RSM 326

Data Analytics with Financial Accounting

Information

Winter 2022

Session 5

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 Where we are now

2. Intro to 4. Preparing
1. Data
Accounting 3. Types of Data Data for
Analytics
Data Analytics

5. Types and
6. Descriptive 7. Diagnostic 8. Predictive
Tools of Data
Analytics Analytics Analytics
Analytics

9. Prescriptive 10. Share the 11. Putting it All

Analytics Story Together

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distribution permitted without the prior written consent of McGraw Hill. 2
 The AMPS Model
In the AMPS model, we’re now going to
look at Perform the Analysis.

Four types of analyses:

• Descriptive Analytics
• Diagnostic Analytics
• Predictive Analytics
• Prescriptive Analytics

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Matching the Analytics With the Question

Four Types of Questions

 What happened?
 Why did it happen?
 Will it happen in the future?
 What should we do, based on what we expect will happen?

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Descriptive Analytics: “What Happened?”
 Did we make a profit last year?
 Did return on assets improve or decline over the past year?
 Did the airline company’s on-time departures improve this past month?
 How much did we pay in federal taxes last year?
 How long have the existing accounts receivable been outstanding?
 Which product is the most profitable one for the company?

Descriptive analytics are performed to characterize, summarize, and organize

features and properties of the data to facilitate understanding.

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Diagnostic Analytics: “Why Did it Happen?”
 Why did advertising expense increase, but sales fall?
 Why did sales, general and administrative expenses increase relative to the industry?
 Why did overall tax increase even though net income did not?
 Can our variance analytics help explain why the labor expenses increased over the past
year?
 Why were some checks greater than $10,000 signed by two members of management
and others of similar size only signed by one?

Diagnostic analytics are performed to investigate the underlying cause that

cannot be answered by simply looking at the descriptive data.

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Broad Categories of Diagnostic Analytics

 Identifying Anomalies/Outliers
o Often a first step in diagnostic analytics is to look for and identify unusual,
unexpected results or transactions.
 Finding previously unknown linkages, patterns, or relationships between
variables:

o Performing Drill-Down Analytics –

look for patterns in the underlying data set by summarizing data at different levels and
uncovering additional details.
o Determine Relations/Patterns/Linkages between Variables –
find the extent to which there are patterns in the data.

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 Predictive Analytics:
“Will it Happen in the Future?”
• What is the chance the company will go bankrupt?
• Do we extend credit or not to customers based on customer background (credit
score, employment record, existing debt)? Will they be able to pay back their
loans?
• Can the IRS find those individuals or corporations evading taxes using predictive
techniques?
• Can we predict when the financial statements might be misstated?

Predictive analytics are performed to provide foresight by identifying patterns

in historical data and assessing likelihood or probability.

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Broad Categories of Predictive Analytics

 Regression – A predictive analytics technique used to predict a specific

dependent variable outcome value based on independent variable inputs.
 Forecasting Using Time Series Analytics – A predictive analytics technique
used to predict future values based on past values of the same variable.
 Classification – A predictive analytics technique used to separate or classify
a sample (or population) into two or more groups or classes.

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 Prescriptive Analytics:
“What Should We Do Based On What We Expect Will
Happen?”
 If we have all December year-end audit clients, how will we organize our audit
work in the new year?
 How can revenues be maximized (or costs be minimized) if there is a trade war?
 What is the level of sales that will allow us to breakeven?
 Should the company lease or own their headquarters office building?
 Should the company make its products or outsource to other producers?

Prescriptive analytics are performed to identify best possible options given

constraints or changing conditions.

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 Broad Categories of Prescriptive Analytics

 Sensitivity Analytics - evaluation of outcomes based on uncertainty regarding the

inputs.
 Capital Budgeting - evaluating future cash flows using various analytics
techniques including net present value and internal rate of return.
 Marginal (or incremental) analytics - technique used to determine the change in
profit associated with the cost or benefit of the next (or marginal) unit.
 What-if Scenario Analytics - analytics of potential future events by considering
potential outcomes.
 Goal Seek Analytics – a form of what-if analytics that tells us what will need to be
done (or assumed) in order to reach a desired outcome.

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 Summary: Types of Data Analytics

 Four types of data analytics:

Descriptive, diagnostic, predictive, and
prescriptive
 The type of analytics to use depends on
the type of question asked.
 We discussed four types of questions
and the corresponding analytics and
tools that are used to answer those types
of questions.

EXHIBIT 5.11 Circumplex of Descriptive, Diagnostic, Predictive and

Prescriptive Analytics and Analytics Techniques

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 Where we are now
2. Intro to 4. Preparing
1. Data
Accounting 3. Types of Data Data for
Analytics
Data Analytics

5. Types and
6. Descriptive 7. Diagnostic 8. Predictive
Tools of Data
Analytics Analytics Analytics
Analyses

9. Prescriptive 10. Share the 11. Putting it All

Analytics Story Together

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further
distribution permitted without the prior written consent of McGraw Hill. 13
 The AMPS Model
In the AMPS cycle, we’re now going
to look at Perform the Analytics.

