Deck 7: Positive Accounting Theory

Question 1

The "efficiency perspective" of Positive Accounting Theory suggests that firms will:

A) Adopt the accounting methods that require the least resources to implement
B) Adopt the accounting methods that result in the highest reported earnings
C) Adopt the accounting methods that result in the lowest reported earnings
D) Adopt the accounting methods that best reflect the underlying economic performance of the entity

Answer 1

D

Question 2

According to Positive Accounting Theory,using stock prices to determine bonuses

A) Increases the likelihood of management disclosing good news
B) Increases the likelihood of management disclosing of bad news
C) Increases the likelihood of management disclosing both good and bad news
D) Has no effect on the likelihood of management disclosures

Answer 2

C

Question 3

Watts and Zimmerman's Positive Accounting Theory is:

A) One of several normative theories of accounting
B) One of several positive theories of accounting
C) One of several critical theories of accounting
D) None of the given options is correct

Answer 3

B

Question 4

A manager electing to adopt a depreciation method that increases income,but does not reflect the actual use of the asset,is consistent with:

A) The efficiency perspective of Positive Accounting Theory
B) The opportunistic perspective of Positive Accounting Theory
C) Both the opportunity and the efficiency perspectives of Positive Accounting Theory
D) Neither the opportunity nor the efficiency perspectives of Positive Accounting Theory

Question 5

A central assumption of Positive Accounting Theory is that:

A) Individuals act solely on the basis of self-interest
B) Firms seek to maximise profits
C) The interests of principals and agents are not aligned
D) Financial statements will be audited regardless of legal requirements

Question 6

In respect of Positive Accounting Theory:

A) The opportunistic perspective is ex-post ,and the efficiency perspective is ex-ante
B) The opportunistic perspective is ex-ante, and the efficiency perspective is ex-post
C) Both the opportunistic and efficiency perspectives are ex-ante
D) Both the opportunistic and efficiency perspectives are ex-post

Question 7

The 'bonus plan hypothesis' of Positive Accounting Theory suggests managers of firms with bonus plans tied to reported income are more likely to use accounting methods that:

A) Increase prior period reported income
B) Increase current period reported income
C) Increase future period reported income
D) None of the given options is correct

Question 8

A problem with Positive Accounting Theory is that:

A) It is not testable
B) It has been empirically discredited
C) It contributes little to improving accounting practice
D) None of the given options is correct

Question 9

Agency theory suggests that government regulation is:

A) Necessary, because principals know that agents may not act in their interests
B) Necessary, because agents know that principals may not act in their interests
C) Unnecessary, because principals know that agents may not act in their interests
D) Unnecessary, because agents know that principals may not act in their interests

Question 10

Positive Accounting Theory suggests that bonus schemes benefit:

A) Only managers
B) Only owners
C) Both managers and owners
D) Neither managers nor owners

Question 11

Which of the following parties desire the firm to take the most risks?

A) Managers
B) Debtholders
C) Owners
D) All parties desire the firm to take the same level of risk

Question 12

To test whether accounting information is useful,researchers such as Ball and Brown tested whether share prices responded to:

A) Expected earnings announcements
B) Forecast earnings announcements
C) Unexpected earnings announcements
D) All of the given options are correct

Question 13

The main advantage of using accounting earnings instead of stock prices to determine bonuses is that:

A) Stock prices are influenced by market forces that are outside the control of management
B) Accounting information is independently audited
C) Accounting information is unbiased
D) Stock prices may be manipulated by managers engaging in insider trading

Question 14

The 'debt/equity hypothesis' of Positive Accounting Theory predicts that:

A) The higher the firm's debt/equity ratio, the more likely managers are to use accounting methods that lower income
B) The lower the firm's debt/equity ratio, the more likely managers are to use accounting methods that increase income
C) The higher the firm's debt/equity ratio, the more likely managers are to use accounting methods that increase income
D) None of the given options is correct

Question 15

The key theory that underpins Positive Accounting Theory is:

A) The Efficient Markets Hypothesis
B) Agency theory
C) Normative ethical theory
D) None of the given options is correct

Question 16

The principal's expectation of opportunistic behaviour by his or her agent results in lower payments to:

A) The agent
B) The principal
C) The principal and the agent
D) Neither the principal nor the agent

Question 17

Which of the following is not a criticism of Positive Accounting Theory?

A) It is based on the assumption that all action is driven by wealth maximisation
B) It is not value-free
C) It has developed little in the past thirty years
D) Its claims cannot be objectively verified

Question 18

According to Positive Accounting Theory,the existence of debt covenants:

A) Can be explained from an efficiency perspective, and gives management an incentive to manipulate accounting information from an opportunistic perspective
B) Can be explained from an opportunistic perspective, and gives management an incentive to manipulate accounting information from an efficiency perspective
C) Can be explained from both efficiency and opportunistic perspectives
D) Cannot be explained

Question 19

According to agency theory,contracts that align the interests of the principal and agent primarily benefit:

A) The agent
B) The principal
C) Both the principal and the agent
D) Neither the principal nor the agent

Question 20

The 'political cost hypothesis' of Positive Accounting Theory suggests that:

A) Large firms are more likely to use accounting choices that reduce reported profits
B) Small firms are more likely to use accounting choices that reduce reported profits
C) Neither large nor small firms are more likely to use accounting choices that reduce reported profits
D) Both large and small firms are more likely to use accounting choices that reduce reported profits

Question 21

A contribution of Positive Theory is that it enables us to understand:

A) Why interest groups expend resources lobbying for or against particular standards
B) Why a manager adopts particular accounting techniques over others
C) The effect accounting standards have on different groups and resource allocation
D) All of the given options are correct

Question 22

Which of the following is an example of political costs under the PAT perspective?

A) Wage and salary deductions paid to unions
B) Contributions to political parties
C) Costs associated with increased wage claims
D) The cost of remaining largely unnoticed by government regulatory agencies

Question 23

Which of the following is not an example of a Positive Accounting Theory or research?

A) True income theories
B) Legitimacy Theory
C) Costs associated with increased wage claims
D) The cost of remaining largely unnoticed by government regulatory agencies

Question 24

Which of the following statements is not true about Positive Accounting Theory?

A) It is used to distinguish research aimed at explanation and prediction
B) It is designed to explain and predict which firms will, and which firms will not, use a particular method, and also prescribes which method a firm should use
C) It focuses on the relationships between the various individuals involved in providing resources to an organisation, and how accounting is used to assist in the functioning of these relationships
D) One of the key theories that underpins Positive Accounting Theory is Agency theory

Question 25

Which of the following statements is true regarding the origins and development of Positive Accounting Theory?

A) Positive research in accounting started coming to prominence around the mid-1960s, and appeared to become the dominant research paradigm within financial accounting in the 1970s and 1980s
B) The introduction of positive research into accounting represented a paradigm shift from normative research to positive research
C) Currently, almost all papers in Accounting Review and most other leading academic journals are positive research-based
D) All of the given options are correct