Question 1

Which of the following accounting policies is consistent with 'creative accounting'?

Accepted Answer

A) A firm with management compensation contract changes its depreciation policy from straight-line to accelerated rate method. 
B) A start-up firm adopts a policy to expense research and development expenses as incurred. 
C) A profit making tobacco producing firm changes its depreciation policy from straight-line to accelerated rate method. 
D) A firm with debt contracts shifts inventory accounting policy from FIFO to LIFO method. 
A) A firm with management compensation contract changes its depreciation policy from straight-line to accelerated rate method. 
B) A start-up firm adopts a policy to expense research and development expenses as incurred. 
C) A profit making tobacco producing firm changes its depreciation policy from straight-line to accelerated rate method. 
D) A firm with debt contracts shifts inventory accounting policy from FIFO to LIFO method.

Question 2

Failure of an organisation to comply with negotiated debt covenants can lead to:

Accepted Answer

A) the operations of the organisation being suspended. 
B) the organisation being placed in the hands of a party nominated by the lender. 
C) the lender taking control of the organisation. 
D) all of the given answers. 
A) the operations of the organisation being suspended. 
B) the organisation being placed in the hands of a party nominated by the lender. 
C) the lender taking control of the organisation. 
D) all of the given answers.

Question 3

Creative accounting describes the actions of report preparers who select accounting methods that best reflect the performance of the firm.

Accepted Answer

A) True 
 B)False

Question 4

Problems associated with rewarding managers based on share-price movements include:

Accepted Answer

A) Share prices do not often reflect the value of the business. 
B) Share prices are a 'noisy' measure of management performance. 
C) Share prices track closely the profit measures so it is more efficient to just use profit. 
D) Share prices do not often reflect the value of the business and share prices are a 'noisy' measure of management performance. 
A) Share prices do not often reflect the value of the business. 
B) Share prices are a 'noisy' measure of management performance. 
C) Share prices track closely the profit measures so it is more efficient to just use profit. 
D) Share prices do not often reflect the value of the business and share prices are a 'noisy' measure of management performance.

Question 5

Regulation is deemed to be an instrument for creating confidence in the capital markets.

Accepted Answer

A) True 
 B)False

Question 6

Income-decreasing accounting methods may be adopted if a firm believes it might be subject to political costs.

Accepted Answer

A) True 
 B)False

Question 7

Positive Accounting Theory seeks to:

Accepted Answer

A) prescribe which accounting methods should be used in particular circumstances. 
B) explain and predict which accounting methods management is likely to select from available choices. 
C) describe how social relationships are implicated in lobbying by interest groups in accounting standard setting. 
D) formulate an understanding of how accountability to a broader set of stakeholders should be achieved. 
A) prescribe which accounting methods should be used in particular circumstances. 
B) explain and predict which accounting methods management is likely to select from available choices. 
C) describe how social relationships are implicated in lobbying by interest groups in accounting standard setting. 
D) formulate an understanding of how accountability to a broader set of stakeholders should be achieved.

Question 8

The predictions of PAT formulated by Watts and Zimmerman (1990)are largely concentrated on the following predictions:

Accepted Answer

A) Managers of companies with bonus plans are likely to choose income increasing accounting policies. 
B) Managers of companies that are close to violating accounting-based debt covenants are likely to choose income increasing accounting policies. 
C) Managers of companies that are subject to greater political costs are likely to choose income decreasing accounting policies. 
D) All of the given answers are correct. 
A) Managers of companies with bonus plans are likely to choose income increasing accounting policies. 
B) Managers of companies that are close to violating accounting-based debt covenants are likely to choose income increasing accounting policies. 
C) Managers of companies that are subject to greater political costs are likely to choose income decreasing accounting policies. 
D) All of the given answers are correct.

