Question 1

Discuss two ways in which a shareholder can mitigate the problem of moral hazard when investing in a company.

Accepted Answer

To mitigate this moral hazard problem, audit reports can be used to provide information to owners about the firm's performance as an indirect indicator of management performance.
Compensation can be linked to performance measures such as net income or earnings per share.
Ask management to take partial ownership of the company through stock purchase and stock option programs. The thought being that if managers share in the rewards of their efforts, they will thus be more motivated to create value for the company's owners.

Question 2

For the situations described below, explain whether managers would be motivated to manage earnings, assets, and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings, assets, and equity downward and liabilities upward.
 $$\begin{array} { l | l | } 
\hline \text { Situation } & \begin{array} { l } 
\text { Management motivation } \
\text { (Upward / Downward) }
\end{array} \
\hline \text { To influence investors to pay more for the firm's } \
\text { shares. } & \
\hline \text { To reduce the likelihood of additional taxes or } & \
\text { regulations. } & \
\hline \begin{array} { l } 
\text { To take a "big bath" in a bad year by recording } \
\text { more expenses than usual so that future years } \
\text { are more likely to show higher and rising } \
\text { profitability, resulting in higher future } \
\text { compensation or stock price. }
\end{array} & \
\hline \text { To reduce riskiness of its cash flows and obtain } & \
\text { funds from the bank at a lower interest rate. } & \
\hline \begin{array} { l } 
\text { To obtain a stronger bargaining position in } \
\text { merger negotiations. }
\end{array} & \
\hline
\end{array}$$

Accepted Answer

$\begin{array}{|l|lcc|}
 \hline \text {  } & \text {Management motivation  }  \
\text {Situation}&\text { (Upward / Downward)}\
\hline \text {To influence investors to pay more for the firm's  } & \text {  }\
\text { shares.}&\text {Upward}\
\hline \text { To reduce the likelihood of additional taxes or  } & \text {  } \
\text {regulations.}&\text {Downward}\
 \hline\text {To take a "big bath" in a bad year by recording  } & \text {  }  \
\text { more expenses than usual so that future years}&\
\text {are more likely to show higher and rising }&\
\text { profitability, resulting in higher future }&\
\text {compensation or stock price.}&\text { Downward}\
\hline \text { To reduce riskiness of its cash flows and obtain } & \text {  } &\
 \text { funds from the bank at a lower interest rate.}&\text {Upward}\
\hline \text { To obtain a stronger bargaining position in  } & \text {  } &\
\text {merger negotiations.}&\text {Upward}\
\hline
\end{array}$

Question 3

Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these accounting activities related to each other?

Accepted Answer

$\bold{Financial}$ reporting is the process by which enterprises provide information to external parties.
$\bold{\text{Managerial accounting,}}$ on the other hand, involves reporting within the enterprise.
Tax accounting is the reporting of taxable amounts to the government revenue authorities.
What ties all the branches of accounting together is the idea that some people have information that others need.

Question 4

Which statement best explains the relationship between the efficient securities market hypothesis and accounting?

Accepted Answer

A) Security prices adjust slowly when accounting reports are publicly released. 
B) The timeliness of accounting information is irrelevant to securities markets. 
C) Accounting information competes with other sources of information. 
D) Security prices are unaffected when accounting reports are publicly released. 
A) Security prices adjust slowly when accounting reports are publicly released. 
B) The timeliness of accounting information is irrelevant to securities markets. 
C) Accounting information competes with other sources of information. 
D) Security prices are unaffected when accounting reports are publicly released.

Question 5

Explain the meaning of adverse selection and moral hazard. Give an example of each.

Accepted Answer

@#LAT-DLM& A type of information asymmetry whereby

Question 6

Explain what accounting is and why financial reporting exists.

Accepted Answer

Accounting is the production of informat

Question 7

Having an audit performed on the company's financial statements best illustrates which of the following?

Accepted Answer

A) Cheap talk. 
B) Signalling. 
C) Moral hazard. 
D) Information. 
A) Cheap talk. 
B) Signalling. 
C) Moral hazard. 
D) Information.

Question 8

Which of the following statements is correct about financial information?

Accepted Answer

A) All users require the same kind of information. 
B) Forward looking information is useful for evaluating management stewardship. 
C) Trade offs are necessary in accounting. 
D) Historical cost information is useful for pricing the value of a company's shares. 
A) All users require the same kind of information. 
B) Forward looking information is useful for evaluating management stewardship. 
C) Trade offs are necessary in accounting. 
D) Historical cost information is useful for pricing the value of a company's shares.

Question 9

Explain how earnings management may arise.

Accepted Answer

Insiders have many incentives to manage

Question 10

Discuss three reasons why it is important to understand accounting theory.

Accepted Answer

•In order to make the best decisions pos

Question 11

Explain how adverse selection and moral hazard affect the qualitative characteristics of accounting information.

Accepted Answer

Adverse selection means that users will

Question 12

Which statement best explains "adverse selection"?

