Financial Accounting Theory
Study Guide Questions
Course Introduction
Financial Accounting Theory explores the conceptual frameworks and theoretical principles underlying current accounting practices and standards. This course examines the rationale behind accounting policies, the economic and social influences on accounting decisions, and the role of regulation in financial reporting. Topics include the evolution of accounting thought, the analysis of accounting information in capital markets, the impact of accounting choices on stakeholders, and current debates in standard-setting processes. Through case studies and academic research, students develop a critical understanding of the strengths, limitations, and implications of various financial accounting theories in both domestic and global contexts.
Recommended Textbook Accounting Theory 7th Edition by Jayne
Godfrey
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) An example of a positive accounting theory is the bonus plan hypothesis.This predicts that managers who are not remunerated via bonus plans use profit-increasing accounting methods more than managers who are remunerated via bonus plan.
A)True
B)False Answer: False
Q2) The main purpose of accounting theory is to prescribe accounting rules for practitioners.
A)True
B)False Answer: False
Q3) An example of an inconsistency in accounting practice is for a company to depreciate some of its assets using the straight-line method and some using the reducing-balance method.
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 an assumption used in normative theory construction?
A)Financial accounting is useful for making economic decisions
B)There are multiple available profit measures
C)Markets are inefficient and can be fooled by 'creative accountants'
D)All of the above are not assumptions used in normative theory construction
Answer: B
Q2) Which of these is not a typical approach to testing hypotheses under positive accounting theory?
A)Questionnaires
B)Surveys
C)Taking output data of specific accounting systems to determine whether the data helps users to make the right decisions
D)Testing the assumed importance of accounting outputs in the marketplace
Answer: C
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Chapter 3: Role of Theory in Accounting Regulation
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Q1) Which of these factors should not affect the extent to which particular countries are able to influence the international standard-setting process?
A)The number of accounting standards issued
B)National economic significance
C)Professional expertise
D)English language competence
Answer: A
Q2) Agency theory assumes that the interests of principals and agents are generally aligned.
A)True
B)False
Answer: False
Q3) International standards on Auditing (ISA)are developed by:
A)Public Company Accounting and Oversight Board (PCAOB)
B)International Auditing and Assurance Standards Board (IAASB).
C)International Accounting Standards Board (IASB)
D)The International Organisation of Securities Commissions (IOSCO)
Answer: B
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Chapter 4: Theory Underpinning Accounting Standards
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Q1) The IASB Framework includes four principal qualitative characteristics,understandability,relevance,reliability and comparability (paragraphs 24-42).Explain the meaning of each of these characteristics and discuss the changes in the list of characteristics that is proposed by the Framework exposure draft.
Q2) The IASB Framework includes four principal qualitative characteristics,understandability,relevance,reliability and comparability.
A)True
B)False
Q3) The point that is not a reason why auditors began to have a greater focus on auditing business risk in the 1990's is:
A)The release of the 1992 report Internal Control - Integrated Framework,by the Committee of Sponsoring organisations (COSO)
B)It was a justification to increase audit fees for clients
C)Gaps in clients' internal controls provided an opportunity for auditors to sell non-audit services.
D)None of these,i.e.all are reasons as to why auditors began to have a greater focus on auditing business risk in the 1990's
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6
Chapter 5: Measurement
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Sample Questions
Q1) What is the main problem in determining accuracy in accounting?
A)The measurement is not reliable
B)The measurement does not give precise results
C)The true value of the measurement is not known
D)There is no repetition of operations in the measurement
Q2) A nominal scale ranks the objects in question with respect to a given property.
A)True
B)False
Q3) 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
Q4) The set of data that would be measured on a nominal scale is:
A)The height of a group of school children
B)Assets classified into current/non-current and tangible/intangible
C)Investment opportunities classified into 'poor','average' or 'good' with respect to anticipated returns.
D)The share prices of a group of companies
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Chapter 6: Accounting Measurement Systems
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Q1) According to Whitman and Shubik,which of these is not the reason why investors are more interested in share market analysis compared to corporate analysis?
A)Investors develop a short-term view because the economics of share market investing is directed towards that end
B)Investors deal with highly marketable securities and therefore move in and out of situations readily
C)Investors have little knowledge about a company,its management,its policies and objectives
D)Investors are concerned about what is really going on in a company's business
Q2) One of the criticisms of current cost accounting is that it does not recognise increases in the value of assets before the assets are sold.
A)True
B)False
Q3) One of the reasons that MacNeal advocates the use of exit prices is the information gap created by the separation of ownership and control in companies.
A)True
B)False
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8
Chapter 7: Assets
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Q1) Which of these is not an argument in favour of restricting the recognition of internally generated goodwill?
A)Good will is not separable from other assets
B)There are difficulties in identifying whether and when goodwill will generate future economic benefits
C)Goodwill cannot be sold
D)All of the above
Q2) IAS 16 and IAS 40 permit,but do not require,the use of a current value measurement model.
A)True
B)False
Q3) Barth and Kasznik reported that,between 1983 and 1995,in the United Kingdom,20% of firms recorded an asset revaluation reserve.
