Question 1

Legitimacy Theory and Stakeholder Theory may both generate similar hypotheses to Positive Accounting Theory. The difference between PAT and the other two theories is that:

Accepted Answer

Legitimacy Theory and Stakeholder Theory both consider the organization in its broader social context and the relationships with various stakeholders. PAT, on the other hand, focuses on the economic self-interest of the manager or firm and does not explicitly consider the organization's social context or stakeholder relationships.

Question 2

A machine with a carrying amount of $9,000 has a net selling price of $8,000. The replacement cost of this asset is $10,000 and the present value of future cash flows is $9,500. What is the deprival value of the machine?

Accepted Answer

The deprival value of an asset is the higher of its net selling price, replacement cost, and present value of future cash flows. In this case, the present value of future cash flows is the highest at $9,500, so that is the deprival value. Therefore, the answer is D.

Question 3

The pharmaceutical industry has been criticised in the financial press for recognising excessive profits and investing less in research and development that the government is threatening the removal of tax concessions to the industry. Under these conditions, PAT predicts that pharmaceutical companies are subject to ___________ costs and are likely to adopt _________________ accounting policies:

Accepted Answer

The government's threat to remove tax concessions is a political cost that pharmaceutical companies are subject to. In response to this cost and the pressure to increase profits, they are likely to adopt income decreasing accounting policies to show lower profits and garner sympathy from the public and government.

Question 4

The development of exit-price accounting (or CoCoa) was based on the following key assumptions:

Accepted Answer

All of the given assumptions are key to the development of exit-price accounting or CoCoa. The aim of firms is to maximize shareholder wealth. For firms to achieve this, they need to be able to adapt to changing circumstances. CoCoa reflects a firm's capacity to adapt by focusing on the monetary value of the organization's net assets at balance sheet date.

Question 5

Capture Theory may be described as taking the perspective that:

Accepted Answer

The answer of Capture Theory may be described as taking...

Question 6

Under PAT, a firm is aware that managers are likely to behave rationally. Which of the following mechanisms will be the appropriate course of action for shareholders to price protect against self interested managers?

Accepted Answer

The answer of Under PAT, a firm is aware that...

Question 7

To comply with AASB 101, in which section of the financial report should a summary of accounting policies adopted by reporting entities be positioned?

Accepted Answer

According to AASB 101, the summary of accounting policies adopted by reporting entities should be presented in the initial section of the notes to the accounts. This is to provide users of the financial reports with an understanding of the basis on which the financial statements were prepared. Placing it in any other section may not adequately serve the purpose of providing information to the users.

Question 8

The general aim of the current-cost accounting theory is:

Accepted Answer

The current-cost accounting theory aims to provide calculation of income that can be withdrawn from the entity while leaving the physical capital intact after adjusting for changing prices. This means that the theory values assets based on their replacement cost, rather than their historical cost, in order to maintain the entity's physical capital.

Question 9

A new accounting standard requires ABC Ltd to recognise as expense all share-based payments, specifically the issue of options to its employees. Prior to this standard, the company need not do anything until the options are exercised. The manager of ABC Ltd. is worried about this new standard as the company is close to a technical violation of its borrowing agreements that the debt-to-equity ratio be less than 40%. Most of the options on issue are cash-settled and will require an increase in liabilities. Which of the following accounting policies if adopted by the company could reduce the likelihood of a debt covenant violation:

Accepted Answer

The answer of A new accounting standard requires ABC Ltd...

Question 10

A company has a debt covenant in place that limits the amount it can borrow to 50% of its tangible assets. If the company's actual value for that ratio is approaching violation of this debt covenant, consistent with PAT, management would try to relax the constraint by:

Accepted Answer

Revaluing assets upwards would increase the value of the tangible assets and thus allow the company to borrow more without violating the debt covenant. Switching depreciation methods, increasing allowance for doubtful debts, and increasing provision for warranty expenses would not impact the tangible assets and therefore would not directly address the issue of approaching violation of the debt covenant. Choosing all of the given answers could potentially address the issue, but D is the best choice as it directly increases the value of the assets.

Question 11

Which of the following are examples of categories of the main normative accounting theories that were developed in the 1950s and 1960s?

Accepted Answer

The answer of Which of the following are examples of...

Question 12

Which of the following accounting policies is consistent with "creative accounting"?

Accepted Answer

The answer of Which of the following accounting policies is...

Question 13

How would the deprival value of an asset be determined?

Accepted Answer

The deprival value of an asset is the value to the business (present value) of the asset, with the caveat that this value must not be less than the net selling price or greater than the current replacement cost. This means that the asset's value should be based on its usefulness to the business, taking into account factors such as future cash flows, rather than simply its market value or replacement cost. Option A focuses solely on the net selling price and replacement cost, while option B only considers future cash flows. Option D overlooks the importance of the asset's usefulness to the business.

Question 14

Economic interest group theory of regulation adopts the notion that _____________ are considered to dominate the legislative process:

Accepted Answer

Economic interest group theory of regulation assumes that private interests, such as businesses and corporations, dominate the legislative process through their significant financial resources and lobbying efforts. Public interests and other stakeholders may have some influence, but the theory suggests that private interests hold the most power in shaping regulatory policies. Shareholders and debtholders are not specific factors in this theory.

Question 15

An asset that has a deprival value of zero is likely to be.

Accepted Answer

The answer of An asset that has a deprival value...

Question 16

A new accounting standard requires the provision of liabilities for share-based payments that has implications in the firm's debt-to-equity ratio. Which of the following accounting policy choices will reduce the probability of the firm violating debt covenants in a debt agreement?

Accepted Answer

Shifting from cost to revaluation method in accounting for land and buildings would increase the value of assets, which would improve the firm's debt-to-equity ratio. By increasing the equity component in the ratio, the firm can reduce the risk of violating debt covenants in a debt agreement. The other options do not have a direct impact on the debt-to-equity ratio and, therefore, will not reduce the probability of violating the debt covenants.

Question 17

Stakeholders are.

Accepted Answer

Stakeholders encompass anyone who has a vested interest in a company, including those with a direct financial interest (such as shareholders), special interest groups concerned with environmental actions, employees, and customers. All of the given answers are correct.

Question 18

The predictions of PAT formulated by Watts and Zimmerman (1990) are largely concentrated on the following predictions:

Accepted Answer

The predictions formulated by PAT, as per Watts and Zimmerman (1990), are all related to the choice of accounting policies by managers in order to influence reported income. The predictions are as follows:
A) Managers of companies with bonus plans are likely to choose income increasing accounting policies.
B) Managers of companies that are close to violating accounting-based debt covenants are likely to choose income increasing accounting policies.
C) Managers of companies that are subject to greater political costs are likely to choose income decreasing accounting policies.
D) All of the given answers.

Question 19

As part of the company's compensation plan, a chief executive officer (CEO) is paid 1% of net profit if net profit exceeds $2,000,000 but no more than $40,000 in a given year. It is estimated that net profit for the year will exceed $4,500,000. Under PAT the CEO will likely adopt which accounting policy:

Accepted Answer

The answer of As part of the company's compensation plan,...

Question 20

A company has a debt contract in place which requires the company's working capital (ratio of current asset to current liabilities) must never fall below 2. As balance date approaches, the company estimates that the working capital ratio will be 1.9 and the company may default on its debt contract unless remedial action is taken. Which of the following action(s) will increase the company's working capital at balance day:

Accepted Answer

The answer of A company has a debt contract in...

Quiz 3: Theories of Financial Accounting