Question 1

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)  having financial statements audited. 
C)  linking management's bonus to profits. 
D)  paying a portion of managerial remuneration as shares. 
A)  paying a bonus linked to the dividend pay-out ratio. 
B)  having financial statements audited. 
C)  linking management's bonus to profits. 
D)  paying a portion of managerial remuneration as shares. D

Question 2

Which of the following problems arises within owner-manager agency relationships:

Accepted Answer

A)  I and III. 
B)  I and IV. 
C)  II and III. 
D)  II and IV. 
A)  I and III. 
B)  I and IV. 
C)  II and III. 
D)  II and IV. B

Question 3

Which of the following is not an example of debt covenant:

Accepted Answer

A)  a restriction in the amount of dividends distributed as a percentage of profit. 
B)  a maximum interest cover of 2.5 times. 
C)  a restriction in undertaking mergers and takeovers unless approved by the lender. 
D)  a maximum leverage ratio of 60%re. 
A)  a restriction in the amount of dividends distributed as a percentage of profit. 
B)  a maximum interest cover of 2.5 times. 
C)  a restriction in undertaking mergers and takeovers unless approved by the lender. 
D)  a maximum leverage ratio of 60%re. B

Question 4

Sally observes that the cash account is an asset account and has a debit balance. She also notices that inventories 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 5

Which of the following statements is correct:

Accepted Answer

A)  Accounting is only concerned with recording transactions and does not involve human behaviours. 
B)  Positive theories provide recommendations about what should happen. 
C)  Inductive reasoning starts with objective setting. 
D)  The conceptual framework is developed through a deductive approach. 
A)  Accounting is only concerned with recording transactions and does not involve human behaviours. 
B)  Positive theories provide recommendations about what should happen. 
C)  Inductive reasoning starts with objective setting. 
D)  The conceptual framework is developed through a deductive approach.

Question 6

Which of the following statements about asset substitution is incorrect:

Accepted Answer

A)  Managers have incentives to use debt finance to invest in higher-risk assets. 
B)  When managers invest in higher-risk projects, lenders would share higher returns earned from the projects. 
C)  The problem of asset substitution can be reduced by having a debt covenant that restricts investment opportunities of the entity. 
D)  Asset substitution increased the risk borne by lenders. 
A)  Managers have incentives to use debt finance to invest in higher-risk assets. 
B)  When managers invest in higher-risk projects, lenders would share higher returns earned from the projects. 
C)  The problem of asset substitution can be reduced by having a debt covenant that restricts investment opportunities of the entity. 
D)  Asset substitution increased the risk borne by lenders.

Question 7

Which of the following statements apply 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 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 8

Which of the following statements about the semi-strong form of market efficiency is not correct:

Accepted Answer

A)  Share prices would adjust more rapidly to information presented in financial statements than in the notes. 
B)  All information is assumed to be 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)  Transaction costs in trading securities are assumed to be nil. 
A)  Share prices would adjust more rapidly to information presented in financial statements than in the notes. 
B)  All information is assumed to be 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)  Transaction costs in trading securities are assumed to be nil.

Question 9

Under the debt hypothesis:

Accepted Answer

A)  managers prefer to have more remuneration. 
B)  managers' interests are more aligned with those of lenders than with those of shareholders. 
C)  managers of entities with high leverage are likely to choose accounting policies that increase profit and equity. 
D)  managers do not have discretion in choosing accounting policies. 
A)  managers prefer to have more remuneration. 
B)  managers' interests are more aligned with those of lenders than with those of shareholders. 
C)  managers of entities with high leverage are likely to choose accounting policies that increase profit and equity. 
D)  managers do not have discretion in choosing accounting policies.

Question 10

Considering whether to use historical cost or fair value 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 11

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 12

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 13

A market is efficient if:

Accepted Answer

A)  investors are able to earn profits by trading on information. 
B)  it adjusts steadily to new information. 
C)  share prices fully reflect available information about the shares. 
D)  available information can be used to earn returns beyond those that compensate for the risk involved. 
A)  investors are able to earn profits by trading on information. 
B)  it adjusts steadily to new information. 
C)  share prices fully reflect available information about the shares. 
D)  available information can be used to earn returns beyond those that compensate for the risk involved.

Question 14

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 15

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 16

When market is efficient in the semi-strong form:

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 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 able 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 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

The problem of 'underinvestment' occurs when the entity faces financial difficulty and managers are reluctant to undertaken projects with positive net present value because:

Accepted Answer

A)  managers prefer less risk than do lenders. 
B)  the projects lead to increased funds available to lenders rather than shareholders. 
C)  the projects would adversely affect managers' bonus payments. 
D)  managers prefer to maintain a greater level of funds within the entity. 
A)  managers prefer less risk than do lenders. 
B)  the projects lead to increased funds available to lenders rather than shareholders. 
C)  the projects would adversely affect managers' bonus payments. 
D)  managers prefer to maintain a greater level of funds within the entity.

Question 19

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.

Question 20

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.

Exam 2: Application of Accounting Theory

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

Which of the following problems arises within owner-manager agency relationships:

Which of the following is not an example of debt covenant:

Which of the following statements is correct:

Which of the following statements about asset substitution is incorrect:

Which of the following statements apply to the political cost hypothesis:

Which of the following statements about the semi-strong form of market efficiency is not correct:

Under the debt hypothesis:

Considering whether to use historical cost or fair value relates to which of the following components in accounting policy decisions:

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

Debt covenants:

A market is efficient if:

An example of political costs is:

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

When market is efficient in the semi-strong form:

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

The problem of 'underinvestment' occurs when the entity faces financial difficulty and managers are reluctant to undertaken projects with positive net present value because:

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

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

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 Reporting

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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