Question 1

In an owner-manager agency relationship the problem of risk aversion arises because:

Accepted Answer

A)  shareholders prefer the managers to take fewer risks in order to maximise the returns on their investment. 
B)  managers prefer to make decisions that are less risky for the entity as they have more to lose than the shareholders. 
C)  managers have less capital invested in the entity than shareholders. 
D)  shareholders generally have no other sources of income. 
A)  shareholders prefer the managers to take fewer risks in order to maximise the returns on their investment. 
B)  managers prefer to make decisions that are less risky for the entity as they have more to lose than the shareholders. 
C)  managers have less capital invested in the entity than shareholders. 
D)  shareholders generally have no other sources of income. B

Question 2

Which of the following statements is not consistent with agency theory?

Accepted Answer

A)  Managers are employed to conduct business on behalf of the shareholders. 
B)  Managers have a legal and fiduciary duty to act in the best interests of the shareholders. 
C)  Managers are more likely to favour the interests of lenders in managing debt contracts. 
D)  Costs are incurred in monitoring and controlling agent's behaviour. 
A)  Managers are employed to conduct business on behalf of the shareholders. 
B)  Managers have a legal and fiduciary duty to act in the best interests of the shareholders. 
C)  Managers are more likely to favour the interests of lenders in managing debt contracts. 
D)  Costs are incurred in monitoring and controlling agent's behaviour. C

Question 3

Which of the following is not identified as one of the major problems that can arise in owner-manager agency relationships?

Accepted Answer

A)  Risk aversion. 
B)  Dividend retention. 
C)  Reduced incentives. 
D)  Horizon problems. 
A)  Risk aversion. 
B)  Dividend retention. 
C)  Reduced incentives. 
D)  Horizon problems. C

Question 4

The majority of monitoring and bonding costs will be borne by:

Accepted Answer

A)  shareholders. 
B)  creditors. 
C)  agents. 
D)  principals. 
A)  shareholders. 
B)  creditors. 
C)  agents. 
D)  principals.

Question 5

Which of the following statements is correct?

Accepted Answer

A)  Accounting is only concerned with recording transactions and does not require professional judgement. 
B)  Normative theories tend to maintain the status quo. 
C)  The process of deductive reasoning starts with objective setting. 
D)  The conceptual framework is developed through an inductive approach. 
A)  Accounting is only concerned with recording transactions and does not require professional judgement. 
B)  Normative theories tend to maintain the status quo. 
C)  The process of deductive reasoning starts with objective setting. 
D)  The conceptual framework is developed through an inductive approach.

Question 6

The mechanistic hypothesis of capital markets means that:

Accepted Answer

A)  investors are assumed to ignore differences in accounting policies when analysing financial statements. 
B)  investors are not easily fooled by changes in the depreciation rates. 
C)  investors respond differently to increases in profit when they result from cash flow implications as opposed to non-cash flow implications. 
D)  available information can be used to earn returns beyond those that compensate for the risk involved. 
A)  investors are assumed to ignore differences in accounting policies when analysing financial statements. 
B)  investors are not easily fooled by changes in the depreciation rates. 
C)  investors respond differently to increases in profit when they result from cash flow implications as opposed to non-cash flow implications. 
D)  available information can be used to earn returns beyond those that compensate for the risk involved.

Question 7

A weak form of market efficiency implies that:

Accepted Answer

A)  investors would be able to earn abnormal returns by using publicly available information. 
B)  a security's price at a particular time fully reflects the information contained in its sequence of past prices. 
C)  investors would be unable to earn abnormal returns by trading on private information. 
D)  a security's price at a particular time fully reflects both publicly and privately available information. 
A)  investors would be able to earn abnormal returns by using publicly available information. 
B)  a security's price at a particular time fully reflects the information contained in its sequence of past prices. 
C)  investors would be unable to earn abnormal returns by trading on private information. 
D)  a security's price at a particular time fully reflects both publicly and privately available information.

Question 8

Positive accounting theory suggests that the separation of ownership and control within an entity means managers, as agents, are likely to act:

Accepted Answer

A)  in their own interests. 
B)  in the interests of the debtholders. 
C)  in the interests of the shareholders. 
D)  in the interests of the directors. 
A)  in their own interests. 
B)  in the interests of the debtholders. 
C)  in the interests of the shareholders. 
D)  in the interests of the directors.

Question 9

Which of the following statements is true with regards to the political cost hypothesis?

