Financial Accounting Theory
Exam Preparation Guide
Course Introduction
Financial Accounting Theory explores the underlying principles and concepts that shape accounting practices and the reporting of financial information. The course examines the theoretical frameworks that inform accounting standards, the rationale behind accounting policies, and the impact of regulatory, ethical, and economic factors on financial disclosure. Students analyze key topics such as positive accounting theory, normative theories, capital market research, and the role of standard-setting bodies. Through case studies and critical discussions, the course invites students to evaluate contemporary issues in accounting, fostering an understanding of how theory informs practice in global business environments.
Recommended Textbook
Financial Accounting Theory 3rd Edition by
Craig Deegan
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12 Chapters
300 Verified Questions
300 Flashcards
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Page 2
Chapter 1: Introduction to Financial Accounting Theory
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Sample Questions
Q1) Normative accounting theories and research seek to:
A) Explain and predict particular phenomena based on observation
B) Prescribe particular approaches not driven by existing practices
C) Describe what is normal, or generally accepted, practice
D) All of the given options are correct
Answer: B
Q2) Which of the following statements is true about proving a theory?
A) An accepted positive accounting theory purports to provide sound predictions the majority of the time
B) An accepted positive accounting theory that purports to explain and predict, must hold true in all cases
C) Positive accounting theories do not need to be tested or proven
D) Accepted positive accounting theories have no 'exceptions to the rule'
Answer: A
Q3) What is a deductive theory or argument judged by?
A) Logic and assumptions
B) Observable real-world phenomena
C) Empirical evidence of relevant data to test the theory
D) All of the given options are correct
Answer: A
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Chapter 2: The Financial Reporting Environment
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Sample Questions
Q1) Which of the following is not a rationale for regulating financial accounting information?
A) To protect users from fraudulent or misleading information
B) Market for information without regulation is inefficient, and may result in production of sub-optimal amount of information
C) To assist management with better information, and reports for use by management and parties within the organisation
D) To ensure equal access to information by all interested parties, including those that have limited power to demand it
Answer: C
Q2) Which of the following is an example of a normative accounting theory,or research?
A) Conceptual frameworks of accounting
B) Critical perspectives of accounting practice
C) True income theories
D) All of the given options are normative accounting theories
Answer: D
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Chapter 3: The Regulation of Financial Accounting
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Q1) Which of the following would be required if we accepted the private contracting argument that managers' interests can be aligned with the maximisation of the wealth of the firm,through contracting arrangements that reward or constrain their behaviour?
A) Credible financial accounting numbers to measure performance
B) Independent audit to monitor and check the accounting numbers are properly measured
C) Regulation that restricts the choice of accounting methods
D) All of the given options are correct
Answer: A
Q2) In the absence of regulation,the 'market for lemons perspective' (Arkerlof,1970)assumes that:
A) There is no incentive for firms to disclose bad news
B) Firms have incentives to disclose both good and bad news
C) No news is good news
D) All of the given options are correct
Answer: B
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Chapter 4: International Accounting
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Sample Questions
Q1) From 2005,Australia has adopted the IASB standards for:
A) All the reporting entities
B) Multinational enterprises only
C) All the entities listed on the stock markets
D) All entities that prepare consolidated financial statements
Q2) Which researcher argued that the value systems of accountants are derived from,and related to,societal values,and that these social values are also held by accountants at a sub-culture level,and therefore will impact on the development of national accounting systems over time?
A) Hofstede (1980)
B) Gray (1988)
C) Mueller (1968)
D) Perera (1989)
Q3) According to Gray (1988),the higher a country ranks in terms of uncertainty avoidance and power distance,and the lower it ranks in individualism,then the more likely it is to rank highly in terms of:
A) Conservatism
B) Professionalism
C) Uniformity
D) Flexibility
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Chapter 5: Normative Theories of Accountingthe Case of
Accounting for Changing Prices
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Q1) Which of the following statements is correct under our current accounting standards?
A) Many assets can, or must, be measured at historical cost
B) Inventory must be measured at cost, or net realisable value if it is lower
C) Property, plant and equipment can be valued at cost where an entity has adopted the 'cost model' for a class of property, plant and equipment
D) All of the given options are correct
Q2) Which of the following is not a reason why alternative methods have not gained acceptance or been formally implemented?
A) The arguments for the alternative methods were not logical
B) There appeared to be more interest when inflation was a problem than when it was not
C) Some alternative models were likely to incur significant costs, negative economic consequences and impacts
D) Lack of support by the public or the government, and eventually by the accounting profession
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Chapter 6: Normative Theories of Accountingthe Case of Conceptual Framework Projects
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Q1) What does the political legitimacy argument,as outlined by Hines (1991),suggest?
