Question 1

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

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

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. C

Question 4

PAT assumes that managers will adopt accounting methods that benefit themselves ahead of the entity.

Accepted Answer

A) True 
 B)False

Question 5

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.

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.

Question 7

The ethical perspective of stakeholder theory is consistent with the efficiency view in Positive Accounting Theory.

Accepted Answer

A) True 
 B)False

Question 8

To comply with IASB 1,in which section of the financial report should a summary of accounting policies adopted by reporting entities be positioned?

Accepted Answer

A)  anywhere in the notes to the accounts as long as this is disclosed
B)  anywhere in the financial report
C)  initial section of the notes to the accounts
D)  middle section of the notes to the accounts

Question 9

An example of a theory that adopts a systems-oriented perspective is Legacy Theory.

Accepted Answer

A) True 
 B)False

Question 10

As part of the company's compensation plan,a chief executive officer (CEO)is paid 1% of net profit if net profit exceeds €2 000 000 but no more than €40 000 in a given year.It is estimated that net profit for the year will exceed €4 500 000.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

Question 11

The development of exit-price accounting (or CoCoa)was based on which of the following key assumptions?

Accepted Answer

A)  Firms exist to increase the wealth of their owners.
B)  Firms' successful operations are based on the ability of the firm to adapt to changing circumstances.
C)  Firms' capacity to adapt will be best reflected by the monetary value of the organisation's net assets at statement of financial position date.
D)  All of the given answers are correct.

Question 12

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?

Accepted Answer

The answer of There is significant scope for managers to...

Question 13

Discuss the criticism of PAT is that it is not value-free.

Accepted Answer

The answer of Discuss the criticism of PAT is that...

Question 14

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

Accepted Answer

A)  make every effort to maximise profits in any given period.
B)  adopt projects with low initial returns to ensure long-term success.
C)  ensure income is minimised in a year they will not reach their performance target so that any profits can be recognised in later periods.
D)  undertake long-term research and development projects if they are near to retirement.

Question 15

Within the principal/agent perspective of PAT,the price-protection approach is:

Accepted Answer

A)  The principal pays the agent a lower salary on the basis that the agent is expected to undertake opportunistic behaviour.
B)  The contract between the principal and agent includes a clause that stipulates the basis for pricing of goods so that the agent does not price the product too highly in an effort to increase the agent's short-term rewards.
C)  The contract between the principal and the agent specifies a period within which the price paid for the services of the agent cannot be changed.
D)  The contract between the principal and the agent includes an agreement whereby the agent guarantees the price of the shares in the company will be protected by the agent's actions.

Question 16

Creative accounting:

Accepted Answer

A)  is a term used by the media to describe the process of selecting accounting methods when creating reports that provide results desired by preparers.
B)  occurs, according to PAT, because managers will work for their own interests.
C)  occurs when account preparers choose not to follow accounting standards to best reflect the performance of the firm.
D)  is a term used by the media to describe the process of selecting accounting methods when creating reports that provide results desired by preparers and occurs, according to PAT, because managers will work for their own interests.

Question 17

The rational economic person assumption as it is used in PAT is that:

Accepted Answer

A)  All action by all individuals is driven by multiple interests in achieving a wide range of goals.
B)  All individual action is driven by self-interest and individuals will act in an opportunistic manner.
C)  Individuals are governed by a desire to cooperate in organisations to achieve the rational allocation of economic resources.
D)  The rational person is concerned only with economic factors and so does not assess the importance of non-economic impacts on their organisation.

Question 18

A new accounting standard requires the provision of liabilities for share-based payments that has implications in the firm's debt-to-equity ratio.Which of the following accounting policy choices will reduce the probability of the firm violating debt covenants in a debt agreement?

Accepted Answer

A)  Expense all research and development costs.
B)  Shift from FIFO to weighted average inventory method.
C)  Shift from straight-line to accelerated method of depreciation.
D)  Shift from cost to revaluation method in accounting for land and buildings.

Question 19

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.

Question 20

Capture Theory may be described as taking the perspective that:

Accepted Answer

A)  the regulated interest controls the regulation and the regulating body.
B)  the principal has control over the agent through contracting and monitoring.
C)  stakeholders compete to influence the entity in which they have a stake and management attempts to capture that influence through voluntary disclosures.
D)  the regulated interest is controlled by the regulation agency that generates the regulations.

Exam 3: Theories of Financial Accounting

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

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

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

PAT assumes that managers will adopt accounting methods that benefit themselves ahead of the entity.

Debt contracts will:

An example of political costs under the PAT perspective is:

The ethical perspective of stakeholder theory is consistent with the efficiency view in Positive Accounting Theory.

To comply with IASB 1,in which section of the financial report should a summary of accounting policies adopted by reporting entities be positioned?

An example of a theory that adopts a systems-oriented perspective is Legacy Theory.

The development of exit-price accounting (or CoCoa) was based on which of the following key assumptions?

Discuss the criticism of PAT is that it is not value-free.

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

Within the principal/agent perspective of PAT,the price-protection approach is:

Creative accounting:

The rational economic person assumption as it is used in PAT is that:

A new accounting standard requires the provision of liabilities for share-based payments that has implications in the firm's debt-to-equity ratio.Which of the following accounting policy choices will reduce the probability of the firm violating debt covenants in a debt agreement?

Firms are subject to political costs when:

Capture Theory may be described as taking the perspective that: