Deegan_FAT3e_chapter_07

Student: ___________________________________________________________________________

1.  Watts and Zimmerman's Positive Accounting Theory is:  

A.  One of several normative theories of accounting

B.  One of several positive theories of accounting

C.  One of several critical theories of accounting

D.  None of the given options is correct

2.  A central assumption of Positive Accounting Theory is that:  

A.  Individuals act solely on the basis of self-interest

B.  Firms seek to maximise profits

C.  The interests of principals and agents are not aligned

D.  Financial statements will be audited regardless of legal requirements

3.  To test whether accounting information is useful, researchers such as Ball and Brown tested whether share
prices responded to:  
A.  Expected earnings announcements

B.  Forecast earnings announcements

C.  Unexpected earnings announcements

D.  All of the given options are correct

 
4.  The key theory that underpins Positive Accounting Theory is:  
A.  The Efficient Markets Hypothesis

B.  Agency theory

C.  Normative ethical theory

D.  None of the given options is correct

5.  The principal's expectation of opportunistic behaviour by his or her agent results in lower payments to:  
A.  The agent

B.  The principal

C.  The principal and the agent

D.  Neither the principal nor the agent

6.  According to agency theory, contracts that align the interests of the principal and agent primarily benefit:  
A.  The agent

B.  The principal

C.  Both the principal and the agent

D.  Neither the principal nor the agent

7.  Agency theory suggests that government regulation is:  

A.  Necessary, because principals know that agents may not act in their interests

B.  Necessary, because agents know that principals may not act in their interests

C.  Unnecessary, because principals know that agents may not act in their interests

D.  Unnecessary, because agents know that principals may not act in their interests

 
8.  The 'political cost hypothesis' of Positive Accounting Theory suggests that:  
A.  Large firms are more likely to use accounting choices that reduce reported profits

B.  Small firms are more likely to use accounting choices that reduce reported profits

C.  Neither large nor small firms are more likely to use accounting choices that reduce reported profits

D.  Both large and small firms are more likely to use accounting choices that reduce reported profits

9.  The 'bonus plan hypothesis' of Positive Accounting Theory suggests managers of firms with bonus plans tied
to reported income are more likely to use accounting methods that:  
A.  Increase prior period reported income

B.  Increase current period reported income

C.  Increase future period reported income

D.  None of the given options is correct

10.  The 'debt/equity hypothesis' of Positive Accounting Theory predicts that:  

A.  The higher the firm's debt/equity ratio, the more likely managers are to use accounting methods that lower
income

B.  The lower the firm's debt/equity ratio, the more likely managers are to use accounting methods that increase
income

C.  The higher the firm's debt/equity ratio, the more likely managers are to use accounting methods that increase
income

D.  None of the given options is correct

11.  The "efficiency perspective" of Positive Accounting Theory suggests that firms will:  
A.  Adopt the accounting methods that require the least resources to implement

B.  Adopt the accounting methods that result in the highest reported earnings

C.  Adopt the accounting methods that result in the lowest reported earnings

D.  Adopt the accounting methods that best reflect the underlying economic performance of the entity

 
12.  In respect of Positive Accounting Theory:  
A.  The opportunistic perspective is ex-post ,and the efficiency perspective is ex-ante

B.  The opportunistic perspective is ex-ante, and the efficiency perspective is ex-post

C.  Both the opportunistic and efficiency perspectives are ex-ante

D.  Both the opportunistic and efficiency perspectives are ex-post

13.  A manager electing to adopt a depreciation method that increases income, but does not reflect the actual use
of the asset, is consistent with:  
A.  The efficiency perspective of Positive Accounting Theory

B.  The opportunistic perspective of Positive Accounting Theory

C.  Both the opportunity and the efficiency perspectives of Positive Accounting Theory

D.  Neither the opportunity nor the efficiency perspectives of Positive Accounting Theory

14.  Which of the following parties desire the firm to take the most risks?  
A.  Managers

B.  Debtholders

C.  Owners

D.  All parties desire the firm to take the same level of risk

15.  Positive Accounting Theory suggests that bonus schemes benefit:  

A.  Only managers

B.  Only owners

C.  Both managers and owners

D.  Neither managers nor owners

 
16.  The main advantage of using accounting earnings instead of stock prices to determine bonuses is that:  
A.  Stock prices are influenced by market forces that are outside the control of management

