BE Accounting Theory

Transcription

1 KANDIDAT 9518 PRØVE BE Accounting Theory Emnekode BE-313 Vurderingsform Multiple choice Starttid :00 Sluttid :00 Sensurfrist :00 PDF opprettet :31 Opprettet av Digital Eksamen 1/22

2 1 BE-313 høsten 2016 Course code: BE-313 Course name: Accounting Theory Date: December 19th Duration: 3 hours Resources allowed: Items to use: English to Norwegian and/or Norwegian to English dictionary Sometimes professors ask for exam answers that can be used for teaching purposes, but in order for this to take place, the university needs your consent. Do you grant the University of Agder permission to use your exam answer for teaching purposes? Yes No Riktig. 0 av 0 poeng. 2 Ch1 The main purpose of accounting theory is to prescribe accounting rules for accountants. 3 Ch1 Select the pair of periods of accounting theoretical development based on a similar approach: The general scientific and the positive periods The normative and positive periods The general scientific and the normative periods None of the above 4 Ch1 The normative period of accounting theory ended because empirical testing proved the theories developed during 2/22

3 this period to be false. 5 Ch1 Which of these is the least important for an accounting theory to be considered acceptable? How acceptable the implications of the accounting theory How prescriptive the accounting theory is How well the theory explains and predicts reality How well the accounting theory has been constructed 6 Ch1 From the positive theory perspective, 'debt hypothesis' predicts that larger the firm's debt to equity ratio, the more likely it is that the firm's manager will select accounting procedures that shift reported profits from future periods to current periods. This is to reduce the likelihood of the firm technically breaching its debt covenants. 7 Ch3 Regulatory capture is said to occur in which of the following situations? When the regulated co-opt the regulators into perspective that gives them the regulation they seek When the regulated entities can ensure non-performance by the regulating body When the regulated entities control the regulation and the regulatory body All of the above 8 Ch3 3/22

4 8 Ch3 BE Accounting Theory Candidate 9518 Agency theory assumes that the interests of principals and agents are generally aligned. 9 Ch3 Proponents of the free-market approach to the provision of accounting information advocate that: Market mechanisms cannot achieve a socially ideal equilibrium price for accounting information Market forces can be depended upon to generate desired information Regulation of accounting information is necessary All of the above 10 Ch3 Private interest theory suggests that government intervention in the standard setting process is to rectify failures in the market for accounting information. 11 Ch3 In relation to accounting and auditing which of these is not a theory of regulation? Life cycle theory Public interest theory Private interest theory Regulatory capture theory 12 Ch3 4/22

5 A limitation of theories of regulation, such as public interest theory and capture theory, is that they are not mutually exclusive. 13 Conceptual Framework Which of these is not one of the benefits of a Conceptual Framework? Standard setting boards will be more accountable for their actions. The need for specific accounting standards should be reduced. It encourages earnings management. Reporting requirements will be more consistent and logical. 14 Conceptual Framework According to the Conceptual Framework Exposure Draft, the financial effects of transactions and other events are classified into the following elements: assets, liabilities, equity, income and expenses, gains and losses. 15 Conceptual Framework According to Conceptual Framework, primary users to whom general purpose financial reports directed are Existing and potential investors Lenders Other creditors All of the above 16 Conceptual Framework 5/22

6 16 Conceptual Framework BE Accounting Theory Candidate 9518 A disadvantage of rules-based standards for users of the standards is: They may reduce the opportunities for earnings management They increase comparability of accounting information They allow for specific structuring of transactions to work around the rules All of the above are disadvantages 17 Conceptual Framework Information about entity's economic resources and claims does not help users to assess whether: reporting entity needs additional financing reporting entity has sufficient liquidity reporting entity can be successful in obtaining financing reporting entity is paying too much on its loan 18 Conceptual Framework A depiction of financial information that is free from error means it is perfectly accurate in all respects. 19 Conceptual Framework The constraint/s on financial reporting identified under the IASB Framework are: Timeliness versus neutrality Understandability versus benefit Understandability versus materiality Cost versus benefit 6/22

