Question 1

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

Accepted Answer

The current-cost accounting theory aims to provide a calculation of income that, after adjusting for changing prices, can be withdrawn from the entity without depleting the physical capital of the entity. This is the essence of the current-cost accounting theory, which seeks to reflect changes in the value of an entity's resources due to inflation, deflation, or other price level fluctuations. By doing so, the theory aims to provide a more accurate picture of an entity's financial position and performance over time.

Question 2

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

Accepted Answer

The development of exit-price accounting (or CoCoa) was based on all the given key assumptions. Firms exist to increase the wealth of their owners, and their successful operations are based on the ability to adapt to changing circumstances. The capacity of firms to adapt will best reflect the monetary value of the organization's net assets on the balance sheet date. Therefore, all the given options are correct assumptions for the development of exit-price accounting.

Question 3

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,a...

Question 4

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

Accepted Answer

The predictions of PAT formulated by Watts and Zimmerman (1990) include all the options given in the question, meaning that all the statements are correct. Therefore, the best choice would be option D, which includes all of the given answers.

Question 5

Capture Theory may be described as taking the perspective that:

Accepted Answer

Capture Theory suggests that the regulated interest (such as an industry or sector) eventually comes to control the regulatory agency, leading to regulations that benefit the industry rather than the public.

Question 6

Stakeholders are.

Accepted Answer

Stakeholders refer to anyone who has an interest in the success or actions of a business, including those with a financial interest (such as shareholders), special interest groups (such as those concerned with environmental impact), employees, and customers. Therefore, all of the given answers are correct as they represent different types of stakeholders.

Question 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

According to economic interest group theory of regulation, private interests, such as corporations or business associations, are likely to dominate the legislative process due to their economic power and resources. Public interests, shareholders, debtholders, and other stakeholders are not considered to have the same level of influence as private interests.

Question 9

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

Accepted Answer

Goodwill and intangible assets often have a deprival value of zero because they do not have a recoverable amount if the business ceases to use them.

Question 10

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 11

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 due to perceived excessive profits and underinvestment in research and development is a political factor. Under such political pressure, pharmaceutical companies are likely to adopt income decreasing accounting policies to reduce their tax burden and alleviate criticism of their profits. This would also help to counter the negative public perception that they prioritise profits over patient healthcare. Therefore, option D - Political; income decreasing - is the most accurate answer.

Question 12

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

Compensating managers with a fixed rate plus a performance-based bonus aligns their interests with shareholders, incentivizing them to act in the shareholders' best interests.

Question 13

How would the deprival value of an asset be determined?

Accepted Answer

The deprival value of an asset is determined as the value to the business (present value), ensuring it is not less than the net selling price and not greater than the current replacement cost.

Question 14

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 company can reduce its debt-to-equity ratio by increasing its equity or decreasing its debt. Revaluing assets upwards (C) will increase equity. Decreasing provision for warranty expenses (B) will also increase equity. Switching from accelerated depreciation to straight-line depreciation method (A) will decrease debt.

Question 15

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 explicitly consider the organization in its broader social context, while PAT focuses solely on the economic motivations of managers and owners without considering the impact on broader society. The other options are not accurate as A is incorrect, C is only partially correct as Legitimacy Theory and Stakeholder Theory can also take a positive research perspective, and D is incorrect as owners and managers can also be considered stakeholders in other theories.

Question 16

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

Accelerating recognition of credit sales increases current assets (accounts receivable), thereby increasing the working capital ratio.

Question 17

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 will increase the book value of the assets, resulting in an increase in shareholders' equity. As a result, the debt-to-equity ratio will decrease, reducing the probability of the firm violating debt covenants in a debt agreement.

Question 18

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 company's tangible assets, which would in turn increase the amount the company can borrow without violating the debt covenant. This is consistent with the principle of PAT (Profit After Taxes), as it would increase the company's ability to generate profits by borrowing more funds to invest in growth opportunities. The other options do not directly affect the value of tangible assets and therefore would not relax the debt covenant constraint.

Question 19

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 a reporting entity should be presented in the initial section of the notes to the accounts. This ensures that users of the financial statements have access to the information they need to understand the accounting policies that have been applied in preparing the financial report. Therefore, option C is the correct choice.

Question 20

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

Accepted Answer

Deprival-value accounting and exit-price accounting are examples of normative accounting theories developed in the 1950s and 1960s, focusing on the valuation of assets and liabilities.

Quiz 3: Theories of Financial Accounting