Question 1

'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'.

Accepted Answer

Politically sensitive firms are likely to understate profits because they may be trying to appease government regulators, tax authorities, or other stakeholders. These firms may be operating in industries that are heavily regulated or have a significant impact on public policy, such as healthcare, energy, or finance. By understating profits, these firms may be able to avoid scrutiny or criticism from these stakeholders, or even gain favor with them by appearing to be more compliant or socially responsible.

Additionally, politically sensitive firms may also be trying to manage public perception and avoid negative attention. By understating profits, they may be able to downplay their financial success and appear more modest or in line with public expectations. This can be particularly important for firms that rely on public support or goodwill, such as non-profit organizations or companies with a strong public image.

Overall, politically sensitive firms are likely to be those that operate in industries with high regulatory or public policy scrutiny, or those that rely on public support or perception. These firms may have a strong incentive to understate profits in order to manage their relationships with government regulators, tax authorities, and the public.

Question 2

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

Accepted Answer

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 C

Question 3

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

Accepted Answer

A) True 
 B)False  True

Question 4

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

Accepted Answer

The answer of Outline how the demand for auditing can...

Question 5

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

Accepted Answer

The answer of Explain and discuss why the firm can...

Question 6

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?

Accepted Answer

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 7

Traditional conservatism in accounting means:

Accepted Answer

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 8

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

Accepted Answer

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 9

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

Accepted Answer

The answer of Explain and discuss why,under signalling theory,it is...

Question 10

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

Accepted Answer

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 11

The statement that is true is:

Accepted Answer

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 12

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

Accepted Answer

A) True 
 B)False

Question 13

An example of a bonding cost is:

Accepted Answer

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

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

The statement that is correct concerning Australia is:

Accepted Answer

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 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Which of these research findings is not true?

Accepted Answer

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 20

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

Accepted Answer

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

Exam 11: Positive Theory of Accounting Policy and Disclosure

'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'.

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

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

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

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

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?

Traditional conservatism in accounting means:

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

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

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

The statement that is true is:

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

An example of a bonding cost is:

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

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

The statement that is correct concerning Australia is:

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.

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

Which of these research findings is not true?

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

Exam 11: Positive Theory of Accounting Policy and Disclosure

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

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

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

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

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

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?

Traditional conservatism in accounting means:

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

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

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

The statement that is true is:

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

An example of a bonding cost is:

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

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

The statement that is correct concerning Australia is:

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.

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

Which of these research findings is not true?

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

'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'.