Exam 3: Theories of Accounting

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:

The Conceptual Framework can be described as a positive theory of accounting.

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

There is significant scope for managers to exercise their judgment in the selection of accounting policies.PAT suggests that accounting policy choices of managers may be influenced by the existence of debt contracts,compensation plans or political costs.How are users made aware of the accounting policies adopted by the reporting entity?

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

Creative accounting violates IFRS standards and generally accepted accounting principles.

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

Various researchers have indicated that when managers receive bonuses based on accounting performance they will:

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

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

Criticisms of PAT include:

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

According to CoCoA current cash equivalents are represented by:

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

Discuss some of the incentives that may encourage managers to manipulate accounting numbers.

A company has a debt contract in place which requires that the company's working capital (ratio of current asset to current liabilities)must never fall below 2.As balance date approaches,the company estimates that the working capital ratio will be 1.9 and the company may default on its debt contract unless remedial action is taken.Which of the following action(s)will increase the company's working capital at balance day?

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

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

AASB 101 requires the summary of accounting policies adopted by reporting entities to be presented in any section of the notes to the financial report.

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