Exam 1 prep

Question 1

Four Components of Accounting Policy

Answer 1

D - Definition
R - Recognition
M - Measurement
D - Disclosure

Question 2

The two types of accounting theory

Answer 2

Normative
Positive

Question 3

Normative Theory

Answer 3

What should be done based on specific goal or objective.

Question 4

Positive Theory

Answer 4

Explain or Predict Activities

Question 5

Three relationships of the nexus of contracts

Answer 5

M - Managerial
D - Debt
P - Political

Question 6

Agency Costs

Answer 6

M - Monitoring
B - Bonding
R - Residual

Question 7

Three major problems with Agency Costs

Answer 7

H - Horizon
R - Risk Aversion
D - Dividend Retention

Question 8

Manager-Lender Agency Problems

Answer 8

E - Excessive Dividend Payments to Owners
A - Asset Substitution
C - Claim Dilution
U - Underinvestment

Question 9

Explain: Excessive Dividend

Answer 9

Occurs when managers pay excessive dividends. Can increase the risk of the company not being able to service loan. Mitigated by implementing maximum dividend barriers.

Question 10

Explain: Asset Substitution

Answer 10

Management invests in riskier assets after the loan approval. Mitigated by establishing a maximum ratio of debt to tangible assets.

Question 11

Explain: Claim Dilution

Answer 11

Occurs when a firm takes on a higher priority debt. Mitigated by implementing a maximum leverage ratio.

Question 12

Explain Underinvestment:

Answer 12

Occurs when management is reluctant to invest in cash generating assets as the cash will go to repaying the debt.

Question 13

Explain: Horizon Problem

Answer 13

Managers focus on short term horizon. Shareholders focus on long term.

Question 14

Implications of agency theory for accounting policy choice

Answer 14

B - Bonus plan hypothesis
D - Debt Hypothesis
P - Political Cost Hypothesis

Question 15

Explain bonus plan hypothesis

Answer 15

Managers prefer accounting policies that increase profit

Question 16

Explain: Debt Hypothesis

Answer 16

Managers of entities with high leverage prefer accounting policies that increase profit

Question 17

Explain: Political Cost Hypothesis

Answer 17

Managers of larger entities prefer policies that reduce profit

Question 18

Two different hypothesis of accounting in capital markets

Answer 18

Mechanistic Hypothesis
Efficient Market Hypotheses

Question 19

Explain: Mechanistic Hypothesis.

Answer 19

The Mechanistic Hypothesis predicts that investors ignore differences in accounting policy and fixate on numbers

Question 20

Explain: Efficient Market Hypothesis

Answer 20

Markets are efficient. Security prices make a rapid and unbiased adjustment to new information. Price reflects available information.

Question 21

Three forms of market efficiency

Answer 21

W: Weak
SS: Semi-Strong
S: Strong

Question 22

Explain: weak efficiency

Answer 22

The security price reflects information contained in the past prices

Question 23

Explain: Semi-Strong Efficiency

Answer 23

The Sec price reflects all publicly available info

Question 24

Explain: Strong Efficiency

Answer 24

The sec price reflects all private and public avail info

Question 25

What is CSR

Answer 25

Corporate Social Responsibility - organisations have a responsibility to act in a way that considers the impact they are having on the environment and society.

Question 26

What is GRI

Answer 26

Global Reporting Initiative

Question 27

Sustainability Issues Include:

Answer 27

H - Human Rights E - Employee Rights P - Philanthropy and Charitable Giving E - Ethical and Transparent Businesses C - Corporate Governance

Question 27

Three areas on Sustainability Reporting

Answer 27

E: Environmental Dev E: Economical Dev S: Social Dev

Question 28

What is ESG

Answer 28

E - Environmental S - Social G - Governance

Question 29

Three main reasons for adopting ESG practices

Answer 29

1) Compliance with mandatory requirements 2) Voluntary activity guided by company's moral or ethical position 3) Strategic Activity to benefit ESG

Question 30

Stakeholders that should be considered when determining sustainability reporting

Answer 30

S: Shareholders C: Customers F: Fund Investors C: Community Groups M: Media G: Government

Question 31

What is ETS

Answer 31

Emissions Trading Scheme - Companies can buy permits with a set limit on the level of emissions permitted. If levels are exceeded - company must buy additional permits. If underused, company can sell permit

Question 32

Benefits of preparing sustainability reports

Answer 32

1) embedding sound corporate governance and ethics through the org. 2) Improved management of risk 3) formalising and enhancing communication to key stakeholders 4) Attracting and Retaining Competent staff 5) Ability to benchmark performance with other entities.

Question 33

What do governance reporting regulations aim to achieve?

Answer 33

Aim to increase transparency and accountability of management, board of directors and auditors. Broader objective is to provide shareholders and other stakeholders with investor confidence and strong capital markets.

Question 34

5 steps of recognising revenue

Answer 34

1) Identify the contract with the customer 2) Identify the performance obligation in the contract 3) Determine the transaction price 4) Allocate the transaction price to the performance obligation 5) Recognise revenue when the entity satisfies the performance obligation

Question 35

explain DEFINITION and give example

Answer 35

does the transaction or event give rise to an item that meets the definition of one of the elements of a financial statement. EG. expenditure on building improvements gives rise to an asset.

Question 36

explain RECOGNITION and give an example

Answer 36

When does the item satisfy the recognition criteria. EG. recognizing cost of goods sold as an expense when goods are delivered.

Question 37

Explain Measurement and give an example

Answer 37

how should the event be measured on initial recognition, and for assets and liabilities, how should subsequent recognitions be measured?. EG. whether to measure PPE at fair value and how to measure depreciation.

Question 38

Explain DISCLOSURE and give an example

Answer 38

how should information be presented and disclosed? EG. how much detail should be included in the calculation of depreciation.