B.  Accounting information is independently audited

C.  Accounting information is unbiased

D.  Stock prices may be manipulated by managers engaging in insider trading

17.  According to Positive Accounting Theory, using stock prices to determine bonuses  
A.  Increases the likelihood of management disclosing good news

B.  Increases the likelihood of management disclosing of bad news

C.  Increases the likelihood of management disclosing both good and bad news

D.  Has no effect on the likelihood of management disclosures

18.  According to Positive Accounting Theory, the existence of debt covenants:  

A.  Can be explained from an efficiency perspective, and gives management an incentive to manipulate
accounting information from an opportunistic perspective

B.  Can be explained from an opportunistic perspective, and gives management an incentive to manipulate
accounting information from an efficiency perspective

C.  Can be explained from both efficiency and opportunistic perspectives

D.  Cannot be explained

19.  A problem with Positive Accounting Theory is that:  

A.  It is not testable

B.  It has been empirically discredited

C.  It contributes little to improving accounting practice

D.  None of the given options is correct

 
20.  Which of the following is not a criticism of Positive Accounting Theory?  
A.  It is based on the assumption that all action is driven by wealth maximisation

B.  It is not value-free

C.  It has developed little in the past thirty years

D.  Its claims cannot be objectively verified

21.  A contribution of Positive Theory is that it enables us to understand:  

A.  Why interest groups expend resources lobbying for or against particular standards
B.  Why a manager adopts particular accounting techniques over others
C.  The effect accounting standards have on different groups and resource allocation
D.  All of the given options are correct

22.  Which of the following is an example of political costs under the PAT perspective?  
A.  Wage and salary deductions paid to unions
B.  Contributions to political parties
C.  Costs associated with increased wage claims
D.  The cost of remaining largely unnoticed by government regulatory agencies

23.  Which of the following is not an example of a Positive Accounting Theory or research?  
A.  True income theories
B.  Legitimacy Theory
C.  Costs associated with increased wage claims
D.  The cost of remaining largely unnoticed by government regulatory agencies

24.  Which of the following statements is not true about Positive Accounting Theory?  
A.  It is used to distinguish research aimed at explanation and prediction
B.  It is designed to explain and predict which firms will, and which firms will not, use a particular method, and
also prescribes which method a firm should use
C.  It focuses on the relationships between the various individuals involved in providing resources to an
organisation, and how accounting is used to assist in the functioning of these relationships
D.  One of the key theories that underpins Positive Accounting Theory is Agency theory

 
25.  Which of the following statements is true regarding the origins and development of Positive Accounting
Theory?  
A.  Positive research in accounting started coming to prominence around the mid-1960s, and appeared to
become the dominant research paradigm within financial accounting in the 1970s and 1980s
B.  The introduction of positive research into accounting represented a paradigm shift from normative research
to positive research
C.  Currently, almost all papers in Accounting Review and most other leading academic journals are positive
research-based
D.  All of the given options are correct

 
Deegan_FAT3e_chapter_07 Key
 

1.  Watts and Zimmerman's Positive Accounting Theory is:  

A.  One of several normative theories of accounting

B.  One of several positive theories of accounting

C.  One of several critical theories of accounting

D.  None of the given options is correct

Deegan - Chapter 07 #1
difficulty: easy
 

2.  A central assumption of Positive Accounting Theory is that:  

A.  Individuals act solely on the basis of self-interest

B.  Firms seek to maximise profits

C.  The interests of principals and agents are not aligned

D.  Financial statements will be audited regardless of legal requirements

Deegan - Chapter 07 #2
difficulty: easy
 
3.  To test whether accounting information is useful, researchers such as Ball and Brown tested whether share
prices responded to:  
A.  Expected earnings announcements