Four types of analyses:

• Descriptive Analytics
• Diagnostic Analytics
• Predictive Analytics
• Prescriptive Analytics

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distribution permitted without the prior written consent of McGraw Hill. 14
 Definition of Descriptive Analytics

Descriptive analytics are performed to characterize, summarize, and organize

features and properties of the data to facilitate understanding.

Descriptive analytics addresses the questions of

• “What happened?” or
• “What is happening?”

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 Descriptive Analytics Tools/Techniques
Mean, Median, Mode: Measures of central tendency.
 What is the average employee salary?
 What is the average stock market return over the past five years?
Minimums, Maximums: Measures showing extreme values.
 What was the largest sales refund given last month?
Standard Deviation, Quartiles: Measures of dispersion.
 What is the standard deviation of the company’s stock price over the last quarter?
 What quartile is Ford in based on its leverage compared to the automobile
industry as a whole?

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 Descriptive Analytics Tools/Techniques (cont.)
Counts: Show how frequently an attempt occurs.
 How many sales transactions did we have last year?
Totals, Sums, Subtotals: Aggregation.
 What is total net income over the past four years?
Graphs (Bar Charts), Histograms
 The change in revenue from one period to the next might be best shown with a
bar chart.
PivotTables, PivotCharts
 What is the total profitability of each customer or each inventory item?

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 Descriptive (Summary) Statistics for the Retail
Industry in 2018

Summarize the “central tendency”,

“dispersion”, and extreme values
of the data:
 Mean, Median, Mode
 Standard Deviation
 Quartiles
 Minimums, Maximums
EXHIBIT 5.3 Summary Statistics for the Retail Industry Reported in 2018
(Source: Compustat Database of all retail firms with fiscal years ending in 2018.)

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 Start With A Simple Table…
Present It As A Bar Graph… Or A Line Chart

EXHIBIT 6.1 A Table of Financial Performance EXHIBIT 6.2 Bar Graph of Sales and Line Graph of Net Income for Amazon from 2008–2018.
(Net Income and Sales Revenue) for Amazon from Source: Amazon Income Statements, 2008–2018
2008–2018
Source: Amazon Income Statements from 2008–
2018

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PivotTables and PivotCharts: Aged Receivables

EXHIBIT 6.3 & 6.4 Example of Aged Receivables from an Excel PivotTable (Using Lab 6-1 Data)

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 Excel’s Data “Analysis Toolpak” Offers a Variety of
Analytics Tools
1. Install “Analysis Toolpak” add-in
File -> Option -> Add-ins -> Manage: “Excel Add-ins” ->
[Add-Ins Window pops up] -> Check “Analysis Toolpak”
2. Conduct Statistical Analysis
Data -> Data Analysis -> [Data Analysis window pops up] -> Click to select

EXHIBIT 5.20 Analytics Tools Available within the Data Analysis Toolpak

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 Using Horizontal, Vertical and DuPont
Analyses for Financial Statement Analyses

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 Horizontal Analyses
 Horizontal Analyses provides comparative increases about various line items of
each financial statement over time.

 Horizontal Analyses uses percentage change:

 (New – Old)/ Old, where “New” is the current period and
“Old” is the prior period.

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 Example of Horizontal Analyses

EXHIBIT 6.5 Horizontal Analysis for Tyson Foods Income Statement

Source: Tyson 2018 Annual Report, page 45, https://s22 .q4cdn.com/104708849/files/ doc_financials/quartely/2018/ q4/TSN-FY18-10-K.pdf, accessed July 2019

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 Vertical Analyses

Vertical Analyses expresses financial information in relation to some relevant

figure, or base.

 For example, on an income statement, the relevant base would be net sales
revenue.
 On a balance sheet, the relevant base for a balance sheet line item would be
total assets.

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 Example of Vertical Analysis

EXHIBIT 6.7 Vertical Analysis for the Tyson Foods Income Statement
Source: Tyson 2018 Annual Report, page 45, https://s22. q4cdn.com/104708849/files/ doc_financials/quartely/2018/ q4/TSN-FY18-10-K.pdf, accessed July
2019

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 Ratio Analysis and DuPont Analysis
Ratio Analysis:
 The computation of financial ratios to assess profitability, efficiency, liquidity, and
solvency.

DuPont Analysis:
 Disaggregation of Return on Equity (ROE) into three component parts.
 Return on Equity (ROE)
 = (Net profit/Sales) x (Sales/Total Assets) x (Total Assets/Equity)
 = Profit Margin x Asset Turnover x Financial Leverage

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 Example of DuPont Analysis
Return on Financial
= Profit Margin × Asset Turnover ×
equity Leverage
Net profit Sales Total assets
= Sales × Total assets × Equity
Google Financial
(Alphabet) = Profit Margin × Asset Turnover ×
Leverage
2017 ROE
12,662 110,855 197,295
= 110,855 × 197,295 × 152,502

