BE Accounting Theory

Transcription

1 KANDIDAT 9530 PRØVE BE Accounting Theory Emnekode BE-313 Vurderingsform Multiple choice Starttid :00 Sluttid :00 Sensurfrist :00 PDF opprettet :32 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 prescriptive the accounting theory is How well the theory explains and predicts reality How well the accounting theory has been constructed How acceptable the implications of the accounting theory 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 9530 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? Public interest theory Life cycle theory Regulatory capture theory Private interest 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? Reporting requirements will be more consistent and logical. It encourages earnings management. Standard setting boards will be more accountable for their actions. The need for specific accounting standards should be reduced. 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 9530 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 can be successful in obtaining financing reporting entity is paying too much on its loan reporting entity needs additional financing reporting entity has sufficient liquidity 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 Cost versus benefit Understandability versus benefit Understandability versus materiality 6/22

7 20 Conceptual Framework If financial information is to be useful, it must be and what it purports to represent. useful, faithfully describe relevant, faithfully represent comparable, faithfully represent consistent, faithfully describe 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. Comparability Consistency Timeliness Understandability 7/22

8 24 Conceptual Framework Which of these describes qualitative characteristic comparability? Classifying, characterizing and presenting information clearly and concisely. It enables users to identify and understand similarities in, and differences among, items. 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. 25 Conceptual Framework Based on the Exposure Draft of the Conceptual Framework, which of these is not accurate? Financial statements are prepared from the perspective of a particular group of investors. Financial statements provide information about the financial effects of transactions and other events of a specified period. Income and expenses are recognized in the statement of profit or loss. Assets, liabilities and equity are recognized in the statement of financial position. 26 Conceptual Framework Which of these describes qualitative characteristic verifiability? 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 enables users to identify and understand similarities in, and differences among, items. 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 historical cost and fair value current cost and historical cost 28 Ch6 Value in use can be directly observed. is the present value of the cash flows that an entity expects to obtain as it fulfills a liability. is based on market-specific assumptions instead of assumptions by the entity. 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. 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 uses original purchase price to value assets It is focused on matching revenue and expenses It uses market selling prices to measure firm s financial position and performance It focuses on the stewardship function of managers 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? Other information is not available Users need this type of information to make decisions Cash is king Easy to obtain needed data 32 Ch6 Under the historical cost accounting model the financial statement that is regarded as the most important is: They are all equally important Statement of profit and loss Statement of financial position Cash flow statement Feil. 0 av 1 poeng. 33 Ch6 Match measurement systems with the basis of valuation for assets. current market buying price original purchase price selling price present value of future cash flows Fair value Historical cost Current cost Value in use 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 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: Prohibited Rare Mandatory Common 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. Feil. 0 av 1 poeng. 42 Ch8 Movie Corporation shows the downside of corporations being given rights of a: Creditor Person Entity Stakeholder Feil. 0 av 1 poeng. 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 ii i, iii i 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: Historical cost Replacement value Market value Fair value Feil. 0 av 1 poeng. 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? Completion of production Receipt of orders after completing 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 Feil. 0 av 1 poeng. 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 Impairment expenses The cost of the goods sold 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 Norsk RegnskapsStiftelse FASB 59 Norway Which Company Act is referred to as "accounting revolution" in Norway? Company Act of 1910 Company Act of 1957 Company Act of 1992 Company Act of /22

18 60 Standards Which of these is an argument for convergence in accounting standards? Reduce financial reporting costs Different environments may call for different accounting systems Developing nations may not need as complex an accounting system Culture will still influence interpretation and selection of choices 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. European Financial Reporting Advisory Group Securities and Exchange Commission Financial Accounting Standards Board Accounting Regulatory Committee Feil. 0 av 1 poeng. 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 Global Reporting Initiative The Sustainability Initiative The IASB The FASB 68 Trends An "integrated report" aims to explain Select best alternative: 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. how businesses set targets and put in place carbon management initiatives to reduce emissions. 69 Essay1 Explain the advantages and disadvantages of principle-based and rule-based standards. Fill in your answer here Principle-based standards: With reference to the principle-based standards the emphasis is on underlyning principles. In this context it requires that the principles be interpreted by the financial information preparers and auditors. Further, it provides a guidance how the principles can be interpreted or applied in particular contexts. All in all, it is more flexible in contrast to rule-based standards because it allows preapers/organizations to interpretate the principles in a way that it most appropriate for their decisions/organizations/issues. Moreover, they do not set out what the preaprers are to do in a step by step manner. Principles-based standards require judgment (IFRS) Rule based standards: Rule-based standards include a detailed direction of action. It gives rather a step by step manner to the preparers. This is why the rule-based standards a more complicate and with a lot of details. Therefore, it is not in the same way flexible like principle-based standards. They do not provide possibility to interpreted the standards in different ways and to work around the rules. Further on, rule-based standards include "bright line" thresholds such as greater than 50%. Last but not least rule-based standards come up with comparability and verifiability. They allows for specific structuring of transactions to work around the rules. Besvart. 20/22

21 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 a) With reference to historical cost accounting the main focus is on income statement. The income stamtement is paramount. Therefore, focus is on profit measurement, revenue recognition, matching and it is transactionbased. Assests and liabilities are stated at actual purchase cost. Therefore profit does not include changes in the value of assets or liabilities. Proponents argue that the role of profit under historical cost would be the best because it is helpful for decesion making and based on actual, not possible merely, costs. Moreover this concept it the best understood concept of profit and instead of profit under historical cost, marekt prices (e.g. the basic of exit price accounting) can be supplementary data. Moreover, profit measurement under historical cost accounting, measures past events. It does not not measure those that might happen like under exit price accounting. Futhermore it is in convergence with the conversatism revenue principle and do not violate the conversatism principle. There is no need to obatin/estimate market prices because under historical cost one have ordinary purchase cost avalible. b) The main critisim for the historical cost account system and in this context the profit measurement is the objective of accounting. Stewardship ist the secondary objective: Providing decision making of users is the primary objective and historic cost is a failure in this regard. Further on, the usefulness for decision making is an other criticism point: 1. Historic cost is irrelevant for evaluating past decision. 2. After aquisition the historic cost data is fictional. 3. Connect to inconsquential measure of capital and 4. it produces a flawed measure of profit. Furthermore, the going concern assumption do not justife the use of historic cost data. The reasons are because: 1. many business failed and 2. there is no business continue indefinitely doing only what it is presently doing. Moreover, there is no possibility to include changes in market prices (specific for non monetey assets) as revenue in the income as unrealized gains. Last but not least a big criticism is matching because 1. there are practically impossibilities, 2. it is totally arbritrary, 3. not assets are classiefied as assets and not liabilities are classiefied as liabilities, 4. it leads to volatility and smoothing. Besvart. 21/22

22 BE Accounting Theory Besvart. Candidate 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) Financial position Emphasis on the financial postion. Standard setters come up with to much convertism. They are not open for new approchaes of accounting and rely on traditional approchaes and financial postions and don t have in mind that the issues of organizations have changed. b) Accountability approach The accountability approach can be used as a evidence to support the criticism above. Besvart. 22/22