Question 1

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.

Question 2

Using the PAT perspective of managers' behaviour,the effect of paying managers a fixed income salary is that:

Accepted Answer

A)  They will feel secure enough to accept risky projects for the organisation. 
B)  They will prefer not to have the organisation take on debt. 
C)  They will be free to consider the optimal investment options for the organisation from the perspective of the principals. 
D)  They will feel secure enough to accept risky projects for the organisation and they will be free to consider the optimal investment options for the organisation from the perspective of the principals. 
A)  They will feel secure enough to accept risky projects for the organisation. 
B)  They will prefer not to have the organisation take on debt. 
C)  They will be free to consider the optimal investment options for the organisation from the perspective of the principals. 
D)  They will feel secure enough to accept risky projects for the organisation and they will be free to consider the optimal investment options for the organisation from the perspective of the principals.

Question 3

Fair value accounting is an example of positive accounting theory.

Accepted Answer

A) True 
 B)False

Question 4

As part of the company's compensation plan,a chief executive officer (CEO)is paid 1% of net profit if net profit exceeds $20 00 000 but no more than $40 000 in a given year.It is estimated that net profit for the year will exceed $45 00 000.Under PAT the CEO will likely adopt which accounting policy

Accepted Answer

A)  decrease reported profit as much as he can 
B)  decrease reported profit to $20 00 000 
C)  increase reported profit as much as he can 
D)  increase reported profit up to $40 00 000 
A)  decrease reported profit as much as he can 
B)  decrease reported profit to $20 00 000 
C)  increase reported profit as much as he can 
D)  increase reported profit up to $40 00 000

Question 5

Market-based bonus schemes may be considered more appropriate from a PAT perspective in industries in which:

Accepted Answer

A)  successful strategies will not be reflected in accounting profits for a number of periods. 
B)  the price/earnings ratio is commonly greater than 12. 
C)  profits may be the subject of manipulation by managers. 
D)  capital investment is not an important strategic decision. 
A)  successful strategies will not be reflected in accounting profits for a number of periods. 
B)  the price/earnings ratio is commonly greater than 12. 
C)  profits may be the subject of manipulation by managers. 
D)  capital investment is not an important strategic decision.

Question 6

An example of political costs under the PAT perspective is:

Accepted Answer

A)  contributions to political parties. 
B)  costs associated with increased wage claims by trade unions. 
C)  the cost of remaining largely unnoticed by government regulatory agencies. 
D)  wage and salary deductions paid to unions. 
A)  contributions to political parties. 
B)  costs associated with increased wage claims by trade unions. 
C)  the cost of remaining largely unnoticed by government regulatory agencies. 
D)  wage and salary deductions paid to unions.

Question 7

Examples of behaviours that create agency costs of debt include situations where the borrowing entity:

Accepted Answer

A)  goes through a broker to raise debt funds. 
B)  pays minimal dividends. 
C)  invests in high-risk projects. 
D)  puts the borrowed money in the bank. 
A)  goes through a broker to raise debt funds. 
B)  pays minimal dividends. 
C)  invests in high-risk projects. 
D)  puts the borrowed money in the bank.

Question 8

Managers may be motivated to revalue assets where there are common forms of debt covenants in place because:

Accepted Answer

A)  It loosens the covenant and allows the business to borrow more. 
B)  Revaluing assets provides more relevant information for debt-holders to use when making decisions. 
C)  Revaluing assets provides greater cash flows out of which to repay debt. 
D)  Revaluing assets provides more relevant information for debt-holders to use when making decisions and provides greater cash flows out of which to repay debt. 
A)  It loosens the covenant and allows the business to borrow more. 
B)  Revaluing assets provides more relevant information for debt-holders to use when making decisions. 
C)  Revaluing assets provides greater cash flows out of which to repay debt. 
D)  Revaluing assets provides more relevant information for debt-holders to use when making decisions and provides greater cash flows out of which to repay debt.

Question 9

Corporate social responsibility reporting is consistent with stakeholder theory.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 12

Information asymmetry is the situation in which the agent has access to information not available to the principal.

Accepted Answer

A) True 
 B)False

Question 13

Under the efficiency perspective of PAT,where regulation bans an accounting method being used by a particular organisation:

Accepted Answer

A)  This will lead to lower monitoring costs because management does not have as wide a range of methods to choose from. 
B)  This will lead to more useful reporting of performance because principals will be able to compare reports between different organisations. 
C)  This will lead to inefficiencies, as the financial statements will no longer provide the best reflection of the performance of the organisation. 
D)  This decreases the chance that agents will undertake opportunistic behaviour to provide principals with creative accounts. 
A)  This will lead to lower monitoring costs because management does not have as wide a range of methods to choose from. 
B)  This will lead to more useful reporting of performance because principals will be able to compare reports between different organisations. 
C)  This will lead to inefficiencies, as the financial statements will no longer provide the best reflection of the performance of the organisation. 
D)  This decreases the chance that agents will undertake opportunistic behaviour to provide principals with creative accounts.

Question 14

Debt contracts will:

Accepted Answer

A)  stipulate in advance all accounting methods to be used by managers. 
B)  ensure management has some discretionary ability to loosen restrictions negotiated by debt-holders. 
C)  encourage the practice of claim dilution to ensure debts are repaid. 
D)  occasionally restrict accounting techniques used by a firm. 
A)  stipulate in advance all accounting methods to be used by managers. 
B)  ensure management has some discretionary ability to loosen restrictions negotiated by debt-holders. 
C)  encourage the practice of claim dilution to ensure debts are repaid. 
D)  occasionally restrict accounting techniques used by a firm.

Question 15

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 16

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 17

Firms are subject to political costs when:

Accepted Answer

A)  They are quite small and have little political influence. 
B)  They choose accounting policies that best reflect the performance of the firm. 
C)  They record high profits and share those profits in the form of increased wages. 
D)  They are highly visible, in the media or other arenas, often as a result of high profits. 
A)  They are quite small and have little political influence. 
B)  They choose accounting policies that best reflect the performance of the firm. 
C)  They record high profits and share those profits in the form of increased wages. 
D)  They are highly visible, in the media or other arenas, often as a result of high profits.

Question 18

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 19

The adoption of IFRS standards requires the use of fair value in recognition and measurement of numerous items in the financial report,stimulating a debate that IFRS standards increases volatility in earnings.Using the opportunistic view,discuss the concerns of reporting entities with the IFRS standards.

Accepted Answer

The adoption of IFRS standards has indee

Question 20

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.

Exam 3: Theories of Accounting

How would the deprival value of an asset be determined?

Using the PAT perspective of managers' behaviour,the effect of paying managers a fixed income salary is that:

Fair value accounting is an example of positive accounting theory.

Market-based bonus schemes may be considered more appropriate from a PAT perspective in industries in which:

An example of political costs under the PAT perspective is:

Examples of behaviours that create agency costs of debt include situations where the borrowing entity:

Managers may be motivated to revalue assets where there are common forms of debt covenants in place because:

Corporate social responsibility reporting is consistent with stakeholder theory.

In a market where individuals are perfectly informed:

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

Information asymmetry is the situation in which the agent has access to information not available to the principal.

Under the efficiency perspective of PAT,where regulation bans an accounting method being used by a particular organisation:

Debt contracts will:

Positive Accounting Theory seeks to:

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

Firms are subject to political costs when:

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

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?

An Overview of the Australian 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

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Leases

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Share-Based Payments

Accounting for Income Taxes

The Statement of Cash Flows

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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