B.  Forecast earnings announcements

C.  Unexpected earnings announcements

D.  All of the given options are correct

Deegan - Chapter 07 #3
difficulty: easy
 

4.  The key theory that underpins Positive Accounting Theory is:  
A.  The Efficient Markets Hypothesis

B.  Agency theory

C.  Normative ethical theory

D.  None of the given options is correct

Deegan - Chapter 07 #4
difficulty: easy
 

5.  The principal's expectation of opportunistic behaviour by his or her agent results in lower payments to:  
A.  The agent

B.  The principal

C.  The principal and the agent

D.  Neither the principal nor the agent

Deegan - Chapter 07 #5
difficulty: easy
 
6.  According to agency theory, contracts that align the interests of the principal and agent primarily benefit:  
A.  The agent

B.  The principal

C.  Both the principal and the agent

D.  Neither the principal nor the agent

Deegan - Chapter 07 #6
difficulty: easy
 

7.  Agency theory suggests that government regulation is:  

A.  Necessary, because principals know that agents may not act in their interests

B.  Necessary, because agents know that principals may not act in their interests

C.  Unnecessary, because principals know that agents may not act in their interests

D.  Unnecessary, because agents know that principals may not act in their interests

Deegan - Chapter 07 #7
difficulty: medium
 

8.  The 'political cost hypothesis' of Positive Accounting Theory suggests that:  
A.  Large firms are more likely to use accounting choices that reduce reported profits

B.  Small firms are more likely to use accounting choices that reduce reported profits

C.  Neither large nor small firms are more likely to use accounting choices that reduce reported profits

D.  Both large and small firms are more likely to use accounting choices that reduce reported profits

Deegan - Chapter 07 #8
difficulty: easy
 
9.  The 'bonus plan hypothesis' of Positive Accounting Theory suggests managers of firms with bonus plans tied
to reported income are more likely to use accounting methods that:  
A.  Increase prior period reported income

B.  Increase current period reported income

C.  Increase future period reported income

D.  None of the given options is correct

Deegan - Chapter 07 #9
difficulty: easy
 

10.  The 'debt/equity hypothesis' of Positive Accounting Theory predicts that:  

A.  The higher the firm's debt/equity ratio, the more likely managers are to use accounting methods that lower
income

B.  The lower the firm's debt/equity ratio, the more likely managers are to use accounting methods that increase
income

C.  The higher the firm's debt/equity ratio, the more likely managers are to use accounting methods that increase
income

D.  None of the given options is correct

Deegan - Chapter 07 #10

difficulty: easy
 

11.  The "efficiency perspective" of Positive Accounting Theory suggests that firms will:  
A.  Adopt the accounting methods that require the least resources to implement

B.  Adopt the accounting methods that result in the highest reported earnings

C.  Adopt the accounting methods that result in the lowest reported earnings

D.  Adopt the accounting methods that best reflect the underlying economic performance of the entity

Deegan - Chapter 07 #11

difficulty: easy
 
12.  In respect of Positive Accounting Theory:  
A.  The opportunistic perspective is ex-post ,and the efficiency perspective is ex-ante

B.  The opportunistic perspective is ex-ante, and the efficiency perspective is ex-post

C.  Both the opportunistic and efficiency perspectives are ex-ante

D.  Both the opportunistic and efficiency perspectives are ex-post

Deegan - Chapter 07 #12

difficulty: easy
 

13.  A manager electing to adopt a depreciation method that increases income, but does not reflect the actual use
of the asset, is consistent with:  
A.  The efficiency perspective of Positive Accounting Theory

B.  The opportunistic perspective of Positive Accounting Theory

C.  Both the opportunity and the efficiency perspectives of Positive Accounting Theory

D.  Neither the opportunity nor the efficiency perspectives of Positive Accounting Theory

Deegan - Chapter 07 #13

difficulty: hard
 

14.  Which of the following parties desire the firm to take the most risks?  
A.  Managers

B.  Debtholders

C.  Owners

D.  All parties desire the firm to take the same level of risk

Deegan - Chapter 07 #14

difficulty: easy
 
15.  Positive Accounting Theory suggests that bonus schemes benefit:  
A.  Only managers

B.  Only owners

C.  Both managers and owners

D.  Neither managers nor owners

Deegan - Chapter 07 #15

difficulty: easy
 

16.  The main advantage of using accounting earnings instead of stock prices to determine bonuses is that:  
A.  Stock prices are influenced by market forces that are outside the control of management

