University of the South Pacific School of Accounting and Finance Semester 1, 2016 AF301 Accounting Theory and Applications (Print Mode) Mid-Semester Test Instructions There are six pages in this test paper, including this cover page All questions are compulsory You may use a hand-held non-programmable calculator. This is not supplied. You have 10 minutes to read the paper and 2 hours to write your answers This test has a total mark of 50 and carries a 25% weighting towards your overall course gradeSection A Multiple Choices «15 marks Answer this section on the special answer sheet provided. Each question is worth 1.5] marks. Spend about 25 minutes on this section. Use the following information to answer Questions 1 and 2 1_ | Descriptive pragmatic approach Il_| Normative accounting theory U_| Psychological pragmatic approach IV_ Positive accounting theory L_| Which of the following statements is INCORRECT? | a} Historical cost emerged through approach |. b) Under approach Il, the usefulness of financial statements is evaluated through users’ responses. ¢) Continuously contemporary accounting was developed through approach Ill. d) Approach IV is generally associated with the naturalistic approach to research. 2 | Which of the following statements is INCORRECT? _ a) I describes the accounting methods used by accountants. b) Il predicts the accounting methods preferred by users. ©) Ill prescribes how accountants should measure income. 4d) \Vexplains accounting choices made by firms. Use the following information to answer Questions 3 and 4 Premise 1 _ | All equity accounts have credit balances Premise 2 Dividend Paid is an equity account sion _| Dividend Paid has a credit balance 3_| The conclusion above has been derived through: a) Deduction. b) Induction. ©) Observation. d) Scientific approach. 4 | The conclusion above: a) Is syntactically valid but semantically incorrect. b) Is syntactically invalid but semantically correct. ¢) Is syntactically valid and semantically correct. d) Is syntactically invalid and semantically incorrect. Page 2 of 6Use the following information to answer Questions 5 and 6 [1 [interval scale t_[ Ordinal scale 1] Nominal scale’ W_[ Ratio scale | 5 | Jane calculated the material quantity variance by comparing the standard cost of materials (set by management) with the actual cost of materials. The standard cost was $10,000 and the actual cost was $10,200. Therefore the materials quantity variance was $200 (unfavourable). The variance is based on: a) I. b) i co) Hi a). 6 | Which of the above could be used for ranking? a) and. b) Mand Ill ©) Only tt d) |, Hand iv. Use the following information to answer Questions 7 and 8 |_| Free riders [il] Free market approach [| Lobbying ard setters 7 | Which of these terms are associated with private interest theory? ~a) landil b) ill and Iv. c) land Iv. d) Wand ut 8 | Which of the following statements is INCORRECT? a) lare likely to over-demand accounting information because it is free. b) Il requires financial resources and organisation. cc) I will ensure that firms disclose comparable information. d) 1V could be government or another body Page 3 of 63_| which of the following is least likely to reflect economic reality? a] Current cost. i Fair value. Historical cost. Market value 10 | Which of the following statements is INCORRECT? 3) Market value is ideally based on active markets. b) Current cost is relevant for replacement decisions. c) Historical cost is easy to verify. 4d) Fair value is not reliable. [Section Short Answers 15 marks Spend about 45 minutes on this section. | Answer ALL questions in this section. Each question is worth 5 marks. For each question, a good answer would be between 4 and 6 sentences. Question 11 Susan is engaged in a research project which involves 1,000 listed companies. Her research is based on a hypothesis that there is no significant difference between the discretionary accruals of large and small companies. Susan hopes her research will provide insight to the practices of all companies around the world a) State whether Susan is using a naturalistic or scientific approach. b) Using the information provided, briefly outline at least three reasons to support your answer. Page 4 of 6Question 12 At the start of the year, Ni ia used $10,000 of her savings to purchase a taxi. During the year she made 3 profit of $30,000. At the end of the year, the purchase price of similar taxis has increased to $20,000. a) Briefly outline the difference between financial capital and physical capital. b) Calculate how much Natalia can withdraw from the business at the end of ‘the year if she wants to maintain her i) Financial capital. ii) Physical capital. Question 13 Hibiscus Ltd has recently completed its annual stocktake. Some employees physically counted the stock and found there were 5,000 items on hand. Based on IFRS, the finance manager decided to use the FIFO method for inventory valuation. The accountant then multiplied the number of inventory items by the unit cost. The unit cost was determined from a computer worksheet. Briefly outline how each of the following have been used in the case above: a) Derived measurement. b) Fiat measurement. c} Fundamental measurement. Page Sof 6Sectionc Essay 20 marks. Spend about 50 minutes on this section. A good answer would be between 1 and 2 pages. Question 14 “Regulatory capture may occur when public interest theory goes wrong.” a) Outline the main features of regulatory capture theory [10 marks]. b) Discuss how regulatory capture theory explains the standard setting process in Fiji. You may refer to the article by Chand and White (2006) provided in the course material [10 marks]. THE END Page 6 of 6