Question 1

Which of the following processes describe how positive theories are developed?

Accepted Answer

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

Question 2

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

Accepted Answer

A)  implementing sound corporate governance. 
B)  having financial statements audited. 
C)  linking management's bonus to profits. 
D)  paying a portion of managerial remuneration as shares. 
A)  implementing sound corporate governance. 
B)  having financial statements audited. 
C)  linking management's bonus to profits. 
D)  paying a portion of managerial remuneration as shares. D

Question 3

Political contracts refer to the relationship between an entity and the following parties, except:

Accepted Answer

A)  government. 
B)  lobby groups. 
C)  trade unions. 
D)  creditors. 
A)  government. 
B)  lobby groups. 
C)  trade unions. 
D)  creditors. D

Question 4

When market is in the semi-strong form of market efficiency:

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 able to earn abnormal returns by trading on private information. 
D)  a security's price at a particular time fully reflects both publicly and not publicly 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 able to earn abnormal returns by trading on private information. 
D)  a security's price at a particular time fully reflects both publicly and not publicly available information.

Question 5

An economic assumption which assumes that all individuals act in their own self-interest and are wealth maximisers is called:

Accepted Answer

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

Question 6

Which of the following contractual relationships is not the focus of positive accounting theory?

Accepted Answer

A)  Shareholder - manager relationships 
B)  Manager - lender relationships 
C)  Shareholder - lender relationships 
D)  Political relationships 
A)  Shareholder - manager relationships 
B)  Manager - lender relationships 
C)  Shareholder - lender relationships 
D)  Political relationships

Question 7

The followings are the limitations of inductive reasoning, except:

Accepted Answer

A)  it does not attempt to improve current practices. 
B)  it may result in a logically valid, but not sound arguments. 
C)  it does not question the appropriateness of the observed actions. 
D)  it has a tendency of maintaining the existing state of affairs. 
A)  it does not attempt to improve current practices. 
B)  it may result in a logically valid, but not sound arguments. 
C)  it does not question the appropriateness of the observed actions. 
D)  it has a tendency of maintaining the existing state of affairs.

Question 8

An example of political costs is:

Accepted Answer

A)  higher tax imposed on mining companies. 
B)  cost of implementing sound corporate governance arrangements. 
C)  having a debt covenant. 
D)  excessive consumption of perquisites. 
A)  higher tax imposed on mining companies. 
B)  cost of implementing sound corporate governance arrangements. 
C)  having a debt covenant. 
D)  excessive consumption of perquisites.

Question 9

Normative theories:

Accepted Answer

A)  prescribe what should be the case based on a specific objective. 
B)  are based on what is happening in the world. 
C)  explain why people behave in certain ways. 
D)  predicts unobserved phenomena. 
A)  prescribe what should be the case based on a specific objective. 
B)  are based on what is happening in the world. 
C)  explain why people behave in certain ways. 
D)  predicts unobserved phenomena.

Question 10

Which of the following statements is not a market efficiency assumption?

Accepted Answer

A)  Share price would adjust more rapidly to information contained in financial statements. 
B)  All information is available free of cost to all market participants. 
C)  There are no differences in the assessment of the implications of new information for the valuation of shares. 
D)  There are no transaction costs in trading securities. 
A)  Share price would adjust more rapidly to information contained in financial statements. 
B)  All information is available free of cost to all market participants. 
C)  There are no differences in the assessment of the implications of new information for the valuation of shares. 
D)  There are no transaction costs in trading securities.

Question 11

Which form of market efficiency is the most relevant to financial reporting?

Accepted Answer

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

Question 12

The risk aversion problem in shareholder-manager agency relationships arises because:

Accepted Answer

A)  managers are more risk-averse than shareholders. 
B)  shareholders prefer less risk than do managers. 
C)  managers have less capital invested in the entity than shareholders. 
D)  shareholders are not able to diversify their risk. 
A)  managers are more risk-averse than shareholders. 
B)  shareholders prefer less risk than do managers. 
C)  managers have less capital invested in the entity than shareholders. 
D)  shareholders are not able to diversify their risk.

Question 13

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

Accepted Answer

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

Question 14

Sally observes that 'Cash' account is an asset account and has a debit balance. She also notices that 'Inventory' account is an asset account and has a debit balance. Therefore, Sally comes into conclusion that all asset accounts have a debit balance. Which approach does Sally use in developing her theory about all asset accounts having a debit balance?

Accepted Answer

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

Question 15

The way that lenders charge a higher interest rate for loans assessed to be of higher risk is known as:

Accepted Answer

A)  risk aversion. 
B)  wealth maximisation. 
C)  claim dilution. 
D)  price protection. 
A)  risk aversion. 
B)  wealth maximisation. 
C)  claim dilution. 
D)  price protection.