7 20 Conceptual Framework If financial information is to be useful, it must be and what it purports to represent. consistent, faithfully describe useful, faithfully describe comparable, faithfully represent relevant, faithfully represent 21 Conceptual Framework According to the Exposure Draft of the Conceptual Framework, one of the objectives of general purpose financial reporting is to assist preparers to develop accounting policies when Standards are available but are not consistent with the Framework. 22 Conceptual Framework The statement in relation to conservatism that is true is: Conservatism is inconsistent with the principle of neutrality Conservatism means recording assets early Conservatism means not depleting future resources All of the statements are true 23 Conceptual Framework Which of the qualitative characteristics listed is not considered to be one of the enhancing characteristics for the usefulness of financial information. Consistency Understandability Comparability Timeliness 7/22

8 24 Conceptual Framework Which of these describes qualitative characteristic comparability? Information faithfully represents the economic phenomena it purports to represent. Use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Classifying, characterizing and presenting information clearly and concisely. It enables users to identify and understand similarities in, and differences among, items. 25 Conceptual Framework Based on the Exposure Draft of the Conceptual Framework, which of these is not accurate? Financial statements provide information about the financial effects of transactions and other events of a specified period. Assets, liabilities and equity are recognized in the statement of financial position. Income and expenses are recognized in the statement of profit or loss. Financial statements are prepared from the perspective of a particular group of investors. 26 Conceptual Framework Which of these describes qualitative characteristic verifiability? It enables users to identify and understand similarities in, and differences among, items. Use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Classifying, characterising and presenting information clearly and concisely. It means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement. 27 Ch6 8/22

9 According to the Exposure Draft of the Conceptual Framework, current value measurement includes the following approaches: fair value and exact cost fair value and value in use current cost and historical cost historical cost and fair value 28 Ch6 Value in use is the present value of the cash flows that an entity expects to derive from the continuing use of an asset and from its ultimate disposal. is based on market-specific assumptions instead of assumptions by the entity. can be directly observed. is the present value of the cash flows that an entity expects to obtain as it fulfills a liability. 29 Ch6 Which of these supports the use of current cost accounting? It is the most objective of the proposed accounting methods It helps management to allocate resources more efficiently It is only useful if the company plans to liquidate its assets All of the above 30 Ch6 The argument that is descriptive of exit price accounting is: It focuses on the stewardship function of managers It is focused on matching revenue and expenses It uses market selling prices to measure firm s financial position and performance It uses original purchase price to value assets 9/22

10 31 Ch6 Which of these best reflects the argument that supports the notion that exit prices should be used for measurement instead of historical cost? Cash is king Easy to obtain needed data Users need this type of information to make decisions Other information is not available 32 Ch6 Under the historical cost accounting model the financial statement that is regarded as the most important is: They are all equally important Cash flow statement Statement of financial position Statement of profit and loss 33 Ch6 Match measurement systems with the basis of valuation for assets. present value of future cash flows selling price original purchase price current market buying price Value in use Historical cost Fair value Current cost Riktig. 4 av 4 poeng. 34 Ch7 10/22

11 34 Ch7 Two main characteristics of an economic resource: i. It must be scarce ii. It must have utility iii. It must be capable of generating cash inflows to the entity i, ii, i, iii i, ii, iii iii 35 Ch7 Which represent three essential characteristics of an asset? Future cash, control by an entity, result of current events Future economic benefit, control by an entity, result of past events Present economic benefit, control by an investor, result of past events None of the listed 36 Ch7 The extent and timing of recognition of assets are important because: They can affect the decision making for users of financial statements They can affect the calculation of ratios which are important inputs for debt covenants They can affect management compensation All of the above 37 Ch7 The statement concerning the measurement of tangible assets that is not true is: 11/22

12 The traditional approach has been to measure tangible assets at historical cost IAS 16 requires the use of the revaluation model for subsequent measurement of tangible assets IAS 16 permits the use of a current value measurement model for tangible assets None of the above Feil. 0 av 1 poeng. 38 Ch7 The valuation of financial instruments must emphasize market inputs. Which of these inputs is considered to provide the most reliable evidence of fair value? Level 1 Level 2 Level 3 Level 4 39 Ch7 The use of a current value model for intangible assets is: Common Prohibited Rare Mandatory 40 Ch7 Which of the inputs that are used to measure fair value are most difficult to audit? Level 1 Level 2 Level 3 All are easy 12/22