Question 9

An empirically based theory could be described as being:

Accepted Answer

A) developed and supported on the basis of observations. 
B) based on a set of accepted scales and measures. 
C) based on a political approach developed in the early nation states. 
D) related to a specific time period and not able to be generalised. 
A) developed and supported on the basis of observations. 
B) based on a set of accepted scales and measures. 
C) based on a political approach developed in the early nation states. 
D) related to a specific time period and not able to be generalised.

Question 10

Theorists' own values or ideological predispositions may be among the factors that determine which side of the argument they will adopt in respect to disputable connections in a theory with evidence.

Accepted Answer

A) True 
 B)False

Question 11

Fair value accounting is an example of positive accounting theory.

Accepted Answer

A) True 
 B)False

Question 12

A combination of well-designed management compensation contracts,the market for corporate takeovers and a well-informed labour market should:

Accepted Answer

A) not be necessary as any one of these methods will control a manager's actions. 
B) ensure that managers only act in their own self-interest. 
C) mean that, on average, managers work in the best interests of owners. 
D) remove any monitoring and bonding costs required under PAT. 
A) not be necessary as any one of these methods will control a manager's actions. 
B) ensure that managers only act in their own self-interest. 
C) mean that, on average, managers work in the best interests of owners. 
D) remove any monitoring and bonding costs required under PAT.

Question 13

An asset that has a deprival value of zero is likely to be:

Accepted Answer

A) goodwill. 
B) intangible assets. 
C) land. 
D) goodwill and intangible assets. 
A) goodwill. 
B) intangible assets. 
C) land. 
D) goodwill and intangible assets.

Question 14

The central assumptions of economics that form a basis for Positive Accounting Theory are that:

Accepted Answer

A) all individual action is driven by self-interest and individuals will act in an opportunistic manner. 
B) all individuals are entrepreneurial and will act in an opportunistic manner. 
C) individuals cooperate in groups to form markets for the benefit of everyone. 
D) there is a moral code that guides the behaviour of individuals to operate efficient markets. 
A) all individual action is driven by self-interest and individuals will act in an opportunistic manner. 
B) all individuals are entrepreneurial and will act in an opportunistic manner. 
C) individuals cooperate in groups to form markets for the benefit of everyone. 
D) there is a moral code that guides the behaviour of individuals to operate efficient markets.

Question 15

Identify accounting policies that are in agreement with the efficiency view of positive accounting theory.

Accepted Answer

The efficiency perspective is often refe

Question 16

Legitimacy Theory relies on the notion that there is a ________ _________ between an organisation and the society in which it operates.

Accepted Answer

A) formal agreement 
B) social contract 
C) working relationship 
D) government regulation 
A) formal agreement 
B) social contract 
C) working relationship 
D) government regulation

Exam 3: Theories of Financial Accounting

Which of the following accounting policies is consistent with 'creative accounting'?

Failure of an organisation to comply with negotiated debt covenants can lead to:

Creative accounting describes the actions of report preparers who select accounting methods that best reflect the performance of the firm.

Problems associated with rewarding managers based on share-price movements include:

Regulation is deemed to be an instrument for creating confidence in the capital markets.

Income-decreasing accounting methods may be adopted if a firm believes it might be subject to political costs.

Positive Accounting Theory seeks to:

The predictions of PAT formulated by Watts and Zimmerman (1990)are largely concentrated on the following predictions:

An empirically based theory could be described as being:

Theorists' own values or ideological predispositions may be among the factors that determine which side of the argument they will adopt in respect to disputable connections in a theory with evidence.

Fair value accounting is an example of positive accounting theory.

A combination of well-designed management compensation contracts,the market for corporate takeovers and a well-informed labour market should:

An asset that has a deprival value of zero is likely to be:

The central assumptions of economics that form a basis for Positive Accounting Theory are that:

Identify accounting policies that are in agreement with the efficiency view of positive accounting theory.

Legitimacy Theory relies on the notion that there is a ________ _________ between an organisation and the society in which it operates.

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

Filters

Legitimacy Theory relies on the notion that there is a _ between an organisation and the society in which it operates.