Advantages of normative accounting theory

Accounting Theory Revision

ACCOUNTING THEORY

PAST EXAMS!

1. Why would an energy firm be inclined to manage profits downwards in a financial year following a steep rise in gas and electricity charges to UK households? Use an accounting theory to explain the phenomenon.

2. Why do preparers of financial statements seem to prefer historic cost to replacement cost or fair value? Discuss the advantages and disadvantages of the various asset valuation models in your answer.

3. How do the underlying assumptions of capital market research and behavioural accounting research differ with respect to human behaviour?

4. Compare and contrast capital markets research with behavioural accounting research. Are they inconsistent with each other? Discuss.

5. Discuss the statement “All accounting research is interdisciplinary.” Illustrate your answer with a range of accounting theories.

6. How do the underlying assumptions of capital market research differ from those of behavioural research?

7. What assumptions, if any, does historical cost accounting make about the purchasing power of currency?

8. Discuss the main differences between PAT and systems-oriented theories with respect to explaining managerial discretionary behaviour.

9. Outline the arguments of the free market perspective with respect to the regulation of accounting. Do their arguments still hold after the financial crisis?

10. Why is there such a variety of accounting theories? [40%] b. Give examples of theories and explain how they differ [60%].

11. How do normative, positive, and critical theories differ? Give examples of each.

12. Discuss the statement that the typical investor can be termed homo heuristics rather than homo economics.

13. Use three accounting theories to explain why Starbucks sends its UK employees to work on coffee plantations in Africa.

14. What are the arguments in favour of using fair value to measure items included in the financial statements? [50%] What are the arguments against the use of fair value? [50%]

15. Explain the advantages and disadvantages of three different approaches to asset valuation.

16. How can the statement “information is the oil that lubricates markets” be used to justify accounting regulation? Discuss.

17. “If an accounting change that does not affect taxes is costly and has no other effect on firm value, why do managers make those changes?” (Watts and Zimmerman). Use insights from Positive Accounting Theory to explain this phenomenon.

18. Why do firms engage in social and environmental reporting? Discuss the different explanations given by three accounting theories.

19. How does the notion of ‘political economy’ differ from the economic focus of Positive Accounting Theory?

20. Discuss the main criticisms of Positive Accounting Theory (PAT)? Do you agree with them? Why/Why not?

21. How would you choose an accounting theory to investigate a particular phenomenon?

22. Discuss the statement that capital markets research concentrates on “the release of information to the public and the capital market reaction, [whereas behavioural research focuses on] what goes on between these two events”.

23. Discuss the alternative explanations put forward by positive accounting theory, legitimacy theory, stakeholder theory, and institutional theory regarding the provision of voluntary disclosures.

24. What is the difference between normative and positive accounting theory? Give examples of each.

25. Discuss the difference between the normative (ethical) and the positive (managerial) branch of stakeholder theory.

Revision Slides Example Questions!

1. What is the basis of the ‘market for lemons’ argument?

2. What is meant by saying that financial accounting information is a ‘public good’?

3. List some of the criticisms that can be made of historical accounting when it is applied in times of rising prices?

4. Explain the bonus hypothesis and the debt hypothesis of Positive Accounting Theory?

5. What is an agency relationship and what is an agency cost? How can agency costs be reduced?

6. Explain the political cost hypothesis of Positive Accounting Theory

7. What is organizational legitimacy and why might it be considered to be a ‘resource’?

8. Legitimacy theory, stakeholder theory and institutional theory are considered to be systems-oriented theories. What does this mean?

9. Explain the differences between the managerial and the ethical branch of stakeholder theory ?

10. What assumptions of market efficiency are typically adopted in capital market research in accounting? What do we mean by market efficiency?

11. If a firms releases its earnings figures for the year and there is no share price reaction, how would capital market researchers possibly explain this finding?

12. What, if any, effect would the size of a firm have on the likelihood that the capital market will react to the disclosure of accounting information?

13. Contrast behavioural accounting research with capital market research.

14. What is a ‘heuristic’ and why could it be beneficial for a group of financial statement users to be informed that they are applying a particular heuristic?