ACT505 Quiz 6
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Charles Darwin University *
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Course
505
Subject
Accounting
Date
May 6, 2024
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Pages
3
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Question 1
The 'political cost hypothesis' of Positive Accounting Theory suggests which of the following?
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 2
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
Feedback
No. The correct answer is D. Adopt the accounting methods that best reflect the underlying economic performance of the entity
Question 3
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
Question 4
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 5
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 6
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 7
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 8
The 'debt/equity hypothesis' of Positive Accounting Theory predicts which of the following?
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 are correct.
Question 9
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.
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Related Questions
Investors who conduct industry analyses typically favor companies with strong market positions over companies with less secure market positions because firms with strong market positions tend to
1. be price leaders.
II. benefit more from economies of scale.
III. have better R&D programs.
IV. have lower production costs.
OA. II and IV only
OB. I, II and IV only
OC. I, II and III only
OD. I, II, III and IV
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Which of the followings is NOT an advantage of financial institutions in consumption
smoothing?
A. They help to solve moral hazard and adverse selection issues.
B. They help to share risks.
C. They help to reduce transaction costs.
D. They help to create more jobs.
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Compare and contrast the net income margins of both Company A and B. Do you think the company with the lower net income margin is in absolute financial distress? Explain.
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Explain the efficiency perspective and the opportunistic perspective of Positive Accounting Theory. Why is one considered to be ex post and the other ex-ante?
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Questions:
Does a low return on sales indicate a weak company? (Y/N). Explain your answer.
Do greater Net sales always result in greater net income? (Y/N) Why?
Examine the financial information above and comment on the item that you find interesting.
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Which of the following best describes the potential impact of business risk on Earnings Quality?
Select one:
a. Business risk is mostly composed of financial risk factors and it has minimal effect on earnings quality.
b. Higher earnings quality is linked with companies more insulated from business risk. While business risk is not primarily a result of management’s discretionary actions, this risk can be lowered by skillful management strategies.'
c. A higher level of earnings quality can be observed in the industries with high business risk, because higher risk means higher returns
d. For managing business risk, the managers almost have no discretion, therefore business risk is not directly or indirectly related to earnings quality.
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Is this situation consistent with a monopolistically competitive firm maximizing
profit? If yes, is it consistent with LR?
P
arrow_forward
Why does income smoothing generally lead to a higher share value?
a. It reduces the perceived risk of the companyb. It leads to higher perceived incomec. It is perceived as increasing the chance of insolvencyd. None of the above.
Research into income smoothing has concluded that
a. Smoothed income indicates high earnings qualityb. Smoothed income indicates low earnings qualityc. The findings are mixed with regards to earnings qualityd. There is no relationship between income smoothing and earnings quality
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Explain with an example why managers find it difficult to adopt a decision alternative even when the relevance cost analysis shows the superiority of this decision alternative to maximize operating income over other decision alternatives. What might the company do to reduce the pressure on management and decrease the ethical conflict?
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Market-based bonus schemes may be considered more appropriate from a PAT perspective in industries in which:
successful strategies will not be reflected in accounting profits for a number of periods.
the price/earnings ratio is commonly greater than 12.
profits may be the subject of manipulation by managers.
capital investment is not an important strategic decision.
arrow_forward
In actual practice, managers frequently use the:
I. average accounting return method because the information is so readily available
II. internal rate of return because the results are easy to communicate and understand
III. discounted payback because of its simplicity
IV. net present value because it is considered by many to be the best method of analysis
arrow_forward
Which of the following situations is most likely to pose a problem for companies that use return on investment as a measure of a manager’s performance?
a. Managers may be encouraged to purchase more operating assets than they otherwise should.
b. Managers may be discouraged from purchasing operating assets that could improve overall profitability.
c. Managers may be discouraged from reducing their division’s costs.
d. Managers may be discouraged from paying off debt in order to reduce costs
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Which of the following statement is correct about cost-benefit analysis?
O A. Costs and benefits must be put into common units (such as dollars) if they are to be compared.
O B. In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that
action is not good for the firm's investors.
C. In order for costs and benefits to be compared, they must typically be converted to common units but not converted to the
same point in time.
O D. A financial manager's decisions should provide benefits to the firm without incurring any costs.
Click to select your answer.
arrow_forward
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