The Usefulness of SFAS No. 82 (Current Cost) Information in Discriminating Business Failure: An Empirical Study

Abstract

This study examines the usefulness of current cost information (CC) provided to meet the requirements of SFAS No. 33 and SFAS No. 82, as compared to historical cost information (HC) in discriminating business failure. The study also examines the usefulness of CC data as supplement to HC data. Two multivariate statistical techniques, multiple discriminant analysis (MDA) and logistic regression analysis (LRA), are used to derive the ex-post classification results. Three functions are developed based on ratios computed with HC, CC, and the combined HCICC. The resulting functions are used to classify fifty-two firms as failed or nonfailed. The analysis is repeated for three time periods: one, two, and three years before bankruptcy. The main results of the various analyses indicate that the combined HCICC model has more discriminant power than does the HC model alone in each of the three years before bankruptcy. LRA has a better classification rate than MDA for the selected sample.