Deck 11: Positive Theory of Accounting Policy and Disclosure

Question 1

An example of a bonding cost is:

A)Income lost due to the manager being unable to share trade secrets with a competing firm
B)The costs of the provision of quarterly financial statements
C)The cost of an audit
D)Costs to establish management compensation plans

Answer 1

A

Question 2

A price-protected owner will remunerate their manager according to the owner's expectations of how much the manager's behaviour is likely to be contrary to the owner's interests.

Answer 2

True

Question 3

Covenants that restrict production-investment opportunities aim to reduce claim dilution problem.

Answer 3

False

Question 4

Ball and Foster were among the researchers who supported the use of firm size as a measure of political costs.

Question 5

The more politically sensitive a firm,the more likely it is that the firm will understate its profits to prevent negative wealth transfers

Question 6

Managers and shareholders have differing incentives regarding the firm.The statement regarding incentives that is true is:

A)Because shareholders' investment portfolios can be widely diversified they are less likely to want to undertake risky projects than managers
B)A manager can fully diversify his/her risk by investing in other firms
C)Managers may hold off paying dividends to owners in order to 'empire build'
D)We would expect the horizon problem to lessen as a manager's age increases

Question 7

Who were generally regarded as the pioneers in developing the agency theory?

A)Alchian and Demsetz
B)Jensen and Meckling
C)Smith and Warner
D)Whittred and Zimmer

Question 8

The situation where a manager protects against bearing agency costs by paying the agent according to the level of costs expected is called:

A)Residual loss
B)Monitoring costs
C)Price protection
D)Bonding costs

Question 9

Which of these management actions might be considered under the efficient contracting perspective?

A)A manger chooses to use FIFO instead of the weighted average cost of inventory because she believes that FIFO better reflects the value of the inventory on hand
B)A manager depreciates an asset using the reducing balance method rather than the straight-line method because he believes that the method better reflects the economic consumption of the asset.
C)A manager uses the straight-line method of depreciation rather than reducing balance to prevent a temporary breach of a debt covenant,even though the chosen method does not best reflect the asset's underlying economic consumption.
D)All of the above might be considered

Question 10

Which of these is not an assumption of the efficient markets hypothesis (EMH)?

A)All market participants are price takers
B)No taxes
C)There are costs of doing transactions in the market
D)Information is available freely

Question 11

Initially monitoring costs are incurred by the principal,however,ultimately agents will bear the monitoring costs.

Question 12

The bonus plan hypothesis and the debt hypothesis are predictions developed under the efficient contracting approach.

Question 13

It may be appropriate to remunerate a manger using reported profits under which of these circumstances?

A)When the firm's market value is non-observable because of thin-trading
B)When the level of management being remunerated is lower than the CEO
C)A and B
D)None of the above

Question 14

The size hypothesis predicts that the larger the firm,the more likely that managers will choose accounting methods that will move reported profits from future periods to current periods.

Question 15

The demand for auditing can be explained by agency theory as part of monitoring and bonding activities and costs.

Question 16

DeAngelo argues that larger auditors,such as those commonly referred to as the 'Big 4',are of lower quality than other auditors because larger auditors have 'more to lose' by failing to report a discovered breach in a particular client's record.

Question 17

Which of these is not an underlying assumption of positive accounting theory?

A)Individuals attempt to maximise their own wealth
B)Accounting numbers play a central role in the distribution of wealth
C)People are self-interested and rational
D)Non-financial aspects of individuals' utility functions are important in the distribution of wealth.

Question 18

Which statement is not true in relation to asset substitution as described in the shareholders-debtholders agency relationship?

A)Managers have incentives to accept debt finance and invest in higher risk assets to increase the potential returns to shareholders
B)Lenders are generally risk preferers
C)When investments in high-risk assets cause financial distress,shareholders are liable only for the amounts unpaid on their shares
D)Lenders' price debt is based on the expectations that firms will not invest in assets that have higher risk than that which is acceptable to the lenders

Question 19

In the oil and gas industry the full costing method would be preferred under the size hypothesis.

