As a preliminary step in the selection of variables to use in a statistical-forecasting model, the management accountant has calculated the coefficient of correlation between the firm's sales and three economic indexes. The results were as follows:$$\begin{array} { c c }
\text { Index } & \text { Coefficient of Correlation } \
\text { A } & .105 \
\text { B } & - .009 \
\text { C } & - .854
\end{array}$$ Which of the following statements indicates the best course of action for the auditor to take in the development of a forecasting model?
A) Drop all three indexes from further consideration because a coefficient of correlation of + 1.0 is necessary for a statistically significant relationship.
B) Include only indexes B and C in the model because they have the only negative coefficients of correlation.
C) Include only index C in the model because its coefficient of correlation is relatively high and therefore probably statistically significant, while the coefficients of indexes A and B are likely to be insignificant.
D) Include only index A in the model because it has the only positive coefficient of correlation.

Question

As a preliminary step in the selection of variables to use in a statistical-forecasting model, the management accountant has calculated the coefficient of correlation between the firm's sales and three economic indexes. The results were as follows:$$\begin{array} { c c } 
\text { Index } & \text { Coefficient of Correlation } \
\text { A } & .105 \
\text { B } & - .009 \
\text { C } & - .854
\end{array}$$ Which of the following statements indicates the best course of action for the auditor to take in the development of a forecasting model?
A) Drop all three indexes from further consideration because a coefficient of correlation of + 1.0 is necessary for a statistically significant relationship.
B) Include only indexes B and C in the model because they have the only negative coefficients of correlation.
C) Include only index C in the model because its coefficient of correlation is relatively high and therefore probably statistically significant, while the coefficients of indexes A and B are likely to be insignificant.
D) Include only index A in the model because it has the only positive coefficient of correlation.

Quizplus · Accepted Answer

Index C has a relatively high coefficient of correlation (-.854), indicating a strong inverse relationship with the firm's sales, which is likely to be statistically significant. Indexes A and B have very low coefficients (.105 and -.009, respectively), suggesting weak or no linear relationship with sales, making them less useful for forecasting.

As a Preliminary Step in the Selection of Variables to Use