A)True
B)False
Q4) Explain and discuss the arguments for and against the use of historical cost for the measurement of tangible assets.
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Chapter 8: Liabilities and Owners Equity
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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) Under the entity theory the assets belong to the owners and the liabilities are the obligations of the owners.
A)True
B)False
Q3) Liabilities are present obligations of an entity,whereas owners' equity is a residual interest or claim but not an obligation to transfer assets.
A)True
B)False
Q4) Generally speaking accountants are more likely to record liabilities later than assets. 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) The criteria that is not included in the Framework's definition of income is:
A)An increase in economic benefits
B)The economic benefits are in the form of increases in assets or reductions in liabilities of the entity (not resulting from equity contributions)
C)The economic benefit results from transactions or events that constitute the entities ongoing major or central operations
D)The benefits result in an increase in equity during the period
Q2) The statement regarding recognition versus realisation of revenue that is true is:
A)For an asset to be "realised' there must be an inflow of assets or a measurable change in the value of an asset
B)'Recognition of revenue' means an inflow of liquid assets
C)'Realisable' means the asset received is readily convertible to known amounts of cash
D)All of the above are true
Q3) Revenue can never be recognised before the point of sale.
A)True
B)False
Q4) Explain and comment on the behavioural view of revenue.
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Chapter 10: Expenses
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Q1) Which of these is not one of the three basic methods of matching costs and revenue that are commonly relied on?
A)The reducing-balance method
B)The straight-line method
C)A and B
D)None of the above is one the three basic methods of matching costs and revenue that are commonly relied on.
Q2) The statements concerning the matching concept that is correct is:
i.The matching concept forms the basis of historical cost accounting
ii.The matching concept forms the basis of accrual accounting
iii.In practice proper matching is a relatively easy task
iv.In practice proper matching is a relatively difficult task
A)i.iii
B)ii.iii
C)i.iv
D)ii.iv
Q3) The cause and effect method of matching is based upon the costs attach concept.
A)True
B)False
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Page 12
Chapter 11: Positive Theory of Accounting Policy and Disclosure
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Q1) It may be appropriate to remunerate a manger using reported profits under which of these circumstances?
A)When the firm's market value is non-observable because of thin-trading
B)When the level of management being remunerated is lower than the CEO
C)A and B
D)None of the above
Q2) Traditional conservatism in accounting means:
A)Accelerating revenue recognition
B)Delaying expenses
C)A higher degree of verification required for expenses compared to revenues
D)Anticipating losses but not gains
Q3) The size hypothesis predicts that the larger the firm,the more likely that managers will choose accounting methods that will move reported profits from future periods to current periods.
A)True
B)False
Q4) Explain and discuss why the firm can be described as a 'nexus of contracts.
Q5) Distinguish between the ex ante efficient contracting approach and ex post opportunism.
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Chapter 12: Capital Market Research
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Q1) 'The empirical research provides evidence of benefits to companies through lower cost of equity and debt capital when they voluntarily purchase an audit or purchase a high quality audit.' J.Godfrey,et el,'Accounting Theory',7<sup>th</sup> Ed.p.442.
Outline the details of a study undertaken on the above question and explain reasons that have put forward for the finding.What do researchers see as a 'high quality audit'?
Q2) The hypothesis that assumes that the capital market only reacts to accounting changes that have cash-flow consequences is the:
A)Differential information hypothesis
B)No-effects hypothesis
C)Mechanistic hypothesis
D)Efficient market hypothesis
Q3) Ball and Brown's study 'An empirical evaluation of accounting income numbers',found that competing information pre-empted the information in annual reports by about:
A)35%
B)65%
C)85%
D)90%
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14
Chapter 13: Behavioural Research
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Q1) The statement that is correct is:
A)Human judgement theory is particularly relevant to auditing
B)Contracting theory in accounting has been eclipsed in recent years by behavioural research
C)The Brunswik lens model was first developed by accounting researchers and then was later used by other disciplines
D)All of the statements are correct
Q2) Which of these is true of the research evidence obtained in the literature regarding the presentation of financial information?
A)Decision makers are readily able to use information presented in a graphical format
B)On the whole,research evidence does not suggest that accounting report formats influence decision-making
C)The question the decision maker is answering and the form of presentation interactively affect performance
D)The theory regarding which forms of information presentation are most appropriate is well developed
Q3) Discuss the limitations of behavioural accounting research.
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15
Chapter 14: Emerging Issues in Accounting and Auditing
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Q1) Despite the existence of 'the Roadmap',it is not certain that the United States will adopt IFRS.
A)True
B)False
Q2) It is not true that:
A)The IASB does not report to any higher body
B)The FASB reports to the US Congress
C)The Australian Accounting Standards Board ultimately reports to the Australian government
D)No statement is untrue.i.e.all are true statements
Q3) In a recent survey KPMG reported which group of countries as having the highest level of formal assurance for their sustainability reports?
A)The North American countries
B)The European countries
C)The Australasian countries
D)The African countries
Q4) Explain how the Extensible Business Reporting Language ( XBRL)system works and discuss the effects that its use is likely to have on financial reporting.
Q5) Discuss how social accounting differs from financial accounting.
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