Question 20

Under signalling theory it is predicted that firms will disclose less information than is demanded.

Question 21

Explain and discuss why,under signalling theory,it is predicted that firms will disclose more information than is demanded.

Question 22

The following arguments are philosophical criticisms of positive accounting theory,except:

A)Cross-sectional models are poorly specified
B)Positive accounting theory is not an accounting theory,but only a sociology of accounting
C)Contrary to its claim,positive accounting theory is in fact value-laden
D)The methodology of positive accounting theory is inappropriate for the purpose it purports to serve

Question 23

The statement that is true is:

A)Politically sensitive firms are likely to overstate profits
B)Politically sensitive firms are likely to understate profits
C)It is more difficult to criticise a firm with higher profits for having an unfair level of government support
D)Smaller firms are expected to be more politically sensitive

Question 24

'Politically sensitive firms are likely to understate profits' ' J.Godfrey,et el,'Accounting Theory',7^th Ed.p.384.Explain why this may be so and which firms are likely to be 'politically sensitive'.

Question 25

Which of these research findings is not true?

A)Blacconiere and Patten found that despite general falls in Indian chemical firms' share price after the Bhopal disaster,firms with more extensive environmental disclosures had less fall reaction.
B)In their study Watts and Zimmerman argue that managers of large firms have greater incentives to reduce reported profits because of political factors.
C)The results of DeFond and Jiambalvo's study of managers of firms that defaulted on their accounting-based debt covenants support the ex ante perspective of accounting policy choice.
D)Godfrey and Jones found that managers of companies with highly unionised workforces attempted to affect the probability of wealth transfers by smoothing reported operating profit via the classification of recurring gains and losses.

Question 26

The statement that is correct concerning Australia is:

A)As a firm's leverage increases the manager selects accounting procedures that decrease assets and decrease liabilities
B)Most debt covenants have constraints on the proportion of debt to profit
C)Most debt covenants constrain liabilities as a proportion of assets
D)All the statements are correct

Question 27

Traditional conservatism in accounting means:

A)Accelerating revenue recognition
B)Delaying expenses
C)A higher degree of verification required for expenses compared to revenues
D)Anticipating losses but not gains

Question 28

The statement that does not relate to the information perspective on accounting policy choice is:

A)Manager use the accounts to signal expectations and intentions regarding the future
B)The information perspective is aligned with contracting theory
C)The accounting information produced under this perspective is used to indicate how the value of the firm and claims against it will change
D)Managers of firms with neutral news have an incentive to report positive news so they will not be suspected of having poor results

Question 29

Which of these is not the reason why there is generally less demand and incentive for the production of information in political markets than in capital markets?

A)There is high probability that one individual's actions will affect that person's wealth
B)Heterogeneity of interests within groups
C)High information and transaction costs
D)In political markets it is harder for individuals or groups to capture benefits from the information

Question 30

Outline how the demand for auditing can be explained by agency theory as part of monitoring and bonding activities and costs.

Question 31

Explain and discuss why the firm can be described as a 'nexus of contracts.

Question 32

The change that will increase reported profit (assuming inflation)is:

A)A switch from the LIFO to the FIFO method of inventory valuation
B)A switch from the straight-line to the reducing balance method of depreciation - assuming new assets are being purchased
C)Reducing the estimated life of depreciable assets
D)All of the above will increase reported profit (assuming inflation)

Question 33

The statement in relation to issues for auditors in relation to agency theory that is not true is:

A)Auditors have a bonding and monitoring role in agency theory
B)Smaller auditing firms have more to lose by failing to report a breach in a clients accounts than larger audit firms
C)Research in the US did not support the proposition that promoters of initial public sharer offerings using a higher quality auditors would have lower holdings of shares than promoters in companies using lower quality auditors
D)Researchers have refined the concept of high quality auditors to include those who specialise in certain industries or contracts

Question 34

Distinguish between the ex ante efficient contracting approach and ex post opportunism.