13 41 Ch8 Interpretation of the IASB Framework suggests that a liability should cease to be recognised when assets or services have been transferred to other entities in satisfaction of the debt. 42 Ch8 Movie Corporation shows the downside of corporations being given rights of a: Person Creditor Entity Stakeholder 43 Ch8 Which is/are descriptive of the proprietorship theory of accounting: i) Assets belong to the proprietor ii) Liabilities are the obligations of the entity iii) An objective of accounting is to determine the net worth of the owner i ii i, iii i, ii 44 Ch8 Liabilities are present obligations arising from past events, the settlement of which is not expected to result in an outflow of resources. 13/22

14 45 Ch8 The most commonly used measurement method for liabilities is: Replacement value Historical cost Fair value Market value 46 Ch8 According to the entity theory perspective, the assets belong to the owners and the liabilities are the obligations of the owners. 47 Ch9 When is revenue most likely to be recognized in the earning cycle? Receipt of orders after completing production Completion of production Delivery of goods to customers Receipt of cash 48 Ch9 New standard - Revenue from Contracts with Clients (IFRS15) - focuses on: 14/22

15 Payment terms Performance obligations Length of the customer relationship Realization of revenue 49 Ch9 Under the IASB Framework, revenue encompasses both income and gains. 50 Ch9 The statement regarding recognition versus realization of revenue that is true is: For an asset to be "realized' there must be an inflow of assets or a measurable change in the value of an asset 'Recognition of revenue' means an inflow of liquid assets 'Realizable' means the asset received is readily convertible to known amounts of cash All of the above are true 51 Ch9 If revenue for 2014 is understated then: Profit for 2014 is understated and equity is overstated Profit for 2014 is overstated and equity is overstated Profit for 2014 is understated and equity is understated None of the above 15/22

16 52 Ch10 Recording of which expense below is typically not based on the principle of immediate recognition? Research expenditure The cost of the goods sold Impairment expenses Advertising expenses 53 Ch10 Treating assets as expenses is a way to overstate profits for a period. 54 Ch10 Which of these is considered to be the 'ideal' way to match expenses? Allocation of costs Cause and effect Immediate recognition None of the above 55 Ch10 When depreciating assets using the allocation of costs method which of the following methods is best? Straight-line Unit-of-production Reducing-balance It is not possible to say 16/22

17 56 Norway Two dominant principles in Norwegian GAAP: Recognition and allocation Estimation and accuracy Conservatism and matching None of the above 57 Norway In Norway, companies that are not listed can choose to use IFRS. 58 Norway Government agency that enforces IFRS in Norway is: IASB Finanstilsynet FASB Norsk RegnskapsStiftelse 59 Norway Which Company Act is referred to as "accounting revolution" in Norway? Company Act of 1976 Company Act of 1910 Company Act of 1957 Company Act of /22

18 60 Standards Which of these is an argument for convergence in accounting standards? Developing nations may not need as complex an accounting system Culture will still influence interpretation and selection of choices Reduce financial reporting costs Different environments may call for different accounting systems 61 Organizations The mission of the IASB is to develop, in the public interest, high quality accounting standards that countries can use as the basis for designing their own national standards. 62 Organizations The is composed of representatives from Member States who vote on whether new IFRSs should be adopted in the EU and EEA. Securities and Exchange Commission Financial Accounting Standards Board Accounting Regulatory Committee European Financial Reporting Advisory Group 63 Organizations International Standards on Auditing (ISA) are developed by the IASB. 18/22

19 64 Organizations One of IASB s responsibilities is to enforce the implementation of its standards to ensure that the objective of high quality financial reporting is achieved. 65 Organizations Trustees of IFRS Foundation have the responsibility to appoint members of IASB members of IFRS Interpretations Committee members of IFRS Advisory Council all of the above 66 Trends Acronym for Extensible Business Reporting Language is EBRL XBRL TBRL None of the above 67 Trends The most widely used set of guidelines for sustainability reporting are published by: 19/22

