Corporate Accounting Theory
Exam Preparation Guide
Course Introduction
Corporate Accounting Theory explores the conceptual frameworks and theoretical principles that underpin accounting practices in contemporary corporations. The course examines the regulatory environment, accounting standards, and the ethical considerations affecting financial reporting. It delves into topics such as the measurement and recognition of assets and liabilities, revenue recognition, and the impact of accounting policies on corporate decision-making and performance evaluation. By analyzing current debates and developments in accounting theory, students gain a deeper understanding of how corporate financial information is produced, presented, and interpreted by various stakeholders.
Recommended Textbook
Accounting Theory 7th Edition by Jayne Godfrey
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14 Chapters
493 Verified Questions
493 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) The statement that is not descriptive of positive theories is,
A)They are descriptive rather than prescriptive
B)They avoid making value-laden judgements
C)They explain why people behave in a certain manner
D)Their primary concern is developing policy recommendations for accounting practice
Answer: D
Q2) The period 1800 - 1955 has been labelled the empirical period in accounting development.
A)True
B)False
Answer: True
Q3) During the normative period of accounting theory development,theorists were concerned with explaining and understanding current accounting practice.
A)True
B)False
Answer: False
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Chapter 2: Accounting Theory Construction
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Q1) Which of these is not a criticism of the descriptive pragmatic approach to theory construction?
A)It does not allow for accounting techniques to be challenged
B)Some of the users of accounting information may be illogical in their responses
C)The focus is on the accountant's behaviour not on measuring the attributes of the firm
D)There is no assessment of whether the accountant reports in the way he or she should
Answer: B
Q2) Concentrating on decision theories and testing them on large samples of people overcomes a major criticism of which of the following approaches to accounting theory construction?
A)The positive approach
B)The psychological pragmatic approach
C)The naturalistic approach
D)The descriptive pragmatic approach
Answer: B
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Page 4
Chapter 3: Role of Theory in Accounting Regulation
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Q1) 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
Q2) In relation to accounting and auditing which of these is not a theory of regulation?
A)Public interest theory
B)Life cycle theory
C)Regulatory capture theory
D)Private interest theory
Answer: B
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Page 5
Chapter 4: Theory Underpinning Accounting Standards
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Q1) Gerboth views conceptual frameworks as policy documents based on the professional values and self-interest of accountants
A)True
B)False
Q2) The group proposed by the IASB and the FASB as the primary user group for general purpose financial reporting is:
A)Lenders
B)Equity investors
C)The public
D)Present and potential capital providers
Q3) The IASB's concept statement encompasses special and general-purpose financial reporting.
A)True
B)False
Q4) In Australia,in the latter years of the 1990's,more progress was made on developing the conceptual framework than in promulgating individual accounting standards.
A)True
B)False
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Page 6
Chapter 5: Measurement
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Sample Questions
Q1) Which of these is not a source of error in measurement?
A)The environment
B)Risk and uncertainty
C)An unclear attribute
D)All are sources of error
Q2) Discuss how the move away from historical cost towards fair value accounting may affect the reliability and relevance of financial reports.
Q3) Under current international accounting standards,accounting profit determination is based on a principle that includes increases and decreases in the 'fair values' of assets and liabilities.
A)True
B)False
Q4) An ordinal scale would be used where the data set consists of the net present value of different projects measured in dollars.
A)True
B)False
Q5) There could be many different asset values that are acceptable to an auditor. A)True
B)False
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Chapter 6: Accounting Measurement Systems
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Sample Questions
Q1) The argument that is descriptive of exit price accounting is:
A)It takes into account the opportunity cost of holding assets
B)The values of non-monetary assets are adjusted to measure changes in the market selling prices of those assets
C)When considering the financial position of the firm and the results of the firm's operations changes in the general purchasing power of money is taken into account
D)All of the above
Q2) Under the physical capital perspective what capital maintenance adjustment would be needed for the following situation? GHI Company purchased 300 units on 1 March for $25 each.On 31 March,GHI sold all the units for $30 each.On this date the current cost of each unit was $29.
A)$1500
B)$1200
C)$9000
D)$300
Q3) Including holding gains as a component of profit reflects a financial capital view.
A)True
B)False
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Chapter 7: Assets
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Q1) The criteria that normally need to be recognised for a non-cancellable lease to be capitalised by a lessee IAS 17/AASB 117)is:
A)The lease term is for the major part of the economic life of the asset
B)At the inception of the lease,the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
C)Both A and B
D)Either A or B
Q2) "Under the IASB standards all wholly executory contracts are recognised as assets." Explain why you agree or disagree with this statement.
