Question 1

Considering whether a past event has arisen relates to which of the following components in accounting policy decisions:

Accepted Answer

A)  Definition. 
B)  Recognition. 
C)  Measurement. 
D)  Disclosure. 
A)  Definition. 
B)  Recognition. 
C)  Measurement. 
D)  Disclosure.

Question 2

The most relevant form of market efficiency to financial reporting is:

Accepted Answer

A)  the weak form. 
B)  the semi-strong form. 
C)  the strong form. 
D)  None of the options is correct. 
A)  the weak form. 
B)  the semi-strong form. 
C)  the strong form. 
D)  None of the options is correct.

Question 3

The horizon problem in owner-manager agency relationships can be reduced by:

Accepted Answer

A)  paying a bonus linked to the dividend pay-out ratio. 
B)  encouraging managers to invest in higher risk projects. 
C)  linking management's bonus to profits. 
D)  aligning manager's interests with the longer-term interests of shareholders through share-based remuneration schemes. 
A)  paying a bonus linked to the dividend pay-out ratio. 
B)  encouraging managers to invest in higher risk projects. 
C)  linking management's bonus to profits. 
D)  aligning manager's interests with the longer-term interests of shareholders through share-based remuneration schemes.

Question 4

Positive accounting theory is based on an economic assumption that all individuals act in their own self-interest and are wealth maximisers. This economic assumption is referred to as the:

Accepted Answer

A)  responsible economic person assumption. 
B)  logical economic person assumption. 
C)  rational economic person assumption. 
D)  reasonable economic person assumption. 
A)  responsible economic person assumption. 
B)  logical economic person assumption. 
C)  rational economic person assumption. 
D)  reasonable economic person assumption.

Question 5

Which of the following statements about the efficient-market hypothesis is not correct?

Accepted Answer

A)  Security prices in an efficient market rapidly respond to new information. 
B)  Investors in an efficient-market are unable to earn returns greater than those commensurate with the level of risk. 
C)  Good news of an entity's future prospects would lead to a decrease in demand for the entity's shares. 
D)  Increased demand for shares will lead to an increase in the share price. 
A)  Security prices in an efficient market rapidly respond to new information. 
B)  Investors in an efficient-market are unable to earn returns greater than those commensurate with the level of risk. 
C)  Good news of an entity's future prospects would lead to a decrease in demand for the entity's shares. 
D)  Increased demand for shares will lead to an increase in the share price.

Question 6

An example of monitoring costs is:

Accepted Answer

A)  implementing a management remuneration plan. 
B)  preparing quarterly financial statements for lenders. 
C)  linking management incentives to entity performance. 
D)  measuring the residual loss of the manager purchasing office supplies for his/her own personal use. 
A)  implementing a management remuneration plan. 
B)  preparing quarterly financial statements for lenders. 
C)  linking management incentives to entity performance. 
D)  measuring the residual loss of the manager purchasing office supplies for his/her own personal use.

Question 7

Which of the following is not an example of a debt covenant?

Accepted Answer

A)  a maximum leverage ratio of 70%. 
B)  a maximum interest cover of 2.5 times. 
C)  a restriction in the amount of dividends distributed as a percentage of profit. 
D)  a restriction in undertaking mergers and takeovers unless approved by the lender. 
A)  a maximum leverage ratio of 70%. 
B)  a maximum interest cover of 2.5 times. 
C)  a restriction in the amount of dividends distributed as a percentage of profit. 
D)  a restriction in undertaking mergers and takeovers unless approved by the lender.

Question 8

The following statements about asset substitution are true except for:

Accepted Answer

A)  Managers have incentives to use debt finance to invest in higher-risk assets with the expectation of obtaining higher returns for shareholders. 
B)  Lenders are willing to share higher returns earned when managers invest in higher-risk projects. 
C)  A debt covenant that restricts investment opportunities of the entity can reduce the entity's borrowing costs. 
D)  Asset substitution arises when an entity uses borrowed funds to invest in higher risk assets than those agreed upon in the debt contract. 
A)  Managers have incentives to use debt finance to invest in higher-risk assets with the expectation of obtaining higher returns for shareholders. 
B)  Lenders are willing to share higher returns earned when managers invest in higher-risk projects. 
C)  A debt covenant that restricts investment opportunities of the entity can reduce the entity's borrowing costs. 
D)  Asset substitution arises when an entity uses borrowed funds to invest in higher risk assets than those agreed upon in the debt contract.

Question 9

In which of the following contexts would accountants be required to exercise professional judgement?

Accepted Answer

A)  Deciding whether property, plant and equipment should be measured at fair value after its initial recognition. 
B)  Determining the most appropriate depreciation method to be used for non-current assets. 
C)  Measuring the net realisable value of inventories. 
D)  All of the options are correct. 
A)  Deciding whether property, plant and equipment should be measured at fair value after its initial recognition. 
B)  Determining the most appropriate depreciation method to be used for non-current assets. 
C)  Measuring the net realisable value of inventories. 
D)  All of the options are correct.

Question 10

Residual loss, as an agency cost, refers to:

Accepted Answer

A)  the costs incurred by the agent when implementing assurances that they are acting in the principal's best interests. 
B)  the costs incurred by the principal in observing, evaluating and controlling the agent's behaviour. 
C)  the amount by which the marginal cost is less than the expected benefit of additional monitoring and bonding. 
D)  the amount by which the marginal cost exceeds the expected benefit of additional monitoring and bonding. 
A)  the costs incurred by the agent when implementing assurances that they are acting in the principal's best interests. 
B)  the costs incurred by the principal in observing, evaluating and controlling the agent's behaviour. 
C)  the amount by which the marginal cost is less than the expected benefit of additional monitoring and bonding. 
D)  the amount by which the marginal cost exceeds the expected benefit of additional monitoring and bonding.

Exam 2: Application of Accounting Theory

Considering whether a past event has arisen relates to which of the following components in accounting policy decisions:

The most relevant form of market efficiency to financial reporting is:

The horizon problem in owner-manager agency relationships can be reduced by:

Positive accounting theory is based on an economic assumption that all individuals act in their own self-interest and are wealth maximisers. This economic assumption is referred to as the:

Which of the following statements about the efficient-market hypothesis is not correct?

An example of monitoring costs is:

Which of the following is not an example of a debt covenant?

The following statements about asset substitution are true except for:

In which of the following contexts would accountants be required to exercise professional judgement?

Residual loss, as an agency cost, refers to:

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

Filters