Deck 5: The Choice of Accounting Methods

Question 1

In relation to agency theory the statement that is not correct is:

A) The self-interest of various parties is often in conflict
B) It assumes that managers act opportunistically all of the time
C) It assumes that individuals act primarily to advance their own self-interest
D) None of the statements is incorrect, i.e., all are correct statements

Answer 1

B

Question 2

The treatment that is likely to lead to a higher reported net profit in the short term than otherwise would be the case is:

A) underestimating an increase in the provision for long-service leave
B) treating expenses as assets
C) failure to sufficiently provide for doubtful debts
D) the deferral of advertising costs until the next accounting period

Answer 2

A

Question 3

During the conceptual framework period of accounting standard setting in Australia,which of the following is most correct?

A) Political considerations completely disappeared as a factor in choosing between accounting methods
B) Arguments by business in relation to proposed changes to standards were based on consideration of the conceptual framework rather than on self-interest
C) It became possible to introduce standards that were less popular with the business community
D) None of above is correct

Answer 3

C

Question 4

An increase in reported net profit in the short term will occur from:

A) overestimating the useful life of a non-current asset
B) writing off supplies that are still on hand as an expense
C) underestimating the residual value of a depreciable asset
D) choosing the reducing balance rather than the straight-line method of depreciation

Question 5

Research suggests that post-Enron,Chief Financial Officers:

A) are reluctant to use accounting policy choices to manipulate earnings
B) prefer not to smooth earnings
C) are more likely to use accounting policy choices to smooth earnings
D) use volatile earnings to signal low risk prospects

Question 6

Which party was not involved in initiating the move towards the harmonisation of Australian and International accounting standards?

A) The Australian Stock Exchange
B) 'Big business' represented by the Group of 100
C) The government
D) None of the above, i.e., all were engaged in initiating the move

Question 7

The income-or-profit smoothing hypothesis suggests that:

A) a variable income stream supports a lower level of dividends and raises the perceived riskiness of the firm compared to a stable income stream
B) a variable income stream supports a higher level of dividends and raises the perceived riskiness of the firm compared to a stable income stream
C) a variable income stream supports a higher level of dividends and lowers the perceived riskiness of the firm compared to a stable income stream
D) none of the above

Question 8

The choice of accounting methods and/or their use to achieve a particular outcome in the financial reports is known as:

A) environmental accounting
B) creative accounting
C) imaginative accounting
D) bottom of the harbour accounting

Question 9

During the ad hoc period of accounting standard setting in Australia in the 1970s and '80s,which of the following is not correct?

A) Arguments by business in relation to standards tended to be based on self-interest rather than sound theoretical considerations
B) The business community preferred standards which reduced choice
C) The business community preferred standards which maintained the status quo
D) Standard setters tended to produce standards that they knew were acceptability to the business community

Question 10

The order of preference set out in AASB 108 for reliance on authoritative pronouncements as a guide to selecting an accounting policy when there is no specific Australian standard is:

A) Related Australian Standards, International Accounting Standards, the Framework, accounting standards from other jurisdictions using a similar conceptual framework and accepted industry practices
B) Related Australian Accounting Standards, the definitions, recognition criteria in the Framework, accounting standards from other jurisdictions using a similar conceptual framework and accepted industry practices
C) Related Australian Standards and the Framework
D) None of the above

Question 11

Which of these is not one of the ways AASB 108 'Accounting Policies' deals with the choice of accounting methods?

A) By establishing a hierarchy of authorities
B) By specifying particular policies to be used in certain situations
C) By specifying the qualitative characteristics that financial information should have
D) None of the above, i.e., all are ways in which AASB 108 deals with the choice of accounting methods

Question 12

Which item does not normally require accountants to exercise a significant degree of professional judgement to determine its amount?

