Understanding Australian Accounting Standards 1st Edition Loftus Test Bank

Testbank

to accompany

Understanding Australian Accounting Standards

By Janice Loftus, Ruth Picker, Ken Leo, Victoria Wise and Kerry Clark

Prepared by Yeny Lukito

John Wiley & Sons Australia, Ltd 2013

Understanding Australian Accounting Standards 1st Edition Loftus Test Bank Visit TestBankDeal.com to get complete for all chapters

Chapter 2: Application of Accounting Theory

© John Wiley & Sons Australia, Ltd 2013 1.1

Chapter 2: Application of Accounting Theory

Learning Objectives:

Learning Objective 2.1 Identify the major decision areas in accounting for transactions and other events.Learning Objective 2.2 Discuss the decisions to be made when considering accounting policy choice.Learning Objective 2.3 Explain how theories can enhance our understanding of accounting practice and distinguish between normative and positive theories used in accounting.Learning Objective 2.4 Explain the general tenets of positive accounting theory and its implications for accounting policy choice.Learning Objective 2.5 Compare the mechanistic hypothesis and the ‘no effects’ efficient market hypothesis and their implications for financial reporting.

Test Bank to accompany Understanding Australian Accounting Standards © John Wiley & Sons Australia, Ltd 2013 1.2 Chapter 2 Application of Accounting Theory

Testbank - Multiple choice

• In which of the following contexts would accountants be required to exercise professional judgement?

Learning Objective 2.1 Identify the major decision areas in accounting for transactions and other events.

• Determining depreciation method used for non-current assets.
• Estimating net realisable value of inventories.
• Deciding which model to use to measure value of property, plant and equipment after initial

recognition.*d. All of the options are correct.

• Considering whether to use historical cost or fair value relates to which of the following components in

accounting policy decisions?Learning Objective 2.2 Discuss the decisions to be made when considering accounting policy choice.

• Definition
• Recognition

*c. Measurement

• Disclosure

3. Normative theories:

Learning Objective 2.3: Explain how theories can enhance our understanding of accounting practice and distinguish between normative and positive theories used in accounting.*a. prescribe what should be the case based on a specific objective.

• are based on what is happening in the world.
• explain why people behave in certain ways.
• predicts unobserved phenomena.

• Which of the following processes describe how positive theories are developed?

Learning Objective 2.3: Explain how theories can enhance our understanding of accounting practice and distinguish between normative and positive theories used in accounting.

• Principles  Assumptions  Objectives  Definitions/Actions
• Objectives  Definitions/Actions  Assumptions  Principles

*c. Definitions/Actions  Principles  Assumptions  Objectives

• Objectives  Assumptions  Principles  Definitions/Actions

• Sally observes that ‘Cash’ account is an asset account and has a debit balance. She also notices that

‘Inventory’ account is an asset account and has a debit balance. Therefore, Sally comes into conclusion that all asset accounts have a debit balance. Which approach does Sally use in developing her theory about all asset accounts having a debit balance?Learning Objective 2.3: Explain how theories can enhance our understanding of accounting practice and distinguish between normative and positive theories used in accounting.

• Deductive reasoning

*b. Inductive reasoning

• Conceptual reasoning
• Conclusive reasoning

Chapter 2: Application of Accounting Theory

© John Wiley & Sons Australia, Ltd 2013 1.3

6. The followings are the limitations of inductive reasoning, except:

Learning Objective 2.3: Explain how theories can enhance our understanding of accounting practice and distinguish between normative and positive theories used in accounting.

• it does not attempt to improve current practices.

*b. it may result in a logically valid, but not sound arguments.

• it does not question the appropriateness of the observed actions.
• it has a tendency of maintaining the existing state of affairs.

• Which of the following statements is correct?

Learning Objective 2.3: Explain how theories can enhance our understanding of accounting practice and distinguish between normative and positive theories used in accounting.

• Accounting is only concerned with recording transactions and does not involve human

behaviours.

• Positive theories provide recommendations about what should happen.
• Inductive reasoning starts with objective setting.

*d. The Conceptual Framework is developed through a deductive approach.

• An economic assumption which assumes that all individuals act in their own self-interest and are wealth

maximisers is called:

Learning Objective 2.4: Explain the general tenets of positive accounting theory and its implications for accounting policy choice.*a. rational economic person assumption.

• reasonable economic person assumption.
• responsible economic person assumption.
• logical economic person assumption.

• Political contracts refer to the relationship between an entity and the following parties, except:

Learning Objective 2.4: Explain the general tenets of positive accounting theory and its implications for accounting policy choice.

• government.
• lobby groups.
• trade unions.

*d. creditors.

• Which of the following statements is not derived from the agency theory?

Learning Objective 2.4: Explain the general tenets of positive accounting theory and its implications for accounting policy choice.

• Entities employ managers to conduct business on their behalf and to negotiate contracts with

other parties.*b. An entity is the centre of contractual relationships, with different parties having rights and responsibilities under the contracts.

• Managers will not always act in the best interest of shareholders.
• There are costs incurred in order to control agent’s behaviour.

11. An example of bonding costs is:

Learning Objective 2.4: Explain the general tenets of positive accounting theory and its implications for accounting policy choice.

• auditor’s fees.
• cost of implementing a management remuneration plan.

*c. cost of preparing quarterly financial reports.