Lecture

Question 1

Accounting theories help us

Answer 1

explain/ understand/ evaluate/ and predict accounting practices

Question 2

Mainstream approaches

Answer 2

normative/ market based/ positive accounting/ behavioural and contingency theories

Question 3

mainstream

Answer 3

economic reality is objective, unique, measurable and independent

Question 4

alternative

Answer 4

economic reality is subjective and socially constructed

Question 5

Normative accounting theory

Answer 5

There’s a unique way to prepare financial statements capturing true and fair picture of an entity

Question 6

Market based theory

Answer 6

Theres no unique accounting method. Accounting info is useful if it helps markets make better economic decision.

Question 7

Positive accounting theory

Answer 7

ER can’t be defined by unique methods/markets. But by written/unwritten contracts between parties.

Question 8

Behavioural research and decision making

Answer 8

Different accounting methods influence decisions of users

Question 9

Stewardship

Answer 9

the role of management in a firm is the stewardship (acting in the interest) of the resources of the owners

Question 10

Decision usefulness

Answer 10

Accounting information should be relevant

Question 11

Fair value accounting

Answer 11

provides information suites for decision usefulness (uses the market value of an asset)

Question 12

Historical cost accounting

Answer 12

provides information aligned to the stewardship role (most reliable info)

Question 13

Agency- Theory paradigm

Answer 13

Shareholder hires a manager (principal - agent) to do a job on his/her behalf

Question 14

Agency cost

Answer 14

The principal needs to devise a contract forcing the agent to choose the most appropriate method which produces more truthful info

Question 15

Group

Answer 15

Under IFRS 10 a group exists where one enterprise (the parent) controls another (the subsidiary)

Question 16

Control occurs when

Answer 16

50% + voting rights/ rights to variable returns/ power over the investee to affect the investors returns or dividends

Question 17

ownership <20%

Answer 17

influence: passive
definition: investment
Reporting method: fair value

Question 18

ownership 20% - 50%

Answer 18

influence: significant influence
definition: associate
Reporting method: equity

Question 19

ownership >50%

Answer 19

influence: controlling
definition: subsidiary
Reporting method: consolidation

Question 20

Goodwill

Answer 20

purchase price - fair value of net assets

Question 21

Fair value of net assets

Answer 21

net assets +/- fair value changes

Question 22

Non controlling interests

Answer 22

represents the value not owned by the parent

Question 23

Consolidation

Answer 23

is combining two or more entities into one

Question 24

Goodwill at acquisition

Answer 24

purchase price MINUS fair value of net assets

Question 25

NCI at acquisition

Answer 25

fair value of net assets MINUS market value

Question 26

If a parent loses control of a subsidiary it must:

Answer 26

derecognise the assets / recognise fair value of consideration/ recognise any investment retained

Question 27

If there’s an impairment

Answer 27

impairment loss will reduce the profit of the year in the consolidated income statement

Question 28

Internal impairment indicators

Answer 28

evidence of physical damage/ significant changes with adverse effect/ evidence indicating that economic performance of an asset is unsatisfactory

Question 29

External impairment indicators

Answer 29

an assets market value has declined significantly/ increase in market interest rates/ significant changes have had an adverse affect on the company