Question 16

Debt covenants:

Accepted Answer

A)  contain restrictions to control lenders' activities. 
B)  are designed to protect the interest of managers. 
C)  reduce the risk to lenders. 
D)  result in higher interest rates being imposed on the borrowers. 
A)  contain restrictions to control lenders' activities. 
B)  are designed to protect the interest of managers. 
C)  reduce the risk to lenders. 
D)  result in higher interest rates being imposed on the borrowers.

Question 17

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

Accepted Answer

A)  Determining depreciation method used for non-current assets. 
B)  Estimating net realisable value of inventories. 
C)  Deciding which model to use to measure value of property, plant and equipment after initial recognition. 
D)  All of the options are correct. 
A)  Determining depreciation method used for non-current assets. 
B)  Estimating net realisable value of inventories. 
C)  Deciding which model to use to measure value of property, plant and equipment after initial recognition. 
D)  All of the options are correct.

Question 18

Which of the following statements is not derived from the agency theory?

Accepted Answer

A)  Entities employ managers to conduct business on their behalf and to negotiate contracts with other parties. 
B)  An entity is the centre of contractual relationships, with different parties having rights and responsibilities under the contracts. 
C)  Managers will not always act in the best interest of shareholders. 
D)  There are costs incurred in order to control agent's behaviour. 
A)  Entities employ managers to conduct business on their behalf and to negotiate contracts with other parties. 
B)  An entity is the centre of contractual relationships, with different parties having rights and responsibilities under the contracts. 
C)  Managers will not always act in the best interest of shareholders. 
D)  There are costs incurred in order to control agent's behaviour.

Question 19

Which of the following statements apply to political cost hypothesis?

Accepted Answer

A)  Political costs arise as a result of an entity's relationships with shareholders and lenders. 
B)  Managers would prefer accounting policies that increase profit in order to compensate for political costs. 
C)  Smaller entities are more likely to be the target of lobby groups. 
D)  Managers of larger entities are more likely 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 would prefer accounting policies that increase profit in order to compensate for political costs. 
C)  Smaller entities are more likely to be the target of lobby groups. 
D)  Managers of larger entities are more likely to choose accounting policies that reduce profit in order to avoid political costs.

Question 20

The following statements describe the mechanistic hypothesis, except:

Accepted Answer

A)  investors can be misled by the use of different accounting policy choices. 
B)  investors respond differently to changes in profit depending on what causes the changes. 
C)  investors ignore differences in accounting policies when analysing financial statements. 
D)  investors are only concerned about changes in reported figures in financial statements. 
A)  investors can be misled by the use of different accounting policy choices. 
B)  investors respond differently to changes in profit depending on what causes the changes. 
C)  investors ignore differences in accounting policies when analysing financial statements. 
D)  investors are only concerned about changes in reported figures in financial statements.

Exam 2: Application of Accounting Theory

Which of the following processes describe how positive theories are developed?

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

Political contracts refer to the relationship between an entity and the following parties, except:

When market is in the semi-strong form of market efficiency:

An economic assumption which assumes that all individuals act in their own self-interest and are wealth maximisers is called:

Which of the following contractual relationships is not the focus of positive accounting theory?

The followings are the limitations of inductive reasoning, except:

An example of political costs is:

Normative theories:

Which of the following statements is not a market efficiency assumption?

Which form of market efficiency is the most relevant to financial reporting?

The risk aversion problem in shareholder-manager agency relationships arises because:

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

The way that lenders charge a higher interest rate for loans assessed to be of higher risk is known as:

Debt covenants:

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

Which of the following statements is not derived from the agency theory?

Which of the following statements apply to political cost hypothesis?

The following statements describe the mechanistic hypothesis, except:

Accounting Regulation and the Conceptual Framework

Shareholders Equity: Share Capital and Reserves

Fair Value Measurement

Revenue

Provisions, Contingent Liabilities and Contingent Assets

Income Taxes

Financial Instruments

Share-Based Payments

Translation of the Financial Statements of Foreign Entities

Employee Benefits

Inventories

Property, Plant and Equipment

Leases

Understanding Australian Accounting Standards

Impairment of Assets

Accounting for Mineral Resources

Agriculture

Financial Statement Presentation

Statement of Cash Flows

Earnings Per Share

Operating Segments

Operating Segments

Business Combinations

Consolidation: Principles and Accounting Requirements

Consolidation: Intragroup Transactions

Consolidation: Non Controlling Interest

Joint Arrangements

Associates and Joint Ventures

Filters