Chapter 7 - Positivte accounting theory - P1

Watts and Zimmerman's Positive Accounting Theory is

A. One of several normative theories of accounting

B. One of several positive theories of accounting

C. One of several critical theories of accounting

D. None of the given options are correct.

Which of the following is a central assumption of Positive Accounting Theory?

A. Individuals act solely on the basis of self-interest.

B. Firms seek to maximise profits

C. The interests of principals and agents are not aligned

D. Financial statements will be audited regardless of legal requirements

To test whether accounting information is useful, researchers such as Ball and Brown tested whether share prices responded to:

A. Expected earnings announcements

B. Forecast earnings announcements

C. Unexpected earnings announcements

D. All of the given options are correct

The key theory that underpins Positive Accounting Theory is:

A. The Efficient Markets Hypothesis

B. Agency theory

C. Normative ethical theor

D. None of the given options are correct

The principal's expectation of opportunistic behaviour by his or her agent results in lower payments to:

A. The agent

B. The principal

C. The principal and the agent

D. Neither the principal nor the agent

According to agency theory, contracts that align the interests of the principal and agent primarily benefit:

A. The agent

B. The principal

C. Both the principal and the agen

D. Neither the principal nor the agen

Agency theory suggests that government regulation is:

A. Necessary, because principals know that agents may not act in their interests

B. Necessary, because agents know that principals may not act in their interests

C. Unnecessary, because principals know that agents may not act in their interest

D. Unnecessary, because agents know that principals may not act in their interests

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.

The 'bonus plan hypothesis' of Positive Accounting Theory suggests managers of firms with bonus plans tied to reported income are more likely to use accounting methods that:

A. Increase prior period reported income

B. Increase current period reported income

C. Increase future period reported income

D. None of the given options are correct.

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.

Chapter 7 - Positivte accounting theory - P1

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