Chapter 3 - The regulation of financial accounting - P1

. Which of the following best describes the process of setting accounting standards?

A. A technical process where accounting experts determine the most technically correct and logical standards to issue

B. A political process where the constituency affected either socially or economically by a proposed AASB standard has influence on the final outcome

C. An exclusive process where the AASB sets the agenda and determines which standards to issue and what requirements they will contain

D. An inclusive process where standards are proposed from various interested parties for approval by the AASB

Which of the following is not an example of a qualitative characteristic guiding the production of financial accounting information?

A. Neutrality

B. Representational faithfulness

C. Consideration of economic and social consequences

D. Consistency and comparability

The free-market perspective of accounting regulation suggests that accounting information:

A. Should be provided free of charge

B. Should be free of considerations and lobbying of the market

C. Should be provided like any other good that is subject to demand and supply

D. Will require regulation to avoid underproduction of information

According to some free-market theorists, there are private economics-based incentives for the organisation that will ensure that credible information will be provided. Which of the following assumptions is not consistent with this?

A. Managers will provide true and correct information for fear of not being rewarded, or fired for not doing so.

B. Shareholders will assume managers will act opportunistically and so, in the absence of safeguards, will pay less for shares.

C. Lenders will price protect, in that the higher the preserved risk, the higher will be the cost of loan funds demanded.

D. All of the given options are correct.

Which of the following is a valid criticism of the economics-based rationality argument that asserts that credible information will be supplied in the absence of regulation, by aligning management's self-interest with that of the owners and lenders, thereby reducing the cost of capital?

A. The arguments do not follow logically

B. The arguments do not have historical support.

C. The assumptions of management self-interest is too pessimistic

D. The argument has no empirical support.

Which of the following is not a valid criticism that management will enter performance-based contracts that will reward or constrain their behaviour, to maximise the value of the firm?

A. It assumes management can gain more by entering a performance-based contract than by continuing to act opportunistically.

B. It relies on credible accounting numbers to monitor performance, but there is no incentive to provide credible unbiased information.

C. It assumes that managers always act from self-interest and do not attempt to maximise the value of the firm, which may not be true

D. It is too difficult to achieve in practice if there is a multitude of different contracting parties.

Which of the following would be required if we accepted the private contracting argument that managers' interests can be aligned with the maximisation of the wealth of the firm, through contracting arrangements that reward or constrain their behaviour?

A. Credible financial accounting numbers to measure performance

B. Independent audit to monitor and check that the accounting numbers are properly measured

C. Regulation that restricts the choice of accounting methods

D. All of the given options are correct.

Which of the following is not assumed by the 'market for managers argument' for reducing or eliminating regulation?

A. The managerial labour market operates efficiently.

B. Information about past management performance will be known by other prospective employers.

C. Information about past management performance will not be fully impounded in future salaries.

D. Managers are not approaching retirement

Which of the following assumptions of the market for corporate takeovers can be criticised for being unrealistic in practice?

A. An under-performing firm will be taken over by another firm, which will then subsequently replace the current management team

B. Managers will be motivated to maximise the firm's value to minimise the likelihood that outsiders could seize control.

C. Management will know the marginal cost and benefit involved in producing the optimum amount of information required to minimise the firm's cost of capital.

D. All of the given options are correct.

In the absence of regulation, the 'market for lemons perspective' (Arkerlof, 1970) assumes that:

A. There is no incentive for firms to disclose bad news.

B. Firms have incentives to disclose both good and bad news.

C. No news is good news.

D. All of the given options are correct.

Chapter 3 - The regulation of financial accounting - P1

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