Deck 4: Research Methodology and Theories on the Uses of Accounting Information

Question 1

Which of the following outcomes of providing accounting information is an attempt to identify individual securities that are mispriced by reviewing all available financial information?

A)Agency theory
B)Efficient markets
C)Fundamental analysis
D)Capital asset pricing model

Answer 1

C

Question 2

Discuss the capital asset pricing model including the concepts of unsystematic risk,systematic risk and beta.

Answer 2

The capital asset pricing model CAPM)is an attempt to deal with both risks and returns.The actual rate of return to an investor from buying a common stock and holding it for a period of time is calculated by adding the dividends to the increase or decrease)in value of the security during the holding period and dividing this amount by the purchase price of the security or Since stock prices fluctuate in response to changes in investor expectations about the firm's future cash flows,common stocks are considered risky investments.In contrast,U.S.Treasury bills are not considered risky investments because the expected and stated rates of return are equal assuming the T-bill is held to maturity).Risk is defined as the possibility that actual returns will deviate from expected returns,and the amount of potential fluctuation determines the degree of risk.A basic assumption of the CAPM is that risky stocks can be combined into a portfolio that is less risky than any of the individual common stocks that make up that portfolio.This diversification attempts to match the common stocks of companies in such a manner that environmental forces causing a poor performance by one company will simultaneously cause a good performance by another,for example,purchasing the common stock of an oil company and an airline company.Although such negative relationships are rare in our society,diversification will reduce risk.Some risk is peculiar to the common stock of a particular company.On the other hand,overall environmental forces cause fluctuations in the stock market that affect all stock prices.These two types of risk are termed unsystematic risk and systematic risk.Unsystematic risk is that portion of risk peculiar to a company that can be diversified away.Systematic risk is the nondiversifiable portion that is related to overall movements in the stock market and is consequently unavoidable.Earlier in the chapter,we indicated that the EMH suggests that investors cannot discover undervalued or overvalued securities because the market consensus will quickly incorporate all available information into a firm's stock price.However,financial information about a firm can help determine the amount of systematic risk associated with a particular stock.Since investors can eliminate the risk associated with acquiring a particular company's common stock by purchasing diversified portfolios,they are not compensated for bearing unsystematic risk.And since well-diversified investors are exposed only to systematic risk,investors using the CAPM as the basis for acquiring their portfolios will be subject only to systematic risk.Consequently,systematic risk is the only relevant and investors will be rewarded with higher expected returns for bearing market-related risk that will not be affected by company-specific risk.The measure of the parallel relationship of a particular common stock with the overall trend in the stock market is termed beta β).β may be viewed as a gauge of a particular stock's volatility to the total stock market.A stock with a β of 1.00 has a perfect relationship to the performance of the overall market as measured by a market index such as the Dow-Jones Industrials or the Standard & Poor's 500-stock index.Stocks with a β of greater than 1.00 tend to rise and fall by a greater percentage than the market,whereas stocks with a β of less than 1.00 are less likely to rise and fall than the general market index over the selected period of analysis.Therefore,β can be viewed as a stock's sensitivity to market changes and as a measure of systematic risk

Question 3

Which of the following outcomes of providing accounting information is based on the supply and demand model

A)Agency theory
B)Efficient markets
C)Fundamental analysis
D)Capital asset pricing model

Answer 3

B

Question 4

Which of the following outcomes of providing accounting information is an attempt to deal with both risks and returns?

A)Agency theory
B)Efficient markets
C)Fundamental analysis
D)Capital asset pricing model

Question 5

The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth,given all available information.Which of the following forms of the efficient market hypothesis defines all available information as knowledge of past security prices?

A)Weak
B)Semi-weak
C)Semi-strong
D)Strong

Question 6

What theory on the outcomes of providing accounting information rejects the view that knowledge of accounting is grounded in objective principles

A)Agency theory
B)Critical perspective
C)Fundamental analysis
D)Capital asset pricing model

Question 7

Which of the following is not viewed as a cost to the principal in an agency relationship?

A)Monitoring expenditures by the principal
B)Monitoring expenditures by the agent
C)Bonding expenditures by the agent
D)The residual loss

Question 8

What is fundamental analysis and what is its goal?

Question 9

Which of the following is not a conclusion that has been drawn from human information processing research?

A)An individual's perception of information is quite selective.That is,since individuals are capable of comprehending only a small part of their environment,their anticipation of what they expect to perceive about a particular situation will determine to a large extent what they do perceive.
B)Since individuals make decisions on the basis of a small part of the total information available,they do not have the capacity to make optimal decisions
C)Individuals are able to process and integrate large amounts of information simultaneously
D)Since individuals are incapable of integrating a great deal of information,they process information in a sequential fashion.

Question 10

Discuss the difference between normative and positive accounting theory.

Question 11

The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth,given all available information.Which of the following forms of the efficient market hypothesis defines all available information as all publicly available information including past stock prices?

A)Weak
B)Semi-weak
C)Semi-strong
D)Strong

Question 12

Which of the following research approaches is attributed to DR Scott?

A)Deductive
B)Ethical
C)Inductive
D)Pragmatic

Question 13

Discuss the concept of critical perspectives research in accounting.

Question 14

What theory on the outcomes of providing accounting information attempts to assess an individual's ability to use information?

A)Agency theory
B)Efficient markets
C)Human information processing
D)Capital asset pricing model

Question 15

The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth,given all available information.Which of the following forms of the efficient market hypothesis defines all available information as information,including security price trends,publicly available information,and insider information?

A)Weak
B)Semi-weak
C)Semi-strong
D)Strong

Question 16

Which of the following research approaches is based on the concept of utility or usefulness?

A)Deductive
B)Behavioral
C)Inductive
D)Pragmatic

Question 17

What is the basic assumption of agency theory? Why is the relationship between shareholders and management an agency relationship?

Question 18

Which of the following research approaches emphasizes going from the specific to the general?

A)Deductive
B)Behavioral
C)Inductive
D)Pragmatic

Question 19

What theory on the outcomes of providing accounting information attempts to answer the question: What is an individual's expected benefit from a particular course of action?

A)Agency theory
B)Efficient markets
C)Fundamental analysis
D)Capital asset pricing model

Question 20

Describe the efficient market hypothesis and its three forms.

Question 21

Discuss the relationship among research,education,and practice in accounting.