Testbank

to accompany

Contemporary Issues in Accounting

Michaela Rankin, Patricia Stanton, Susan

McGowan, Matthew Tilling, Kimberly
Ferlauto & Carol Tilt

Prepared by
Matt Tilling

John Wiley & Sons Australia, Ltd 2012

 Chapter 5 Theories in accounting

Chapter 5 Theories in accounting

Multiple Choice Questions

1. Theories in accounting can help us to understand the decisions of:

a. Financial information preparers

b. Financial information users
c. Financial information regulators
*d. All of the above

Correct answer: d
Learning Objective 5.1 ~ Evaluate how theories can enhance our understanding of accounting
practice.

2. Accounting theory helps us understand accounting better as:

a. A fundamental part of the natural universe

*b. A human endeavour
c. A random process
d. A representation of truth

Correct answer: b
Learning Objective 5.1 ~ Evaluate how theories can enhance our understanding of accounting
practice.

3. A normative theory

a. Is completely divorced from reality

b. Describes, explains or predicts activities
*c. Is based on what should be the case given a certain objective
d. Only focuses on normal activities

Correct answer: c
Learning Objective 5.2 ~ Identify the types of theories used in accounting.

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Testbank to accompany Contemporary Issues in Accounting

4. A positive theory

a. Is completely divorced from reality

*b. Describes, explains or predicts activities
c. Is based on what should be the case given a certain objective
d. Only focuses on rewarding activities

Correct answer: b
Learning Objective 5.2 ~ Identify the types of theories used in accounting.

5. Which of these is NOT an assumption on which positive accounting theory is based?

a. People are rational

b. People are wealth maximisers
*c. People prefer to act altruistically
d. None of the above, i.e. they are all assumptions of positive accounting theory?

Correct answer: c
Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine
how it explains accounting practice and disclosures.

6. According to agency theory the following are examples of bonding costs:

a. Auditing the financial reports

b. Putting in place operating rules
*c. Linking remuneration to performance
d. All of the above

Correct answer: c
Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine
how it explains accounting practice and disclosures.

7. Which of the following has been identified as a problem in owner-manager relationships?

a. Short-term focus
b. Risk aversion
c. Dividend retention
*d. All of the above

Correct answer: d
Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine
how it explains accounting practice and disclosures.

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 Chapter 5 Theories in accounting

8. Which of the following has been identified as a problem in owner-lender relationships?

a. Dividend retention
*b. Asset substitution
c. Over-investment
d. All of the above

Correct answer: b
Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine
how it explains accounting practice and disclosures.

9. Which of the following is NOT an important role for accounting in the agency
relationship?

*a. Identifying excessive perquisite consumption

b. Signalling good news to the market
c. Determining performance
d. Protecting lenders interests

Correct answer: a
Learning Objective 5.3 ~ Explain the general tenets of positive accounting theory and examine
how it explains accounting practice and disclosures.

10. A key underlying assumption of Institutional Theory is that people are:

a. Self-interested
*b. Likely to conform to external norms
c. Risk-adverse
d. All of the above

Correct answer: b
Learning Objective 5.4 ~ Explain institutional theory and examine how it explains
organisational structures.

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Testbank to accompany Contemporary Issues in Accounting

11. According to institutional theory which of the following statements is NOT true about
corporate social and environmental disclosure

a. It will be heavily influenced by regulation

b. Well organised external stakeholders will lead to increased disclosure
*c. Within industries the nature of the disclosure is likely to diverge over time
d. None of the above, i.e. they are all true.

Correct answer: c
Learning Objective 5.4 ~ Explain institutional theory and examine how it explains
organisational structures.

12. Legitimacy theory argues that

disclosure practice.

*a. Organisations can only continue to exist if they demonstrate values consistent
with society at large.
b. Organisations should focus on wealth maximisation for their owners
c. The business of business is business
d. Consumers are only interested in minimising costs to themselves.

Correct answer: a
Learning Objective 5.5 ~ Explain legitimacy theory and examine how it explains accounting

13. Which of the following is NOT one of the four ways an organisation can obtain or
maintain organisational legitimacy according to Lindblom?
disclosure practice.

a. Change perceptions of society, without changing its own behaviour

b. Manipulate perceptions by deflecting attention from societal concerns
c. Change its behaviour
*d. None of the above, i.e. they are all ways an organisation can obtain or maintain
legitimacy

Correct answer: d
Learning Objective 5.5 ~ Explain legitimacy theory and examine how it explains accounting

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 Chapter 5 Theories in accounting

14. Stakeholder theory

accounting disclosure practice.

a. Is completely different to legitimacy theory

b. Focuses on government power
*c. Has both a normative and positive version
d. All of the above

Correct answer: c
Learning Objective 5.6 ~ Explain stakeholder theory and examine how it prescribes and explains

15. Which of the following is NOT considered a stakeholder according to the managerial
branch of stakeholder theory?
accounting disclosure practice.

a. Communities
*b. Competitors
c. Customers
d. None of the above, i.e. they are all considered stakeholders

Correct answer: b
Learning Objective 5.6 ~ Explain stakeholder theory and examine how it prescribes and explains

16. According to stakeholder theory accounting information

accounting disclosure practice.

a. is seen as largely advertising

b. is unimportant to most stakeholders
c. is usually misleading
*d. is an important way to communicate with stakeholders

Correct answer: d
Learning Objective 5.6 ~ Explain stakeholder theory and examine how it prescribes and explains

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Testbank to accompany Contemporary Issues in Accounting

17. The central proposition of contingency theory is:

accounting disclosure practice.

a. Institutional norms drive organisational structure.

b. Organisational performance is largely random and poorly understood
*c. Organisational performance depends on the fit between organisational context and
structure.
d. Organisations are simply a nexus of contractual agreements.

Correct answer: c
Learning Objective 5.7 ~ Explain contingency theory and examine how it prescribes and
explains

18. Contingency theory proposes that

accounting disclosure practice.

a. Accounting policies are likely to be consistent within industries.

b. Size is not an important factor when considering management accounting
systems.
c. Shareholder needs drive accounting system choices.
*d. No universally consistent accounting system can apply to all organisations.

Correct answer: d
Learning Objective 5.7 ~ Explain contingency theory and examine how it prescribes and
explains

19. Agency theory would hold that managers on compensation contracts which have bonuses
tied to a current measure of performance would prefer to:

a. Be indifferent to expensing or capitalising transactions

b. Expense transactions rather than capitalise them.
c. Smooth income using either expensing or capitalising.
*d. Capitalise transactions rather than expense them.

Correct answer: d
Learning Objective 5.8 ~ Outline the different decisions made by accounting practitioners.

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 Chapter 5 Theories in accounting

20. Which of the following theories have been used to explain voluntary disclosure in the
annual report?

a. Stakeholder Theory
b. Legitimacy Theory
c. Institutional Theory
*d. All of the above

Correct answer: d
Learning Objective 5.8 ~ Outline the different decisions made by accounting practitioners.

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