A) Doubtful debts
B) Depreciation
C) Cost of goods sold
D) Interest

Question 13

International harmonisation:

A) refers to the harmonisation of Australian accounting standards and reporting practices with international standards and practices
B) was supported by the Group of 100
C) led to the adoption of standards, even if those standards were no compatible with the conceptual framework
D) all of the above

Question 14

Costs incurred to reduce opportunistic behaviour plus the costs of opportunistic behaviour that it is not economic to eliminate are known as:

A) political costs
B) bonding costs
C) agency costs
D) opportunity costs

Question 15

The AASB accounting standard(s)that deal(s)with the choice of accounting policy is/are?

A) AASB 118 and 181
B) AASB 181
C) AASB 118
D) AASB 108

Question 16

Means by which accountants may be 'creative' in the preparation and presentation of accounting reports is/are:

A) by the way transactions are disclosed
B) by the way estimates and predictions are made
C) by the timing of transactions
D) all of the above

Question 17

The choice of accounting methods is made by:

A) setters of accounting standards
B) preparers of financial reports
C) users of financial reports
D) both A and B

Question 18

The true and fair override:

A) was removed in 1991
B) meant that in certain circumstances directors were not required to comply with approved accounting standards
C) was replaced by a requirement for directors to comply with accounting standards even if a true and fair view did not result
D) all of the above

Question 19

An example of legal form not reflecting economic substance is:

A) a legal document describing an accounts receivable as a debtor
B) a legal document describing a loan as an advance
C) a legal document describing a transaction as a lease when in fact it is a credit sale
D) all are examples of legal form not reflecting economic substance

Question 20

The statement concerning agency relationships between owners and managers that is incorrect is:

A) One way to reduce potential conflicts between owners and managers is to include bonuses based on profits in managers' remuneration packages
B) Monitoring is an activity undertaken by or on behalf of management
C) Owners may want cash dividends from the business but managers may prefer to retain cash for expansion
D) None of the above is incorrect, i.e., all are correct

Question 21

Describe and discuss how agency theory seeks to explain the choice of accounting methods by financial report preparers.

Question 22

If a firm has agreed to a debt covenant that specifies a maximum ratio of debt-to-total tangible assets,the probability of breaching the covenant is reduced if:

A) additional borrowing is undertaken
B) advertising is treated as an asset rather than as an expense
C) depreciation is charged at a higher rate
D) research and development costs are treated as an expense rather than as an asset

Question 23

Explain the income smoothing hypothesis.In your answer discuss the reluctance of Chief Financial Officers to use accounting policy choice to achieve income smoothing post-Enron.

Question 24

All of these are ways in which accountants may be 'creative' in the preparation and presentation of financial reports except:

A) by timing transactions within the limits of generally accepted accounting practice
B) by changing an accounting policy to achieve a desired outcome
C) by making estimates in a way biased towards achieving a desired outcome
D) none of the above, i.e., all are ways in which accountants may be 'creative'

Question 25

Recent research on the manipulation of profit numbers by managers with a view to influencing share price has shown:

A) no evidence of manipulation
B) firms reporting continuous growth are priced at a discount to other firms
C) reporting of small losses is rare and reporting of small profits fairly common
D) none of the above

Question 26

In agency relationships between owners,managers and debt-holders,it can normally be assumed,in relation to debt contracts,that:

A) Managers will align their interests with those of debt-holders
B) Debt-holders will align their interests with those of owners
C) Managers will align their interests with those of owners
D) None of the above

Question 27

Explain the meaning of creative accounting and discuss various factors that tend to limit its operation.

Question 28

'Most creative accounting techniques do not lead to permanent increases in profits and assets and therefore achieve little.' Using at least three specific examples,explain what is meant by this statement and discuss whether or not you agree with it.

Question 29

All of these are typical examples of provisions in Australian trust deeds for public issues of debt except:

A) restrictions on the sale of assets
B) specifying which accounting policies are to be employed in preparing the accounting reports
C) limitations on the issue of further debt
D) a minimum debt/equity ratio