A) The accounting profession consists of experts in technical knowledge of accounting, and therefore should be given authority to regulate accounting
B) The accounting profession used the development of the conceptual framework as a strategy to promote their self-regulation interests
C) The Conceptual Framework provides the authority to resolve technical issues with authority and legitimacy
D) As users are politically involved in developing the Conceptual Framework, the outcome has political legitimacy
Q2) What is the purpose of developing a conceptual framework?
A) To provide a coherent structure to accounting practice, which had developed in an ad hoc way
B) To guide standard-setters to develop standards based on the same concepts and principles, rather than in a piece-meal approach
C) To guide users where there is no accounting standard covering an issue
D) All of the given options are correct
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8
Chapter 7: Positive Accounting Theory
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Q1) 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
Q2) 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
Q3) 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
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Chapter 8: Unregulated Corporate Reporting Decisions:
Considerations of Systems-Oriented Theories
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Q1) The idea of the 'social contract' is that corporations only exist because they benefit: A) Shareholders
B) Governments
C) Managers
D) Society
Q2) According to Lindblom (1994),which of the following strategy can an organisation adopt when it perceives that its legitimacy is in question because its actions or operationsare at variance with society's expectations and values?
A) Seek to educate and inform its 'relevant public' about actual changes in the organisation's performance and activities
B) Seek to change the perceptions that 'relevant public' have of the organisation's performance and activities
C) Seek to manipulate perception by deflecting attention from the issue of concern onto other issues to demonstrate how the organisation has fulfilled social expectations
D) All of the given options are correct
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Chapter 9: Extended Systems of Accountingthe
Incorporation of Social and Environmental Factors Within External Reporting
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Q1) Including all affected stakeholders in a dialogue with the corporation may be difficult because:
A) There may be multiple stakeholder groups in diverse geographic regions
B) Stakeholders may be reluctant to express their honest views to the company for fear of reprisal
C) The stakeholders may not be aware of the corporation's activities
D) All of the given options are correct
Q2) The Brundtland Report defined 'sustainable development' in terms of:
A) Intergenerational equity
B) Intragenerational equity
C) Both inter- and intra-generational equity
D) None of the given options is correct
Q3) A 'social audit' may assist an organisation to:
A) Identify areas where stakeholders believe it is deficient
B) Avoid losing its 'licence to operate'
C) Enhance its reputation
D) All of the given options are correct
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Chapter 10: Reactions of Capital Markets to Financial Reporting
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Q1) Capital markets research assumes that markets are:
A) Semi-strong-form efficient
B) Strong-form efficient
C) Weak-form efficient
D) Inefficient
Q2) Given efficient markets,the disclosure of favourable new information about a firm would be evidenced by:
A) A share price decrease
B) No change in the share price
C) A share price increase
D) None of the given options is correct
Q3) According to the findings of capital markets research,the existence of post-announcement abnormal returns for a given firm suggests that for firms in the same industry:
A) Subsequent post-announcement abnormal returns will increase
B) Subsequent post-announcement abnormal returns will decrease
C) There will be no effect on subsequent post-announcement abnormal returns
D) It is impossible to predict the effect on subsequent post-announcement abnormal returns
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Chapter 11: Reactions of Individuals to Financial Reporting:
An Examination of Behavioural Research
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Q1) Which of the following is not a branch of behavioural research?
A) Auditing processes
B) Accounting information processing
C) Accounting standard setting processes
D) All of the above are branches of behavioural research
Q2) An auditor does not revise his or her initial assessment of the quality of a firm's internal controls when contradictory evidence is subsequently obtained.This is an example of the:
A) Anchoring and adjustment heuristic
B) Availability heuristic
C) Representativeness heuristic
D) Assessment heuristic
Q3) 'Heuristics' are:
A) Rules
B) Cues
C) Behaviours
D) Decisions
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Page 13
Chapter 12: Critical Perspectives of Accounting
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Q1) Critical researchers believe that capital markets studies are flawed because they:
A) Only consider the usefulness of accounting information to investors
B) Focus on quantitative, rather than qualitative data
C) Ignore social and environmental disclosures
D) All of the given options are correct
Q2) Which of the following statements is not true regarding the 'deep ecologists' and 'radical feminists' perspective?
A) The 'deep ecologists' question the trade-off between economic performance and ecological damage
B) The 'radical feminists' believe that accounting maintains and reinforces masculine traits, such as the need for success and competition
C) Researchers working with the feminist literature argue for the need for accounting to be more 'masculine' and less 'feminine' in orientation
D) To a deep ecologist it is inconceivable that a trade-off could have any form of moral justification
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