Q3) The IASB (AASB)Framework does refer to the conservatism (prudence)principle. A)True
B)False
Q4) 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
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Chapter 8: Liabilities and Owners Equity
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Sample Questions
Q1) With respect to the IASB Framework's definition of a liability,and in particular the requirement for a present obligation,which of the following items would be recognised as liabilities?
i.An employee has accrued 2 months worth of long service leave with the company
ii.An employee has fallen ill and has accrued 12 days of sick leave which she will now use iii.An employee has worked for the company for six years and has accrued 25 days sick leave
A)i,iii
B)i,ii,iii
C)ii,iii
D)i,ii
Q2) 'Since pension funds are separate legal entities,it might be presumed that unfunded commitments of the plans are not liabilities of an employer firm that pays into a fund.' J.Godfrey,et el,'Accounting Theory',7<sup>th</sup> Ed.p.273.Explain and discuss.
Q3) Generally speaking accountants are more likely to record liabilities later than assets.
A)True
B)False
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Page 10
Chapter 9: Revenue
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Sample Questions
Q1) Revenue is directly related to the monetary event of value increasing in the firm.
A)True
B)False
Q2) The statement regarding IAS 11/AASB 111 'Construction Contracts 'that is not true with respect to revenue recognition is:
A)The standard adopts the 'stage of completion' method
B)It is recommended that revenues and associated costs be recognised only when they can be 'clearly estimated'
C)Revenues and expenses are recognised in the financial years in which the construction activities are performed
D)None of the above,i.e.all are true statements
Q3) Explain and comment on the behavioural view of revenue.
Q4) The main consideration to determine whether a sale has occurred is:
A)The economic substance of the transaction
B)Whether title to the goods has passed
C)The provisions of the legal contract
D)Whether the sale is for goods or services
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Chapter 10: Expenses
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Q1) When depreciating assets using the allocation of costs method which of the following methods is best?
A)Straight-line
B)Unit-of-production
C)Reducing-balance
D)It is not possible to say which is the best method from the information given in the question
Q2) Under the FASB's Concept Statement No 6,the statement that is correct is:
A)There is no distinction between expenses and losses
B)Losses are regarded as always arising outside the course of the ordinary activities of the entity
C)The treatment of losses is similar to that of the Framework
D)All of the statements are correct
Q3) 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.
Q4) Treating assets as expenses is a way to overstate profits for a period.
A)True
B)False
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Chapter 11: Positive Theory of Accounting Policy and Disclosure
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Q1) The following arguments are philosophical criticisms of positive accounting theory,except:
A)Cross-sectional models are poorly specified
B)Positive accounting theory is not an accounting theory,but only a sociology of accounting
C)Contrary to its claim,positive accounting theory is in fact value-laden
D)The methodology of positive accounting theory is inappropriate for the purpose it purports to serve
Q2) Initially monitoring costs are incurred by the principal,however,ultimately agents will bear the monitoring costs.
A)True
B)False
Q3) The demand for auditing can be explained by agency theory as part of monitoring and bonding activities and costs.
A)True
B)False
Q4) Outline how the demand for auditing can be explained by agency theory as part of monitoring and bonding activities and costs.
Q5) Explain and discuss why the firm can be described as a 'nexus of contracts.
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Chapter 12: Capital Market Research
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Q1) If the 'sufficient conditions' outlined by Fama are met for an efficient market then it is impossible,on average,to earn economic profits by trading on security information.
A)True
B)False
Q2) 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
Q3) Outline the arguments that have been raised to explain why a firm's size is a factor in the responsiveness of share price and the volume of trade to profit announcements.
Q4) One focus of the second stage of positive accounting theory development is known as ex-ante,that is,trying to explain whether managers choose certain accounting methods for opportunistic reasons.
A)True
B)False
Q5) Explain what accounting researchers mean by the market 'being efficient'.
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Chapter 13: Behavioural Research
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Sample Questions
Q1) It is not true regarding research conducted using the Brunswik lens model that:
A)Replacing people with predictive models does not increase predictive accuracy
B)It is the subject's choice of information,not his or her processing of the cues,that limits accuracy
C)Expert and non-expert subjects are over-confident of their ability in specific judgement tasks
D)All of the above are not true
Q2) 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.
Q3) Which of these accounting research types can be called 'normative' research?
A)Behavioural research
B)Capital market research
C)Agency theory
D)None can be called normative research
Q4) One of the limitations of the Brunswick lens model is that decision makers often have difficulty explaining all the steps they go through.
A)True
B)False
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Page 15
Chapter 14: Emerging Issues in Accounting and Auditing
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Q1) 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
Q2) The water standards currently under development in Australia will essentially require qualitative rather than quantitative reports.
A)True
B)False
Q3) It is agreed among accountants that a big contributor of the 2008 global financial crisis was the practice of requiring firms to mark their assets to fair value.
A)True
B)False
Q4) SFAS 157 explicitly uses exit price as a definition of fair value but IFRS fair value is neither explicitly an exit nor an entry price.
A)True
B)False
Q5) Discuss how social accounting differs from financial accounting.
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Page 16