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Test Bank | Theories of Financial Accounting - 9e

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Chapter 03 Testbank

1. Normative theories are referred to as prescriptive theories.

True False

2. According to Chambers' CoCoA model, if assets cannot be sold separately, they should be deemed to have no value.

True False

3. Positive Accounting Theory involves measurement methods such as fair value accounting.

True False

4. Income-decreasing accounting methods may be adopted if a firm believes it might be subject to political costs.

True False

5. The costs that relate to the divergent behaviour of the borrower are referred to in PAT as the agency costs of debt.

True False

6. According to the underlying assumption of Positive Accounting Theory, firms with higher leverage (gearing) are more likely to use earnings-increasing accounting methods to avoid default.

True False

7. The central assumption of economics that forms a basis for Positive Accounting Theory is that:

A. all individual action is driven by self-interest and individuals will act in an opportunistic manner

B. all individuals are socially responsible and will act in an opportunistic manner

C. individuals cooperate in groups to form markets for the benefit of everyone

D. there is a moral code that guides the behaviour of individuals to operate efficient markets

8. The efficiency perspective in PAT research considers:

A. the social cost of adopting a specific accounting policy

B. what mechanisms are introduced 'up-front' with the objective of minimising future agency costs.

C. the interaction of many investors in the market for corporate shares to generate efficient prices

D. the lowest cost method for establishing which accounting methods are best for particular enterprises

9. Where a contractual arrangement has been negotiated that would provide a manager with a bonus based on the profits generated by the entity:

A. the efficiency perspective identifies this as a way of minimising agency costs by aligning the interests of the principal and the agent

B. the opportunistic perspective predicts that managers will seek to adopt accounting methods that best reflect the performance of the organisation

C. the opportunistic perspective identifies this as a way of minimising agency costs by aligning the interests of the principal and the agent

D. the efficiency perspective identifies this as a way of maximising the self-interests of the managers

10. Positive Accounting Theory (PAT) assumes that principals are aware that agents will act opportunistically, so principals use ‘price protection’. This means that:

A. a carefully worded contract is assumed by PAT to remove the potential for the agent to overstate profits.

B. agents will not be permitted to negotiate elements of organisational contracts

C. principles pay lower salaries to compensate the opportunistic approach of the agents

D. principles charge customers to compensate the loss caused due to opportunistic behaviour

11. Using the PAT perspective of managers' behaviour, the effect of paying managers a fixed income salary is that:

A. they will feel secure enough to accept risky projects for the organisation.

B. they will prefer not to have the organisation take on debt.

C. they will work in the best interest of the company

D. they will undertake optimum levels of debt

12. From an efficiency perspective of PAT, what approach should be adopted when managers are approaching retirement and an organisation undertakes research and development expenditure?

A. Increase the percentage of their remuneration that is paid out as bonus based on accounting profit in order to keep them motivated to work hard.

B. Use a market-based bonus scheme.

C. Make them redundant as early as possible.

D. Use profit-based incentive plans.

13. A combination of well-designed management compensation contracts, the market for corporate takeovers and a well-informed labour market should:

A. not be necessary as any one of these methods will control a manager's actions.

B. ensure that managers only act in their own self-interest.

C. mean that, on average, managers will work in the best interests of owners.

D. remove any monitoring and bonding costs required under PAT

14. Firms are subject to political costs when:

A. they are quite small and have little political influence

B. they choose accounting policies that best reflect the performance of the firm

C. they record high losses

D. they record high profits and their accounting records are positive

15. Capture Theory may be described as taking the perspective that:

A. the regulated interest controls the regulation and the regulating body

B. the principal has control over the agent through contracting and monitoring, and stakeholders capture that influence through voluntary disclosures

C. stakeholders compete to influence the entity in which they have a stake and management attempts to capture that influence through voluntary disclosures

D. the regulated interest is controlled by the regulation agency that generates the regulations

16. A machine with a carrying amount of $9000 has a replacement cost of $10 000 and its present value of future cash flows is $9500. What is the deprival value of the machine?

A. $0

B. $8000

C. $9000

D. $9500

17. Failure of an organisation to comply with negotiated debt covenants can lead to:

A. the operations of the organisation being suspended

B. the organisation being placed in the hands of a party nominated by the lender

C. the lender taking control of the organisation

D. All of the given answers are correct.

18. An organisation is viewed as a part of the wider social system. Which among the following forms a part of that social system?

A. employees

B. interest groups

C. investors

D. All of the given answers are correct.

19. Which of the following theories is associated with the system-based perspective?

A. Stakeholder Theory

B. Legitimacy Theory

C. Institutional Theory

D. All of the given answers are correct.

20. Which of the following theories is associated with the perspective that considers the importance for an organisation’s survival of satisfying the demands of its various stakeholders?

A. Stakeholder Theory

B. Legitimacy Theory

C. Institutional Theory