20 The FASB The IASB The Sustainability Initiative The Global Reporting Initiative 68 Trends An "integrated report" aims to explain Select best alternative: how businesses set targets and put in place carbon management initiatives to reduce emissions. how businesses, governments and other organizations impact sustainability issues such as climate change, human rights, corruption and many others. how businesses combat corruption and prevent criminal activities arising from corruption. how the organization interacts with the external environment and the capitals to create value over the short, medium and long-term. Feil. 0 av 1 poeng. 69 Essay1 Explain the advantages and disadvantages of principle-based and rule-based standards. Fill in your answer here 20/22

21 Fill in your answer here Principle-based Advantages for principle-based standards: The need for specific accounting standards should be reduced, as the principle-based standards covers wide instead of spesific settings/transactions. This is also an advantage as it is reducing the risk of creating loopholes in the standards that managers can use to legaly minipulate the financial reporting. Disadvantages for principle-based standards: It is not possible to make standards that covers every transaction/event in an optipal way. Therefore the us of principle-based standard that covers wide, can be a failure in some matters. Although the principle-based standards covers wide, it gives room for alternatives to fight the latter disadvantage. This again can result in distortion by managers. Rule-based Advantages for rule-based: The two fundamental characheristics of usefull accounting information is that it is relevant and faithfully represented. With a rule-based stardard, this information can be more comparabal and verifyable, hens more usefull as this are two of the enhancement characteristis. As it is more specific and reduce choises for the managers regarding recognition and choise of measurement system, it may reduce the opportunities for earnings management, as it can be less subject to manipulation and disortion by the managers. Disadvantages for rule-based: It is possible to structure the transactions/events to be abel to work around the rules, as the rule-based standards are spesific, leaving a risk for loopholes that managers can use to manipulate the financial reporting. Besvart. 70 Essay2 Consider historical cost system and answer questions below. a) What is the objective of accounting and the role of profit under historical cost system? b) What criticisms are made of profit calculated under the historical cost system? Fill in your answer here 21/22

22 Fill in your answer here a) Objectives: - providing information for decisionmaking - stewardship and accountability The latter is the main focus of accounting in the perspective of historical cost accounting. The role of profit under a historical cost system is to show the value created in the period, and is the excess of revenue from operating activities, less cost of resources used and impairmant losses. Gains are not regocnised as a part of profit under historical cost system but losses in value of assets are, resulting in impairmant losses. It is a conservative view. The profit makes the manager (agent) accountabal for the profit it has produced with the amount of used resources in the period, putting focus on the stewardship, and what has been accomlished, rather than forward-looking angel of reporting. Using mathcing of expences to related revenue as under historical cost is the most understud consept of profit. b) The consept of profit under historical cost receives criticism as it is heavily relying on matching expences to revenue in the period. The methode used to match can be seen as arbatry, an is a subject to manipulation, and is seen as almost impossible in practise. The calculation of depreciations is hard to audit and verify as it is relying on internal factors and subjective judgements and possible alternatives. Although the profit consept is the best understood, it has a focus on the income statement (profit and loss statement). This is in conflict with the trend towards a shift to a balance-sheet focus (financial position) in the international standards. The profit consept therefor makes the balance-sheet secondary and less important, and a "dumping ground" for assets and cost waiting to be expired and consumed/used and recognised as expenses. The critis also points out that gains should be recognised as profit, and should not be understaded until it is actually realised. The critics altso state that the profit is on a basis of information that is not as current as other measurement systems. Besvart. 71 Essay3 Standard setters have been criticized for being balance sheet biased. a) What does this mean? b) What evidence is available to support this criticism? Fill in your answer here a) The standard setters have desided to make the balance-sheet paramount, and the income-statement secondary. This means that profit and losses are directly impacted by changes in assets and liabilities. As the standard setters have made this choise, it shows that it is not supported by neutrality, as it is a subjective choise, based on many poitical biases and pressure form public instrest groups, batteling for their own selfintrest. b) The definition of income (including revenue) points out that it is a result of increasing value of assets (decrease if expenses) or decrease in liabilities (increase if expences), resulting in changes in owners equity other than owners contribution (or disributions). This shows that it is possible to impact the profit, without having any revenue, just by revaluate the assets on the balance sheet in times of rising prices, and choosing the right way of measurments to maximise it. An evidence of the opposite way, is the implementation of IAS 39 in EU, where massive political preassure resulted in a EU carve-out, to give the banks relief to avoid further bank collaps. Besvart. 22/22