Chapter 5 Slides

Question 1

Normative Theories

Answer 1

Recommend what should happen

Prescribe action to achieve the objective or goal

Question 2

Positive Theories

Answer 2

Describes, explains or predicts activities

Helps us understand what happens in the world

Question 3

Rational Economic Person

Answer 3

Assume people act in their own interest and maximize their wealth

Question 4

Contracting Theory

Answer 4

Organization is a nexus of contracts
Parties have rights and responsibilities under these contracts
Focus on managerial contracts and debt contracts

Question 5

Agency Theory

Answer 5

Principal employs the services of and delegates the decision making authority to an agent
The agent will not always act in the interests of the principal

Question 6

Moral Hazard

Answer 6

The risk that managers might undertake actions that are detrimental to owners or other principals

Question 7

Agency Costs

Answer 7

Monitoring (measure, observe and control the agents behaviour)
Bonding
Residual (May costs more to monitor than the expected benefits)

Question 8

Owner Manager Agency Relationship Problems

Answer 8

Horizon Problem (differing time zones)
Risk Aversion (Managers prefer less risk than shareholders)
Dividend Retention (Managers prefer to maintain a greater level of funds within the entity, and pay less of the entity’s earnings to shareholders as dividends)

Question 9

Manager-Lender Agency Relationship

Answer 9

Risk that lending party may not repay those funds

Managers have incentives that show they are acting in a way that doesn’t create risk for lenders

Question 10

Institutional theory

Answer 10

How rule, norms, and guidelines become established

Question 11

Legitimacy theory

Answer 11

explicit and implicit idea about hot businesses should act
expectations of a social contract
organizational legitimacy includes social and the environment

Question 12

Stakeholder theory

Answer 12

relationship between stakeholders and organization

Question 13

Normative branch of stakeholder theory

Answer 13

Treat all stakeholders fairly
Entity should be managed for the benefit of the stakeholders
Stakeholders should be considered in decisions

Question 14

Managerial branch of stakeholder theory

Answer 14

positive theory

how stakeholders influence actions stakeholders power is related to the degree of control they have over resources

Question 15

Contingency theory

Answer 15

organizations are affect by a range of factors (external environment, business strategy, size)
Used to evaluate management accounting info and internal control systems