Accepted Answer

A)  Political costs arise as a result of an entity's relationships with shareholders and lenders. 
B)  Managers of financial institutions may prefer to increase profits to reduce government pressure to pass on interest rate cuts. 
C)  Smaller entities are more likely to be the target of environmental groups. 
D)  Managers of entities that are more politically visible are expected to choose accounting policies that reduce profit in order to avoid political costs. 
A)  Political costs arise as a result of an entity's relationships with shareholders and lenders. 
B)  Managers of financial institutions may prefer to increase profits to reduce government pressure to pass on interest rate cuts. 
C)  Smaller entities are more likely to be the target of environmental groups. 
D)  Managers of entities that are more politically visible are expected to choose accounting policies that reduce profit in order to avoid political costs.

Question 10

The problem of 'underinvestment' occurs when managers are reluctant to undertake projects with positive net present value because:

Accepted Answer

A)  shareholders prefer less risk than do lenders and managers. 
B)  the increased funds obtained from the projects will rank higher in priority of payments to creditors over shareholders in the event of the entity being liquidated. 
C)  the projects would result in a reduction of managers' incentives. 
D)  managers prefer to maintain a high level of funds within the entity. 
A)  shareholders prefer less risk than do lenders and managers. 
B)  the increased funds obtained from the projects will rank higher in priority of payments to creditors over shareholders in the event of the entity being liquidated. 
C)  the projects would result in a reduction of managers' incentives. 
D)  managers prefer to maintain a high level of funds within the entity.

Question 11

Claim dilution arises when:

Accepted Answer

A)  the entity is unable to repay a loan. 
B)  a lender restricts an entity from obtaining debt of a lower priority. 
C)  the entity takes out a secured loan after obtaining an unsecured loan from another lender. 
D)  a lender restricts an entity from obtaining debt with an earlier maturity date. 
A)  the entity is unable to repay a loan. 
B)  a lender restricts an entity from obtaining debt of a lower priority. 
C)  the entity takes out a secured loan after obtaining an unsecured loan from another lender. 
D)  a lender restricts an entity from obtaining debt with an earlier maturity date.

Question 12

Which of the following is not a relationship focused on by positive accounting theory?

Accepted Answer

A)  debt contracts. 
B)  political contracts. 
C)  managerial contracts. 
D)  creditor contracts. 
A)  debt contracts. 
B)  political contracts. 
C)  managerial contracts. 
D)  creditor contracts.

Question 13

A limitation of the use of inductive reasoning in the development of an accounting theory is that it:

Accepted Answer

A)  does not question the appropriateness of the observed actions. 
B)  attempts to improve a particular process. 
C)  is based on identifying a set of objectives. 
D)  is only useful for developing normative theories. 
A)  does not question the appropriateness of the observed actions. 
B)  attempts to improve a particular process. 
C)  is based on identifying a set of objectives. 
D)  is only useful for developing normative theories.

Question 14

Positive theories:

Accepted Answer

A)  explain why managers choose a particular accounting method. 
B)  might be descriptive of accounting practice. 
C)  All of these options are correct. 
D)  rely on real-world observations. 
A)  explain why managers choose a particular accounting method. 
B)  might be descriptive of accounting practice. 
C)  All of these options are correct. 
D)  rely on real-world observations.

Question 15

Which of the following statements about the strong form of market efficiency is not correct?

Accepted Answer

A)  Security prices fully reflect all information, including that which is not publicly available. 
B)  Investors are able to participate in 'insider trading'. 
C)  Investors are unable to earn abnormal returns through private information. 
D)  Capital markets are not considered to be efficient in the strong form. 
A)  Security prices fully reflect all information, including that which is not publicly available. 
B)  Investors are able to participate in 'insider trading'. 
C)  Investors are unable to earn abnormal returns through private information. 
D)  Capital markets are not considered to be efficient in the strong form.

Question 16

Under the debt hypothesis for accounting policy choice:

Accepted Answer

A)  managers act in their own interests and therefore prefer more remuneration. 
B)  managers of entities with bonus plans prefer accounting policies that increase profit in the long-term. 
C)  managers have no discretion in choosing accounting policies relating to debt. 
D)  managers of entities with high leverage are likely to choose accounting policies that increase profit and equity. 
A)  managers act in their own interests and therefore prefer more remuneration. 
B)  managers of entities with bonus plans prefer accounting policies that increase profit in the long-term. 
C)  managers have no discretion in choosing accounting policies relating to debt. 
D)  managers of entities with high leverage are likely to choose accounting policies that increase profit and equity.

