Accounting Theory

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INFORMATION FOR CANDIDATE

1.This exam is worth 50% of the overall semester assessment. 2.The total number of marks available for this exam is 100%. 3.This exam paper contains FIVE (5) questions in THREE (3) pages excluding the cover page.

INSTRUCTIONS TO CANDIDATE

1.Answer all questions.
2.Write all your answers in the answer booklet provided.
3.If you make a mistake please put a single diagonal line through the section you wish to be ignored by the examiner. 4.Return all exam papers and scripts upon completion of the exam including any workings Question 1 (20 marks)

Applying agency theory, positive accounting theory focused on the agency relationships between principals and agents. Positive accounting theory proposed that agents have incentives to enter various contracts. Firms themselves were considered as a nexus of contracts between many self interested individuals. The contractual arrangements are initially put in place for efficiency reasons with well developed contracts reducing the overall agency costs that could arise within the firm.

(a)What is an agency relationship and what is an agency costs? (4 marks)

(b)How can agency costs be reduced? (4 marks)

(c)If a manager is paid based on a percentage of profits, does this actually generates a motive to manipulate profits? Would this be anticipated by principals, and if so, how would principals react to this expectation? (6 marks)

(d)Explain the efficiency perspective and the opportunistic perspective of positive accounting theory. (6 marks)

Question 2 (20 marks)

(a)Positive accounting theory assumes that all individual action is driven by self interest, with the self interest being tied to wealth maximization. (i) Is this a useful and/or realistic assumption? (ii) If we adopt this assumption, why would politicians introduce particular regulations? (iii) Why would you think researchers study particular issues?...
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