Question 1

The agency relationship:

Accepted Answer

A) can lead to a loss of efficiency. 
B) can only work if principals are paid a bonus. 
C) involves delegating authority. 
D) can lead to a loss of efficiency and involves delegating authority. 
A) can lead to a loss of efficiency. 
B) can only work if principals are paid a bonus. 
C) involves delegating authority. 
D) can lead to a loss of efficiency and involves delegating authority.

Question 2

From an efficiency perspective of PAT,what approach should be adopted when managers are approaching retirement?

Accepted Answer

A) Increase the percentage of their remuneration that is paid out as bonuses based on accounting profit in order to keep them motivated to work hard. 
B) Use a market-based bonus scheme. 
C) Make them redundant as early as possible. 
D) Link an additional element of the manager's superannuation package to profits. 
A) Increase the percentage of their remuneration that is paid out as bonuses based on accounting profit in order to keep them motivated to work hard. 
B) Use a market-based bonus scheme. 
C) Make them redundant as early as possible. 
D) Link an additional element of the manager's superannuation package to profits.

Question 3

Positive Accounting Theory (PAT)assumes that principals are aware that agents will act opportunistically,so principals stipulate in any bonus contract the accounting methods to be applied.This means that:

Accepted Answer

A) A carefully worded contract is assumed by PAT to remove the potential for the agent to overstate profits. 
B) Agents will not be permitted to negotiate elements of the bonus contract relating to the stipulation of accounting methods. 
C) While the range of accounting treatments may be reduced, the cost of stipulating all the methods for all circumstances is too high, so there will always be scope for agents to opportunistically select accounting methods. 
D) It is more efficient in terms of the assumptions of PAT not to use bonus plans for agents. 
A) A carefully worded contract is assumed by PAT to remove the potential for the agent to overstate profits. 
B) Agents will not be permitted to negotiate elements of the bonus contract relating to the stipulation of accounting methods. 
C) While the range of accounting treatments may be reduced, the cost of stipulating all the methods for all circumstances is too high, so there will always be scope for agents to opportunistically select accounting methods. 
D) It is more efficient in terms of the assumptions of PAT not to use bonus plans for agents.

Question 4

Distinguish between opportunistic and efficient contracting versions of positive accounting theory.

Accepted Answer

From the efficiency perspective,research

Question 5

In a market where individuals are perfectly informed:

Accepted Answer

A) It could be assumed managers would ultimately bear costs associated with bonding and monitoring. 
B) There are no monitoring costs as managers will not risk acting in their own self-interests. 
C) Managers will receive a higher salary as principals will assume that managers will act opportunistically. 
D) Principals will bear the costs of bonding and monitoring so that they can remain informed. 
A) It could be assumed managers would ultimately bear costs associated with bonding and monitoring. 
B) There are no monitoring costs as managers will not risk acting in their own self-interests. 
C) Managers will receive a higher salary as principals will assume that managers will act opportunistically. 
D) Principals will bear the costs of bonding and monitoring so that they can remain informed.

Question 6

The pharmaceutical industry has been criticised in the financial press for recognising excessive profits and investing less in research and development so that the government is threatening the removal of tax concessions to the industry.Under these conditions,PAT predicts that pharmaceutical companies are subject to ___________ costs and are likely to adopt _________________ accounting policies

Accepted Answer

A) agency; income increasing 
B) agency; income decreasing 
C) political; income increasing 
D) political; income decreasing 
A) agency; income increasing 
B) agency; income decreasing 
C) political; income increasing 
D) political; income decreasing

Question 7

In the decade leading up to the 1970s the notable theories being developed were predominantly normative in nature.

Accepted Answer

A) True 
 B)False

Question 8

According to Chambers' CoCoA model,if assets cannot be sold separately they should be deemed to have no value.

Accepted Answer

A) True 
 B)False

Question 9

Normative theories are referred to as prescriptive theories.

Accepted Answer

A) True 
 B)False

Question 10

Creative accounting violates IFRS standards and generally accepted accounting principles.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following are examples of categories of the main normative accounting theories that were developed in the 1950s and 1960s?

Accepted Answer

A) current-cost accounting and conservatism 
B) critical theory and opportunity-cost accounting 
C) ABC costing and historical-cost accounting 
D) deprival-value accounting and exit-price accounting 
A) current-cost accounting and conservatism 
B) critical theory and opportunity-cost accounting 
C) ABC costing and historical-cost accounting 
D) deprival-value accounting and exit-price accounting

Question 12

Legitimacy Theory and Stakeholder Theory may both generate similar hypotheses to Positive Accounting Theory.The difference between PAT and the other two theories is that:

Accepted Answer

A) different research methods are applied. 
B) PAT does not explicitly consider the organisation in its broader social context. 
C) PAT is the only theory that takes a 'positive' research perspective. 
D) PAT considers owners and managers who cannot be considered legitimate stakeholders. 
A) different research methods are applied. 
B) PAT does not explicitly consider the organisation in its broader social context. 
C) PAT is the only theory that takes a 'positive' research perspective. 
D) PAT considers owners and managers who cannot be considered legitimate stakeholders.