B.  Accounting information is independently audited

C.  Accounting information is unbiased

D.  Stock prices may be manipulated by managers engaging in insider trading

Deegan - Chapter 07 #16

difficulty: medium
 

17.  According to Positive Accounting Theory, using stock prices to determine bonuses  
A.  Increases the likelihood of management disclosing good news

B.  Increases the likelihood of management disclosing of bad news

C.  Increases the likelihood of management disclosing both good and bad news

D.  Has no effect on the likelihood of management disclosures

Deegan - Chapter 07 #17

difficulty: medium
 
18.  According to Positive Accounting Theory, the existence of debt covenants:  
A.  Can be explained from an efficiency perspective, and gives management an incentive to manipulate
accounting information from an opportunistic perspective

B.  Can be explained from an opportunistic perspective, and gives management an incentive to manipulate
accounting information from an efficiency perspective

C.  Can be explained from both efficiency and opportunistic perspectives

D.  Cannot be explained

Deegan - Chapter 07 #18

difficulty: hard
 

19.  A problem with Positive Accounting Theory is that:  

A.  It is not testable

B.  It has been empirically discredited

C.  It contributes little to improving accounting practice

D.  None of the given options is correct

Deegan - Chapter 07 #19

difficulty: easy
 

20.  Which of the following is not a criticism of Positive Accounting Theory?  

A.  It is based on the assumption that all action is driven by wealth maximisation

B.  It is not value-free

C.  It has developed little in the past thirty years

D.  Its claims cannot be objectively verified

Deegan - Chapter 07 #20

difficulty: easy
 
21.  A contribution of Positive Theory is that it enables us to understand:  
A.  Why interest groups expend resources lobbying for or against particular standards
B.  Why a manager adopts particular accounting techniques over others
C.  The effect accounting standards have on different groups and resource allocation
D.  All of the given options are correct

Deegan - Chapter 07
difficulty: easy
 

22.  Which of the following is an example of political costs under the PAT perspective?  
A.  Wage and salary deductions paid to unions
B.  Contributions to political parties
C.  Costs associated with increased wage claims
D.  The cost of remaining largely unnoticed by government regulatory agencies

Deegan - Chapter 07
difficulty: medium
 

23.  Which of the following is not an example of a Positive Accounting Theory or research?  
A.  True income theories
B.  Legitimacy Theory
C.  Costs associated with increased wage claims
D.  The cost of remaining largely unnoticed by government regulatory agencies

difficulty: medium
 

24.  Which of the following statements is not true about Positive Accounting Theory?  
A.  It is used to distinguish research aimed at explanation and prediction
B.  It is designed to explain and predict which firms will, and which firms will not, use a particular method, and
also prescribes which method a firm should use
C.  It focuses on the relationships between the various individuals involved in providing resources to an
organisation, and how accounting is used to assist in the functioning of these relationships
D.  One of the key theories that underpins Positive Accounting Theory is Agency theory

Deegan - Chapter 07
difficulty: hard
 
25.  Which of the following statements is true regarding the origins and development of Positive Accounting
Theory?  
A.  Positive research in accounting started coming to prominence around the mid-1960s, and appeared to
become the dominant research paradigm within financial accounting in the 1970s and 1980s
B.  The introduction of positive research into accounting represented a paradigm shift from normative research
to positive research
C.  Currently, almost all papers in Accounting Review and most other leading academic journals are positive
research-based
D.  All of the given options are correct

Deegan - Chapter 07
difficulty: easy
 
Deegan_FAT3e_chapter_07 Summary

Category #  of  Question

s
Deegan - Chapter 07 24
difficulty: easy 17
difficulty: hard 3
difficulty: medium 5