Question 1

Explain the difference between moral hazard and adverse selection.

Accepted Answer

The answer of Explain the difference between moral hazard and...

Question 2

Which statement is correct?

Accepted Answer

A) Financial reporting is the process of preparing information for internal parties. 
B) Financial reporting involves issuing financial statements to external parties. 
C) Financial reporting provides the same information as management accounting. 
D) Financial reporting is based on rules issued by the CPA or IASB.

Question 3

How does an accountant decide on the appropriate method of accounting for a business transaction?

Accepted Answer

A) Evaluating if the particular method is consistent with the conceptual framework. 
B) Ensuring that the accounting method agrees with that selected by other companies. 
C) Evaluating whether the selected method differs from the underlying economics. 
D) Testing the selected method for numerical accuracy and consistency.

Question 4

Which is not a question that financial accounting theory can answer?

Accepted Answer

A) Why do companies provide financial information to external parties? 
B) Why do all companies use the same accounting policies? 
C) Why is certain disclosure mandatory in financial reporting? 
D) What is the role of financial accounting and reporting?

Question 5

Explain the meaning of publicly accountable enterprises, efficient securities market (semi-strong form), and efficient securities market (strong form).

Accepted Answer

The answer of Explain the meaning of publicly accountable enterprises,...

Question 6

Management motivation to increase the likelihood that the company will receive a $50,000 government rebate best illustrates which of the following?

Accepted Answer

A) Earnings management. 
B) Positive accounting theory. 
C) Information asymmetry. 
D) Efficient securities market.

Question 7

Why is the efficient securities market hypothesis important for accounting?

Accepted Answer

A) When providing financial information, management need only consider the specifically identifiable users who they know will rely on the information. 
B) Accounting standards can assume that the majority of market participants have a reasonable level of sophistication. 
C) Individuals with information that is not publicly available cannot make significant profits. 
D) Accounting information is the only source of financial information that markets use.

Question 8

For the situations described below, explain whether managers would be motivated to manage earnings, assets, and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings, assets, and equity downward and liabilities upward.
 $$\begin{array} { | l | l | } 
\hline \text { Situation } & \begin{array} { l } 
\text { Management motivation } \
\text { Upward / Downward) }
\end{array} \
\hline \text { To obtain higher bonuses. } & \
\hline \text { To increase the likelihood of receiving } \
\text { government subsidies and trade protection. } & \
\hline \begin{array} { l } 
\text { To improve bargaining position relative to } \
\text { employee unions. }
\end{array} & \
\hline \text { To meet covenants based on net income. } & \
\hline \text { To meet regulatory requirements. } & \
\hline
\end{array}$$

Accepted Answer

The answer of For the situations described below, explain whether...

Question 9

Which statement best explains the semi-strong form of the efficient securities market hypothesis?

Accepted Answer

A) A market in which the prices of securities traded in that market at all times properly reflect all information that is publicly known about those securities. 
B) A market in which the prices of securities traded in that market reflect all information, whether publicly or privately known. 
C) A market in which the prices of debt securities traded in that market reflect all information that is privately known about those securities. 
D) A market in which the prices of equity securities traded in that market reflect all information that is privately known about those securities.

Question 10

Explain the process an accountant uses to determine the appropriate accounting method for a business transaction.

Accepted Answer

The answer of Explain the process an accountant uses to...

Question 11

Which statement best explains "information asymmetry"?

Accepted Answer

A) Information asymmetry means that there is uncertainty about the future. 
B) Information asymmetry means that some people have more information than others. 
C) Information asymmetry means that external parties need financial information. 
D) Information asymmetry means information is material to a decision maker.

Question 12

Explain the accounting implications of the following concepts about efficient securities markets:
a)Accounting information competes with other sources of information.
b)Accounting reports and standards can assume that users have a reasonable level of sophistication.

Accepted Answer

The answer of Explain the accounting implications of the following...

Question 13

Which statement best explains "moral hazard"?

Accepted Answer

A) The term refers to a situation where one party has an information advantage over another. 
B) The term refers to the need external parties have for financial information. 
C) The term refers to the fact that some people have more information than others. 
D) The term refers to a situation where one party cannot observe the actions of another party.

Exam 1: Fundamentals of Financial Accounting Theory