Chapter 1 Flashcards
A lemons problem can arise when:
A. Investors lack the ability to interpret business opportunities.
B. Managers are more informed about the value of their business ideas than investors.
C. Communication from managers to investors is not entirely credible.
D. All of these choices.
D
Which of the following is not a financial intermediary?
A. Bank.
B. Insurance company.
C. Financial news source.
D. Superannuation fund.
C
Auditors and audit committees are examples of:
A. Regulatory intermediaries.
B. Information intermediaries.
C. Audit intermediaries.
D. Both information and regulation intermediaries.
B
The Australian Securities Exchange (ASX) is an example of a/an:
A. Information intermediary.
B. Regulatory intermediary.
C. Financial intermediary.
D. Both a regulatory and financial intermediary.
B
If a dispute arose between a buyer and a seller on a transaction involving a shipment of grain, to where might the disgruntled party turn?
A. Financial intermediary.
B. Regulatory intermediary.
C. Transaction intermediary.
D. Information intermediary.
B
Information intermediaries add value in which of the following ways?
A. Performing an analysis by using the financial statements.
B. Enhancing the credibility of financial reports.
C. Both enhancing the credibility of financial reports and analysing financial statements.
D. None of these choices.
C
What does the efficient market hypothesis state about asset prices?
A. The price of an asset is set to a level where all market participants can afford to purchase it.
B. Markets are only efficient when they have regulatory and financial intermediaries.
C. All available information is incorporated and reflected in the price of the asset.
D. Investors can use the market to efficiently trade new information and earn a riskless profit.
C
Which of the following best describes how firms can create value?
A. Steadily increasing revenue on a year-to-year basis.
B. Having a business strategy that is better than their competitors.
C. Generating returns that are in excess of the cost of maintaining capital.
D. Investing in risky projects.
C
Why is there a need for accrual accounting?
A. Accrual accounting informs investors on the actual cash movements of a firm.
B. There is no need for accrual accounting as cash accounting satisfies investors’ needs.
C. The full economic consequences of transactions in a period are not fully accounted for by cash accounting.
D. None of these choices.
C
A firm sells a pallet of goods to a customer who has yet to pay with cash. If the firm recognises this as revenue in their financial statements, this would be an example of:
A. Cash accounting.
B. Accrual accounting.
C. Cost accounting.
D. Revenue accounting.
B
Why would a manager use accounting discretion to distort financial information?
A. To increase their bargaining power in negotiating a debt contract.
B. To achieve a bonus which is tied to accounting performance in the form of profit.
C. Because they lack objectivity in assessing accounting estimates.
D. All of these choices.
D
Which of the following accounting practices assist in ensuring that managers objectively use their accounting flexibility?
A. Accrual accounting and accounting standards.
B. Accounting standards and internal audits.
C. Independent audits and accounting standards.
D. Accounting standards and accounting discretion.
E. Accounting discretion and independent audits.
C
Which of the following would be a drawback of an accounting standard?
A. A reduction in the flexibility for managers to communicate complex economic transactions in which they have substantial knowledge.
B. Increased comparability between organisations and time periods.
C. Similar economic transactions are recorded in a consistent manner where management have substantial knowledge.
D. All of these choices.
A
Disclosure requirements are usually prescribed at which level by accounting regulations?
A. Maximum disclosure requirements.
B. Minimum disclosure requirements.
C. Voluntary disclosure requirements.
D. Both voluntary and minimum disclosure requirements.
B
Why might a firm not voluntarily disclose sensitive information regarding the operations of a business?
A. Because they are restricted from voluntarily disclosing this sort of information due to accounting regulations.
B. They may not want to damage their competitive position.
C. They believe they have already reached the maximum disclosure requirements allowed due to accounting regulations.
D. None of these choices.
B
