Accounting Theory Exam Review
Accounting Theory Exam Review
Part I – 25 MC
Part II – 2 marks
Part III – 10 marks
Part IV – 7 marks
Part V – 10 marks
Total – 54 marks
Chapter:
8 – 5 marks
9 – 16 marks
10 – 6 marks
11 – 5 marks
12 – 10 marks
13 – 5 marks
Reading – 7 marks
Total – 54 marks
Chapter 8 – Economic Consequence
If they do not affect cash flow, they do not matter. Stock should not change by the change in accounting policy, two examples in book where this did not hold (1. employee stock option – authorities proposed that employee stock options be expense has no impact on cash therefore should have no impact on stock price but price was falling strong indication that accounting policies do matter 2. Dry holes companies were allowed to amortize dry holes but there was no revenue generated so it does not make sense so the only holes you could amortize is the successful ones ie holes where they found the oil.. dry holes would be expensed does not affect cash flow therefore should not affect price of stock, companies who were amortizing dry holes saw their price fall – accounting policy does matter --- significance = accounting theory/policy matter.. managers of a company are going to try and keep up the price of stock therefore they will do things that have an influence on price and determines the cost of capital)information that it trades on is important
-difference between positive accounting theory (predict what will happen—measure is how accurate it is) and normative theory (predicts what should happen—is a good theory if it is logical – ex single person decision theory) managers will shift the income into the current period in order to increase their bonus (difficult to measure the shifting of income). Come up with three hypothesis that would support the positive accounting theory 1. Bonus plan (managers will try to move the income into the period where its going to benefit them) 2. Debt convenient (managers will try to avoid a default in the contractual
Part I – 25 MC
Part II – 2 marks
Part III – 10 marks
Part IV – 7 marks
Part V – 10 marks
Total – 54 marks
Chapter:
8 – 5 marks
9 – 16 marks
10 – 6 marks
11 – 5 marks
12 – 10 marks
13 – 5 marks
Reading – 7 marks
Total – 54 marks
Chapter 8 – Economic Consequence
If they do not affect cash flow, they do not matter. Stock should not change by the change in accounting policy, two examples in book where this did not hold (1. employee stock option – authorities proposed that employee stock options be expense has no impact on cash therefore should have no impact on stock price but price was falling strong indication that accounting policies do matter 2. Dry holes companies were allowed to amortize dry holes but there was no revenue generated so it does not make sense so the only holes you could amortize is the successful ones ie holes where they found the oil.. dry holes would be expensed does not affect cash flow therefore should not affect price of stock, companies who were amortizing dry holes saw their price fall – accounting policy does matter --- significance = accounting theory/policy matter.. managers of a company are going to try and keep up the price of stock therefore they will do things that have an influence on price and determines the cost of capital)information that it trades on is important
-difference between positive accounting theory (predict what will happen—measure is how accurate it is) and normative theory (predicts what should happen—is a good theory if it is logical – ex single person decision theory) managers will shift the income into the current period in order to increase their bonus (difficult to measure the shifting of income). Come up with three hypothesis that would support the positive accounting theory 1. Bonus plan (managers will try to move the income into the period where its going to benefit them) 2. Debt convenient (managers will try to avoid a default in the contractual