Question 17

An example of political costs is:

Accepted Answer

A)  lower taxes on mining companies. 
B)  economic sanctions imposed on retailers who purchase their supplies from overseas businesses that use child labour. 
C)  excessive consumption of perquisites. 
D)  having a debt covenant. 
A)  lower taxes on mining companies. 
B)  economic sanctions imposed on retailers who purchase their supplies from overseas businesses that use child labour. 
C)  excessive consumption of perquisites. 
D)  having a debt covenant.

Question 18

Marcus observes that the bank overdraft account is a liability account and has a credit balance. He also notices that the accounts payable account is a liability account and has a credit balance. Therefore, Marcus comes to the conclusion that all liability accounts have a credit balance. Which approach is Marcus using in developing his theory that all liability accounts having credit balances?

Accepted Answer

A)  Conceptual reasoning. 
B)  Conclusive reasoning. 
C)  Inductive reasoning. 
D)  Deductive reasoning. 
A)  Conceptual reasoning. 
B)  Conclusive reasoning. 
C)  Inductive reasoning. 
D)  Deductive reasoning.

Question 19

Normative theories are developed using the following process:

Accepted Answer

A)  Principles$\rightarrow$ Assumptions$\rightarrow$ Objectives$\rightarrow$ Definitions/Actions. 
B)  Objectives$\rightarrow$ Definitions/Actions$\rightarrow$ Assumptions$\rightarrow$ Principles. 
C)  Definitions/Actions$\rightarrow$ Principles$\rightarrow$ Assumptions$\rightarrow$ Objectives. 
D)  Objectives$\rightarrow$ Assumptions$\rightarrow$ Principles$\rightarrow$ Definitions/Actions. 
A)  Principles$\rightarrow$ Assumptions$\rightarrow$ Objectives$\rightarrow$ Definitions/Actions. 
B)  Objectives$\rightarrow$ Definitions/Actions$\rightarrow$ Assumptions$\rightarrow$ Principles. 
C)  Definitions/Actions$\rightarrow$ Principles$\rightarrow$ Assumptions$\rightarrow$ Objectives. 
D)  Objectives$\rightarrow$ Assumptions$\rightarrow$ Principles$\rightarrow$ Definitions/Actions.

Question 20

An agreement between managers and lenders to maintain a minimum ratio of working capital can assist which of the following problems in relation to increased lender's risk?

Accepted Answer

A)  claim dilution. 
B)  asset substitution. 
C)  underinvestment. 
D)  excessive dividend payments. 
A)  claim dilution. 
B)  asset substitution. 
C)  underinvestment. 
D)  excessive dividend payments.

Exam 2: Application of Accounting Theory

In an owner-manager agency relationship the problem of risk aversion arises because:

Which of the following statements is not consistent with agency theory?

Which of the following is not identified as one of the major problems that can arise in owner-manager agency relationships?

The majority of monitoring and bonding costs will be borne by:

Which of the following statements is correct?

The mechanistic hypothesis of capital markets means that:

A weak form of market efficiency implies that:

Positive accounting theory suggests that the separation of ownership and control within an entity means managers, as agents, are likely to act:

Which of the following statements is true with regards to the political cost hypothesis?

The problem of 'underinvestment' occurs when managers are reluctant to undertake projects with positive net present value because:

Claim dilution arises when:

Which of the following is not a relationship focused on by positive accounting theory?

A limitation of the use of inductive reasoning in the development of an accounting theory is that it:

Positive theories:

Which of the following statements about the strong form of market efficiency is not correct?

Under the debt hypothesis for accounting policy choice:

An example of political costs is:

Normative theories are developed using the following process:

An agreement between managers and lenders to maintain a minimum ratio of working capital can assist which of the following problems in relation to increased lender's risk?

Accounting Regulation and the Conceptual Framework

Fair Value Measurement

Inventories

Property, Plant and Equipment

Intangible Assets

Impairment of Assets

Provisions, Contingent Liabilities and Contingent Assets

Employee Benefits

Leases

Financial Instruments

Income Taxes

Share Capital and Reserves

Share Based Payment

Revenue

Presentation of Financial Statements

Statement of Cash Flows

Accounting Policies and Other Disclosures

Earnings Per Share

Operating Segments

Related Party Disclosures

Sustainability and Corporate Social Responsibility Recording

Foreign Currency Transactions and Forward Exchange Contracts

Translation of Foreign Currency Financial Statements

Business Combinations

Consolidation: Controlled Entities

Consolidation: Wholly Owned Entities

Consolidation: Intragroup Transactions

Consolidation: Non-Controlling Interest

Consolidation: Other Issues

Associates and Joint Ventures

Joint Arrangements

Insolvency and Liquidation

Accounting for Mineral Resources

Agriculture

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