Accepted Answer

A) The term refers to a situation where one party has an information advantage over another. 
B) The term refers to the need external parties have for financial information. 
C) The term refers to the fact that some people have more information than others. 
D) The term refers to a situation where one party cannot observe the actions of another party. 
A) The term refers to a situation where one party has an information advantage over another. 
B) The term refers to the need external parties have for financial information. 
C) The term refers to the fact that some people have more information than others. 
D) The term refers to a situation where one party cannot observe the actions of another party.

Question 13

Why is financial information required?

Accepted Answer

•Governmental bodies issue proclamations

Question 14

Which statement appropriately explains the meaning of "publicly accountable enterprise"?

Accepted Answer

A) Firms without equity, debt or other securities traded in public markets. 
B) Firms with equity, debt or other securities traded in public markets. 
C) Firms with assets and liabilities that provide goods and services in public markets. 
D) New firms entering the public markets to provide goods and services. 
A) Firms without equity, debt or other securities traded in public markets. 
B) Firms with equity, debt or other securities traded in public markets. 
C) Firms with assets and liabilities that provide goods and services in public markets. 
D) New firms entering the public markets to provide goods and services.

Question 15

Explain how accounting information helps security markets?

Accepted Answer

Accounting is an important source of inf

Question 16

Discuss two ways in which a bank can mitigate the problem of moral hazard when lending money to a company.

Accepted Answer

The lender can request certain covenants

Question 17

Which statement is not correct?

Accepted Answer

A) Financial accounting is the process of providing information to external parties. 
B) Accounting is about the communication of financial information. 
C) Accounting is the production of information about an enterprise and the transmission of that information to those who need the information. 
D) Financial accounting is the process of providing information to internal parties. 
A) Financial accounting is the process of providing information to external parties. 
B) Accounting is about the communication of financial information. 
C) Accounting is the production of information about an enterprise and the transmission of that information to those who need the information. 
D) Financial accounting is the process of providing information to internal parties.

Question 18

Explain the meaning of generally accepted accounting principles (GAAP).

Accepted Answer

GAAP refers to broad principle

Question 19

How does accounting information help alleviate adverse selection and moral hazard?

Accepted Answer

•The presence of adverse selection reduc

Question 20

Explain the meaning of information and information asymmetry. Give an example of each

Accepted Answer

@#LAT-DLM& Evidence that can potentially affect an

Discuss two ways in which a shareholder can mitigate the problem of moral hazard when investing in a company.

Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these accounting activities related to each other?

Which statement best explains the relationship between the efficient securities market hypothesis and accounting?

Explain the meaning of adverse selection and moral hazard. Give an example of each.

Explain what accounting is and why financial reporting exists.

Having an audit performed on the company's financial statements best illustrates which of the following?

Which of the following statements is correct about financial information?

Explain how earnings management may arise.

Discuss three reasons why it is important to understand accounting theory.

Explain how adverse selection and moral hazard affect the qualitative characteristics of accounting information.

Which statement best explains "adverse selection"?

Why is financial information required?

Which statement appropriately explains the meaning of "publicly accountable enterprise"?

Explain how accounting information helps security markets?

Discuss two ways in which a bank can mitigate the problem of moral hazard when lending money to a company.

Which statement is not correct?

Explain the meaning of generally accepted accounting principles (GAAP).

How does accounting information help alleviate adverse selection and moral hazard?

Explain the meaning of information and information asymmetry. Give an example of each

Conceptual Frameworks for Financial Reporting

Accrual Accounting

Revenue and Recognition

Cash and Receivables

Inventories

Financial Assets

Property, Plant and Equipment

Intangible Assets, Goodwill, Mineral Resources, and Government Grants

Applications of Fair Value to Non-Current Assets

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Exam 1: Fundamentals of Financial Accounting Theory

Discuss two ways in which a shareholder can mitigate the problem of moral hazard when investing in a company.

Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these accounting activities related to each other?

Which statement best explains the relationship between the efficient securities market hypothesis and accounting?

Explain the meaning of adverse selection and moral hazard. Give an example of each.

Explain what accounting is and why financial reporting exists.

Having an audit performed on the company's financial statements best illustrates which of the following?

Which of the following statements is correct about financial information?

Explain how earnings management may arise.

Discuss three reasons why it is important to understand accounting theory.

Explain how adverse selection and moral hazard affect the qualitative characteristics of accounting information.

Which statement best explains "adverse selection"?

Why is financial information required?

Which statement appropriately explains the meaning of "publicly accountable enterprise"?

Explain how accounting information helps security markets?

Discuss two ways in which a bank can mitigate the problem of moral hazard when lending money to a company.

Which statement is not correct?

Explain the meaning of generally accepted accounting principles (GAAP).

How does accounting information help alleviate adverse selection and moral hazard?

Explain the meaning of information and information asymmetry. Give an example of each

Conceptual Frameworks for Financial Reporting

Accrual Accounting

Revenue and Recognition

Cash and Receivables

Inventories

Financial Assets

Property, Plant and Equipment

Intangible Assets, Goodwill, Mineral Resources, and Government Grants

Applications of Fair Value to Non-Current Assets

Filters