ACCOUNTING

Accounting Research Assessment

Accounting Research Assessment

Q# which bankruptcy prediction models have been most successful internationally in predicting the financial failures of quoted firms?

Introduction

Bankruptcy is defined as when the company or business has fewer assets than its liabilities, especially current assets and current liabilities. When the firm faces continuously losses, and when the direction of market share is on a declining trend since few years, may be called bankrupt state of the business. However, if a firm or company is unable to pay its short term liabilities or short term liabilities exceeds than their current or quick assets then it will be called bankruptcy. There are various bankruptcy prediction models like Survival methods, Option valuation approaches, sophisticated models, neural network models and analysis of financial statements models. Here, the analysis of financial statements model is selected for the evaluation of bankrupt firms or business units of the Australian. Let take the recent three Australian firms or businesses this shows the financial bankruptcy (jardin & philippe, 2009 p. 39-46).

Reasons to choose the analysis of financial statements models

The reason is to choose or select this model due to its financial perfection. It portrays the true picture of the financial condition of the firm and its capabilities regarding its strength and weaknesses. The selection of this model is taken due to its perfection and authenticity. The financial issue of the firm shows the interest of creditors and investors in the firm. The market price per share also shows the financial strength of the firm. It can be said that the liquidity ratio especially current ratio and acid test ratio are the spinal cord of this study. This is because the liquidation problem is very close with the bankruptcy of the business or firm (Penman & Zhang, 2002 p. 1-3).

Major parts of the model

I- Leverage Financial Ratios

II- Liquidity Financial Ratios

III- Operating Financial Ratios

IV- Profitability Financial Ratios (FA, 2013 p.2-16).

Bankrupt firms or businesses of Australia

Following are the three most recent films /businesses which are announced bankrupted or liquidated advance Healthcare Group Ltd, Hercules Chemicals (Australia), Saiesh Enterprises Limited (CIL, 2013 p.nd).

These businesses were in financial vulnerable condition. The financial statements show the frail picture of their digits and therefore these are liquidated due to their poor financial ratios, especially liquidity ratio. Let us discuss the Australian Failure Firms components parts via calculations of financial statements of respective firms (ASIC, 2013 p. nd).

A-Healthcare Group Ltd

Reason for closing or liquidating the business is due to negative acid test ratio and very poor current assets. Let's us analyze the financial statements via above stated parts of the model (AHZ, 2013 p. nd).

Leverage Financial Ratios

These ratios show the rate of a business's capital structure consists on liabilities and debts owed to exterior parties (FL, 2013 p.nd).

'Debt to Equity Ratio'

This ratio shows the division between the total liabilities and shareholders equity. It shows how many times equity is more than the total liabilities or how much part the liabilities are reached its overall shareholders ...