Alternative Accounting Measures As Predictors of Failure.

Abstract The article focuses on evaluating alternative accounting measures. The evaluation of alternative accounting measures is one of the most difficult tasks facing the accounting profession. According to this method, alternative measures would be evaluated in terms of their ability to predict events of interest to users of accounting data. The measure with the greatest predictive ability with respect to a given event would be considered the "best" measure for that particular purpose. Although a variety of accounting measures have been offered as predictors, little is known empirically about their relative predictive power. The examination of this area can be described by summarizing earlier investigation. The purpose of the earlier study was to discover how well financial ratios could predict failure relative to random prediction. The findings of the study were: based solely upon a knowledge of the financial ratios, the failure status of firms can be correctly predicted to a much greater extent than would be expected from random prediction. This evidence, together with other tests conducted, suggested that financial ratios can be useful in the prediction of failure for at least five years prior to the event.