Chapter 7 - Positive accounting theory - P2

The 'efficiency perspective' of Positive Accounting Theory suggests that firms will

A. Adopt the accounting methods that require the least resources to implement

B. Adopt the accounting methods that result in the highest reported earnings

C. Adopt the accounting methods that result in the lowest reported earnings

D. Adopt the accounting methods that best reflect the underlying economic performance of the entity

Which of the following is correct in respect of Positive Accounting Theory?

A. The opportunistic perspective is ex-post, and the efficiency perspective is ex-ante.

B. The opportunistic perspective is ex-ante, and the efficiency perspective is ex-post.

C. Both the opportunistic and efficiency perspectives are ex-ante.

D. Both the opportunistic and efficiency perspectives are ex-post.

A manager electing to adopt a depreciation method that increases income, but does not reflect the actual use of the asset, is consistent with:

A. The efficiency perspective of Positive Accounting Theory

B. The opportunistic perspective of Positive Accounting Theory

C. Both the opportunity and the efficiency perspectives of Positive Accounting Theory

D. Neither the opportunity nor the efficiency perspectives of Positive Accounting Theory

Which of the following parties desire the firm to take the most risks?

A. Managers

B. Debtholders

C. Owners

D. All parties desire the firm to take the same level of risk.

Positive Accounting Theory suggests that bonus schemes benefit:

A. Only managers

B. Only owners

C. Both managers and owners

D. Neither managers nor owners

Which of the following is the main advantage of using accounting earnings instead of share prices to determine bonuses?

A. Share prices are influenced by market forces that are outside the control of management.

B. Accounting information is independently audited

C. Accounting information is unbiased.

D. Share prices may be manipulated by managers engaging in insider trading

According to Positive Accounting Theory, using stock prices to determine bonuses:

A. Increases the likelihood of management disclosing good news

B. Increases the likelihood of management disclosing of bad news

C. Increases the likelihood of management disclosing both good and bad news

D. Has no effect on the likelihood of management disclosures

According to Positive Accounting Theory, the existence of debt covenants:

A. Can be explained from an efficiency perspective, and gives management an incentive to manipulate accounting information from an opportunistic perspective

B. Can be explained from an opportunistic perspective, and gives management an incentive to manipulate accounting information from an efficiency perspective

C. Can be explained from both efficiency and opportunistic perspectives

D. Cannot be explained

Which of the following is a problem with Positive Accounting Theory?

A. It is not testable.

B. It has been empirically discredited.

C. It contributes little to improving accounting practice.

D. None of the given options are correct.

Which of the following is not a criticism of Positive Accounting Theory?

A. It is based on the assumption that all action is driven by wealth maximisation

B. It is not value-free.

C. It has developed little in the past 30 years.

D. Its claims cannot be objectively verified

Chapter 7 - Positive accounting theory - P2

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