= 11.42% × 0.56 × 1.29

= 8.3%

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 Example of DuPont Analysis (Just ROA)
Target Higher Margins; Walmart Higher Turnover
Return on assets = Profit margin × Asset turnover
= Net profit Sales
×
Sales Total assets
Walmart’s return on = Profit margin × Asset turnover
assets (2018) in = 7,179 510,329
millions ×
510,329 219,295
= 1.41% × 2.33
= 3.28%
Target’s return on = Profit margin × Asset turnover
assets (2018) in = 2,914 71,879
millions ×
71,879 40,303
= 4.05% × 1.78
= 7.21%

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Descriptive Analytics as the First Step in
Additional Analyses

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Using Descriptive Analytics as the First Step to Identify
Phenomena

EXHIBIT 6.10 The Distribution of Return on the Market Value of Stockholders’ Equity from 1976 to 1994
Source: Burgstahler, David, and Ilia Dichev. “Earnings management to avoid earnings decreases and losses.” Journal of Accounting and Economics 24.1.

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Using Descriptive Analytics as the First Step to Identify
Phenomena (cont.)
Descriptive analytics leads to additional questions:
 Why would this be?
 Did managers make this happen?
 Do managers not like small losses? Do they prefer small gains?
 Do managers use the flexibility within accounting standards to make earnings
higher (or lower) than the expected? If they do manage earnings, how do they
do that?
 What incentives do they have to manage earnings up or down? To maximize
bonus? To maintain a string of positive earnings?

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 Exercise

Using the 2016 executive compensation data, answer the following question:
1) What is the mean and median total compensation?
2) What is the standard deviation of total compensation?
3) Indicate the quartile each manager is in based on the total compensation.
4) How many managers earn more than $1,000K in 2016?
5) How many CEOs earn more than $1,000K?
6) Do female managers make less than male managers?

33
 Countif Function
=COUNTIF(D5:D12,">100") // count sales over 100
=COUNTIF(B5:B12,"jim") // count name = "jim"
=COUNTIF(A1:A10,100) // count cells equal to 100
=COUNTIF(A1:A10,"<"&B1) // count cells less than B1
=COUNTIF(A1:A10,"<>red") // not "red”
=COUNTIF(A1:A10,"<>") // not blank
=COUNTIF(A1:A10,"") // blank
=COUNTIF(A1:A10,"<"&DATE(2020,4,1)) // dates less than 1-Apr-2020
=COUNTIF(A1:A5,"*apple*") // cells that contain "apple”
=COUNTIF(A1:A5,"???") // cells that contain any 3 characters

If there are more than one condition, use the COUNTIFS function:
=COUNTIFS(criteria_range1, criteria1, [criteria_range2, criteria2]…)

34
 IF Function
Condition Operator Formula Example Description
If the number in cell A2 is greater than 5, the formula returns "OK"; otherwise
Greater than > =IF(A2>5, "OK",)
0 is returned.
If the number in cell A2 is less than 5, the formula returns "OK"; an empty
Less than < =IF(A2<5, "OK", "")
string otherwise.
If the number in cell A2 is equal to 5, the formula returns "OK"; otherwise the
Equal to = =IF(A2=5, "OK", "Wrong number")
function displays "Wrong number".

If the number in cell A2 is not equal to 5, the formula returns "Wrong number
Not equal to <> =IF(A2<>5, "Wrong number", "OK")
"; otherwise - "OK".

Greater than or equal

Syntax: =IF(logical_test, [value_if_true], [value_if_false])
If the number in cell A2 is greater than or equal to 5, the formula returns "OK";
>= =IF(A2>=5, "OK", "Poor")
to otherwise - "Poor".

If the number in cell A2 is less than or equal to 5, the formula returns "OK"; an
Less than or equal to <= =IF(A2<=5, "OK", "")
empty string otherwise.

35
 IF Function (cont.)
1. Case-insensitive text criterion

2. Case-sensitive text criterion

36
 IF Function (cont.)
3. Case-insensitive partial-match criterion

Search function: SEARCH(substring, string, [start_position]), returns the position of the substring in
number, otherwise #VALUE!
ISNUMBER function: isnumber(value) returns true or false

4. Case-sensitive partial-match criterion

If you want a case-sensitive match, simply replace SEARCH with FIND in this
way:=IF(ISNUMBER(FIND(”deliv", C2)), “No”, “Yes”)
37
IF Function with Multiple Conditions

38
 IF Function with Dates
IF function with date criterion

39
 Nested IF Function

Today () function and Nested IF function

40
IFS Function versus Nested IF Function

41
 Summary
 Descriptive Analytics addressed the accounting questions of
“What Happened?” or “What is Happening?”
 Descriptive analytics is analytics we perform that characterizes, summarizes,
and organizes features and properties of the data to facilitate understanding.
 Descriptive analytics simply explains in detail “what happened”, faithfully
representing the substance of what actually occurred without bias or error.
 We discussed various tools and techniques including the use of summary
statistics, charts, pivottables, pivotcharts, ratio analyses (including DuPont
ratios).
 Descriptive analytics is often the first step performed to begin to address a
question of any type (before other analyses - such as diagnostic, predictive
and prescriptive).

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distribution permitted without the prior written consent of McGraw Hill. 42