Question 13

Corporate social responsibility reporting is consistent with stakeholder theory.

Accepted Answer

A) True 
 B)False

Question 14

Economic interest group theory of regulation adopts the notion that _____________ are considered to dominate the legislative process.

Accepted Answer

A) public interests 
B) private interests 
C) shareholders 
D) debtholders 
A) public interests 
B) private interests 
C) shareholders 
D) debtholders

Question 15

PAT suggests that agents agree to bonding and monitoring mechanisms to avoid price protection by principals.

Accepted Answer

A) True 
 B)False

Question 16

What is Institutional Theory and why is relevant to financial reporting research?

Accepted Answer

Institutional Theory considers the forms

Question 17

IAS 1 requires the summary of accounting policies adopted by reporting entities to be presented in any section of the notes to the financial report.

Accepted Answer

A) True 
 B)False

Question 18

Under PAT,a firm is aware that managers are likely to behave rationally.Which of the following mechanisms will be the appropriate course of action for shareholders to price protect against self-interested managers?

Accepted Answer

A) Compensate managers at a fixed rate. 
B) Compensate managers at a fixed rate plus bonus on the basis of performance. 
C) Compensate managers at a fixed rate with extra perquisites. 
D) Include debt covenants in the management compensation contract. 
A) Compensate managers at a fixed rate. 
B) Compensate managers at a fixed rate plus bonus on the basis of performance. 
C) Compensate managers at a fixed rate with extra perquisites. 
D) Include debt covenants in the management compensation contract.

Question 19

A machine with a carrying amount of £9 000 has a net selling price of £8 000.The replacement cost of this asset is £10 000 and the present value of future cash flows is £9 500.What is the deprival value of the machine?

Accepted Answer

A) £0 
B) £8000 
C) £9000 
D) £9500 
A) £0 
B) £8000 
C) £9000 
D) £9500

Question 20

How would the deprival value of an asset be determined?

Accepted Answer

A) It is the net selling price except where the value to the business (present value) is less or the current replacement cost greater. 
B) It is the present value of the future cash flows to be generated by the asset except where the current replacement cost or net selling price is less than that value. 
C) It is the value to the business of the asset (present value) within the bounds that this value is not less than the net selling price or greater than its current replacement cost. 
D) It is the current replacement cost where the present value is less than the current replacement cost and greater than the net selling price. 
A) It is the net selling price except where the value to the business (present value) is less or the current replacement cost greater. 
B) It is the present value of the future cash flows to be generated by the asset except where the current replacement cost or net selling price is less than that value. 
C) It is the value to the business of the asset (present value) within the bounds that this value is not less than the net selling price or greater than its current replacement cost. 
D) It is the current replacement cost where the present value is less than the current replacement cost and greater than the net selling price.

Exam 3: Theories of Financial Accounting

The agency relationship:

From an efficiency perspective of PAT,what approach should be adopted when managers are approaching retirement?

Positive Accounting Theory (PAT)assumes that principals are aware that agents will act opportunistically,so principals stipulate in any bonus contract the accounting methods to be applied.This means that:

Distinguish between opportunistic and efficient contracting versions of positive accounting theory.

In a market where individuals are perfectly informed:

In the decade leading up to the 1970s the notable theories being developed were predominantly normative in nature.

According to Chambers' CoCoA model,if assets cannot be sold separately they should be deemed to have no value.

Normative theories are referred to as prescriptive theories.

Creative accounting violates IFRS standards and generally accepted accounting principles.

Which of the following are examples of categories of the main normative accounting theories that were developed in the 1950s and 1960s?

Legitimacy Theory and Stakeholder Theory may both generate similar hypotheses to Positive Accounting Theory.The difference between PAT and the other two theories is that:

Corporate social responsibility reporting is consistent with stakeholder theory.

Economic interest group theory of regulation adopts the notion that _____________ are considered to dominate the legislative process.

PAT suggests that agents agree to bonding and monitoring mechanisms to avoid price protection by principals.

What is Institutional Theory and why is relevant to financial reporting research?

IAS 1 requires the summary of accounting policies adopted by reporting entities to be presented in any section of the notes to the financial report.

Under PAT,a firm is aware that managers are likely to behave rationally.Which of the following mechanisms will be the appropriate course of action for shareholders to price protect against self-interested managers?

A machine with a carrying amount of £9 000 has a net selling price of £8 000.The replacement cost of this asset is £10 000 and the present value of future cash flows is £9 500.What is the deprival value of the machine?

How would the deprival value of an asset be determined?

An Overview of the International External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

An Overview of Accounting for Liabilities

Accounting for Leases

Share Capital, Reserves and Share Options Employee Bonus Schemes

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Income Taxes

The Statement of Cash Flows

Events Occurring After the Reporting Date

Related-Party Disclosures

Earnings Per Share

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues III: Accounting for Indirect Ownership Interest

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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