Course Introduction
Accounting Theory Exam
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Accounting Theory explores the fundamental concepts, principles, and frameworks that underpin the practice of accounting. This course delves into the development and evolution of accounting standards, the role of regulatory bodies, and various theoretical approaches used to resolve contemporary accounting issues. Students examine the ethical, social, and economic factors that influence accounting policy and practice, as well as the conceptual foundations of financial reporting. The course also critically analyzes current debates in accounting theory and their implications for decision-making by businesses and other stakeholders.
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Accounting Theory 7th Edition by Jayne Godfrey
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493 Verified Questions
493 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) The research question that is most unlikely to be tested using positive methodology is:
A)Which firms are more likely to use straight-line depreciation rather than diminishing-balance depreciation?
B)Is the quantitative data derived from given sets of operations,based on an overall accounting theory,useful to users of financial statements?
C)How do changes in tax rules affect a firm's leverage position?
D)Are firms with more intangible assets more likely to repurchase their shares?
Answer: B
Q2) Which of the following is not regarded as a period of accounting theory development?
A)The normative period
B)The pre-scientific period
C)The positive accounting theory period
D)The mixed development period
Answer: B
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Chapter 2: Accounting Theory Construction
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Q1) The main difference between normative and positive theories is that normative theories are descriptive whereas positive theories are prescriptive.
A)True
B)False
Answer: False
Q2) The following research methods are used by naturalistic researchers,except:
A)Case studies
B)Experience of events
C)Syntactic model formulation
D)Exploration by flexibility
Answer: C
Q3) Mautz and Sharaf,in 1961,attempted to generalise the existing auditing literature and provide a comprehensive theory of auditing.
A)True
B)False
Answer: True
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Chapter 3: Role of Theory in Accounting Regulation
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Q1) Which theory of regulation assumes that politicians are not neutral arbiters?
A)Private-interest theory
B)Public-interest theory
C)Regulatory capture theory
D)All assume that politicians are not neutral arbiters.
Answer: A
Q2) Which of these is not an assumption underlying the public-interest theory of regulation?
A)There are agents who will seek regulation on behalf of the public interest
B)The government has an independent role to play in the development of regulations
C)The interest of consumers is translated into legislative action through the operation of the internal marketplace
D)Economic markets are subject to a series of market imperfections or transaction failures
Answer: B
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Chapter 4: Theory Underpinning Accounting Standards
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Q1) Which of these is not a reason why inconsistencies have arisen between the Framework and IAS 139 Financial Instruments: Recognition and Measurement?
A)The complexity of the standard
B)Areas where the Framework provides inadequate guidance
C)The lack of any possible solutions to issues dealt with by the standard that would be consistent with the Framework
D)All of the above
Q2) To be relevant accounting information should have which of these characteristics?
A)The transaction or other event relating to the accounting information should have occurred
B)It must assist in making predictions about future situations or must help confirm past predictions of users
C)The financial information should faithfully represent transactions and events without bias or undue error
D)To be relevant accounting information should have all of the above characteristics
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6
Chapter 5: Measurement
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Sample Questions
Q1) The operations that can be performed with reference to particular numbers on the interval scale is/are:
A)Multiplication and division
B)Subtraction
C)Addition
D)B and C only
Q2) Changing from the nominal dollar scale to the purchasing power of the dollar scale for historical cost accounting is an example of invariant transformation.
A)True
B)False
Q3) ' when profit is derived from changes in fair values more difficult questions arise for the auditor ' J.Godfrey,et el,'Accounting Theory',7<sup>th</sup> Ed.p.150.
Discuss the implications for auditors of the shift in the focus of profit measurement from matching revenues and expenses to assessing changes in the fair value of the net assets.
Q4) Stevens's general description of scales is nominal,interval or ratio.
A)True
B)False
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Chapter 6: Accounting Measurement Systems
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Q1) The difference between the physical capital concept and the financial capital concept is that holding gains are included in profit under the physical capital concept.
A)True
B)False
Q2) Under the historical cost accounting model the financial statement that is regarded as the most important is:
A)Balance sheet
B)Cash flow statement
C)Income statement
D)They are all equally important
Q3) Which of these is a criticism of the physical capital concept?
A)It is not meaningful if the firm does not continue to replace identical units
B)When costs are decreasing a profit may still be recorded when a company sells a product for less than purchase price
C)When a company buys and sells in the same market it will record zero profit
D)All of the above
Q4) Exit price accounting considers value in use as one of its key factors.
A)True
B)False
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Chapter 7: Assets
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Q1) Cairns argues that under the IASB standards fair value is used to measure assets on initial recognition but subsequent measurement at fair value is more rare.
A)True
B)False
Q2) The extent and timing of recognition of assets are important because:
A)They can affect the decision making for users of financial statements
B)They can affect the calculation of ratios which are important inputs for debt covenants
C)They can affect management compensation
D)All of the above
Q3) IAS 16 and IAS 40 permit,but do not require,the use of a current value measurement model.
A)True B)False
Q4) Explain and discuss the arguments for and against the use of historical cost for the measurement of tangible assets.
Q5) Explain and discuss how an asset can provide future economic benefits.Refer to both profit seeking and not-for-profit organisations.
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Chapter 8: Liabilities and Owners Equity
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Sample Questions
Q1) The version of the accounting equation that represents the entity theory of accounting is:
A)P = A - L
B)Assets = Equities
C)A = L + P
D)None of the above
Q2) The statement that is true in respect of appropriations is:
A)Some appropriations are a ploy by a company to make it appear to shareholders that the amount available for dividends has been reduced.
