Testbank to accompany Accounting Theory 7e by Godfrey et al

Test Bank For Accounting Theory 7th edition

PREPARED BY

Barbara Burns 1 / 4

Testbank to accompany Accounting Theory 7e by Godfrey et al © John Wiley & Sons Australia, Ltd

1.2

Chapter 1: Introduction

True/False

• The main purpose of accounting theory is to prescribe accounting rules for practitioners.

• True

*b. False

Feedback: The main purpose of accounting theory is to explain current accounting practice and to provide the basis for development of such practice.Section "Overview of accounting theory"

• As a result of accounting prescription being developed in a haphazard way there are follow-on

inconsistencies in practice.

*a. True

• False

Feedback: Because of the haphazard development of prescriptive accounting practice the theories underlying the practice have developed in an unstructured manner resulting in inconsistent practices eg. different measurement methods for different classes of assets.Section "Overview of accounting theory"

• 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.

• True

*b. False

Feedback: This is not an example of an inconsistency in accounting practice but a choice available so that the amount of depreciation charged best reflects the way in which the asset contributes to the earning of revenue.Section "Overview of accounting theory"

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Chapter 1: Introduction

© John Wiley & Sons Australia, Ltd

1.3

• No systemic theory of accounting was devised from the time of Pacioli in the 15

th century until the opening of the 19 th century.

*a. True

• False

Feedback: For 300 years following Pacioli's 1494 treatise, progress in accounting concentrated on refining practice rather than on developing theory.Section "Overview of accounting theory"

• The period 1800 - 1955 has been labelled the empirical period in accounting development.

*a. True

• False

Feedback: The period 1800 -1955 has been labelled the empirical period in accounting development. The emphasis was on real-world observation to explain why accountants account as they do.Section "Overview of accounting theory"

• The development of a conceptual framework has solved the problem of inconsistency in the

application of accounting in practice.

• True

*b. False

Feedback: Because conceptual frameworks seek to provide universal guidance they have proved too general to provide a clear set of guidelines which totally resolve inconsistencies in accounting practice.Section "Overview of accounting theory"

• During the normative period of accounting theory development, theorists were concerned with

explaining and understanding current accounting practice.

• True

*b. False

Feedback: During the normative period theorists were more concerned with developing theories about what accounting practitioners ought to be doing rather than what practitioners were actually doing.Section "Overview of accounting theory"

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Testbank to accompany Accounting Theory 7e by Godfrey et al © John Wiley & Sons Australia, Ltd

1.4

• The normative period of accounting theory ended because empirical testing proved the

theories developed during this period to be false.

• True

*b. False

Feedback: In fact, one of the reasons that the normative period drew to a close was the lack of testing methods available for the theories.Section "Overview of accounting theory"

• The 'debt hypothesis' predicts that the 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. The theory underlying this hypothesis would be a positive theory.

*a. True

• False

Feedback: The objective of positive accounting theory is to explain and predict accounting practice. A normative theory, which this is not, would prescribe what the accountants ought to do as the firm's debt covenants come close to a technical breach.Section "Overview of accounting theory"

• 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.

• True

*b. False

Feedback: It is the other way around. According to bonus plan hypothesis, managers who are remunerated via bonus plans use profit-increasing accounting methods more than those who are not remunerated via bonus plans in order to maximise profits in the accounting period when they are likely to receive bonuses.Section "Overview of accounting theory"

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