firms—and is smallest in the fifth year—117 firms.^* Availa- bility of data over the five-year period was not made a criterion for in- clusion in the sample, since a possible bias might be introduced in this " The number of observations in each year before failure appears in Table A-3 in the Appendix.
78 WILLIAM H. BEAVER TABLE 1 List of Ratios Tested^ GROUP I (CASH FLOW RATIOS) 1. Cash flow to sales 2. Cash flow to total assets 3. Cash flow to net worth 4. Cash flow to total debt GROUP II (NET-INCOME RATIOS) 1. Net income to sales 2. Net income to total assets 3. Net income to net worth 4. Net income to total debt GROUP III (DEBT TO TOTAL-ASSET RATIOS) 1. Current liabilities to total assets 2. Long-term liabilities to total assets 3. Current plus long-term liabilities to total assets 4. Current plus long-term plus preferred stock to total assets GROUP IV (LIQUID-ASSET TO TOTAL-ASSET RATIOS) 1. Cash to total assets 2. Quick assets to total assets 3. Current assets to total assets 4. Working capital to total assets GROUP V (LIQUID-ASSET TO CUR- RENT DEBT RATIOS) 1. Cash to current liabilities 2. Quick assets to current liabilities 3.

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