B)Appropriations affect profit determination
C)Appropriations of retained earnings to specific reserve accounts represent particular assets
D)None of the statements are true.
Q3) Do frequent flyer points give rise to a liability for an airline? Discuss.
Q4) The IASB has decided not to treat share-based remuneration as an expense. A)True
B)False
Q5) Are preference shares debt or equity and does it matter? Discuss.
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Chapter 9: Revenue
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Q1) Understatement of revenue is regarded as a greater problem by auditors than overstatement of revenue.
A)True
B)False
Q2) Which of these is not an accepted exception to the recorded revenue at the time of sale?
A)Revenue recognised upon receipt of an order
B)Revenue recognised at the end of production
C)Revenue recognised when cash is received after the sale is made
D)Revenue recognised during production
Q3) If revenue for 2010 is understated then:
A)Profit for 2010 is understated and net assets are overstated
B)Profit for 2010 is overstated and net assets are overstated
C)Profit for 2010 is understated and net assets are understated
D)None of the above
Q4) Explain the justification for using the percentage-of-completion method to recognise revenue for long-term construction contracts rather than the point of sale.
Q5) Explain and comment on the behavioural view of revenue.
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Chapter 10: Expenses
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Q1) For an outflow to be recognised as an expense it must be probable that the outflow of future economic benefits has occurred or the expense must be able to be measured with reliability.
A)True
B)False
Q2) An example where accountants normally decide that a cause and effect relationship exist between revenue and expenses is:
A)Sales revenue and sales commissions
B)Sales revenue and cost of sales
C)Sales and sales manager's salary
D)All of the above
Q3) IAS1/AASB 101 distinguishes between expenses and losses by categorising items as abnormal or extraordinary in the income statement.
A)True
B)False
Q4) Explain the essence of each of the three basic methods of matching commonly relied on;associated cause and effect,systematic and rational allocation and immediate recognition.
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Page 12
Chapter 11: Positive Theory of Accounting Policy and Disclosure
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Sample Questions
Q1) Explain and discuss why the firm can be described as a 'nexus of contracts.
Q2) Which of these management actions might be considered under the efficient contracting perspective?
A)A manger chooses to use FIFO instead of the weighted average cost of inventory because she believes that FIFO better reflects the value of the inventory on hand
B)A manager depreciates an asset using the reducing balance method rather than the straight-line method because he believes that the method better reflects the economic consumption of the asset.
C)A manager uses the straight-line method of depreciation rather than reducing balance to prevent a temporary breach of a debt covenant,even though the chosen method does not best reflect the asset's underlying economic consumption.
D)All of the above might be considered
Q3) The bonus plan hypothesis and the debt hypothesis are predictions developed under the efficient contracting approach.
A)True
B)False
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Chapter 12: Capital Market Research
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Q1) The 'mechanistic' hypothesis states that the market will ignore accounting changes which have no cash flow consequences.
A)True
B)False
Q2) Explain what accounting researchers mean by the market 'being efficient'.
Q3) You have been given the following one period market model for Acme Ltd for the calendar quarter ending June 2010:
<sub>Acme </sub>= 3.0% R<sub>Acme </sub>= 10 %
<sub>Acme </sub>= 0.6 R<sub>m </sub>= 7%
What is the error during this period of time?
A)3%
B)2.8%
C)0%
D)1.8%
Q4) Blackwell,Noland and Winters found for small private companies that are not required to be audited,it was those that purchased audits who were charged lower interest rates.
A)True
B)False
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Chapter 13: Behavioural Research
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Q1) Briefly explain the Brunswik lens model and what factors make it a better predictor of the event of interest than the person from whom the model was derived.
Q2) Consider the following linear equation model regarding an accountant's judgements regarding the likelihood of business failure: Likelihood of Insolvency/Solvency= constant + 0.1 Net profit + 0.3 Cash flow + 0.15 Acid test ratio + 0.25 Debt to Equity ratio + other information cues + error According to the model which of the following statements is correct?
A)The accountant considers the debt to equity ratio to be a relatively more important information cue regarding insolvency than the cash flow
B)The Acid test ratio has a higher beta weight than net profit
C)The accountant will only consider net profit,cash flow,acid test ratios and debt to equity ratios when making judgements on business solvency
D)The acid test ratio is the least important information cue for the accountant in making his solvency judgement
Q3) Explain and discuss some of the findings concerning behavioural research in the field of auditing.
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Page 15
Chapter 14: Emerging Issues in Accounting and Auditing
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Q1) The Sarbanes-Oxley Act in the United States decided not to restrict auditors' provision of non-audit consulting services to their clients as the evidence that the practice comprised auditor's independence was mixed.
A)True
B)False
Q2) In 2008 the IASB voted to require the 500 largest companies of each member to file their 2009 financial reports using Extensible Business Reporting Language (XBRL).
A)True
B)False
Q3) Despite the existence of 'the Roadmap',it is not certain that the United States will adopt IFRS.
A)True
B)False
Q4) 'Despite the existence of the Roadmap,it is not certain that the United States will adopt IFRS'.J.Godfrey,et el,'Accounting Theory',7<sup>th</sup> Ed.p.492.Discuss some advantages that adopting IFRS would have for the US and some of the problems that have yet to be resolved concerning the US adopting International Financial Reporting Standards.
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Page 16