PG-FAT-Positive theory

Q1: 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.

Q2: Liam, Noah, and Ava are discussing Positive Accounting Theory in their accounting class. Ava argues that there is a problem with Positive Accounting Theory. Which of the following is her argument?

• 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 are correct.

Q3: 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 are correct.

Q4: Avery, Charlotte, and Olivia are discussing Positive Accounting Theory in their study group. According to this theory, which of the following assumptions would they agree is central? 

• A. 

  Individuals, like Avery, Charlotte, and Olivia, act solely on the basis of self-interest.

• B. 

  Firms, like the ones Avery, Charlotte, and Olivia might work for in the future, seek to maximise profits.

• C. 

  The interests of principals and agents, like Avery, Charlotte, and Olivia, are not aligned.

• D. 

  Financial statements, like the ones Avery, Charlotte, and Olivia might review, will be audited regardless of legal requirements.

Q5. Benjamin, Sophia, and Ethan are studying for their accounting exam. They come across a question about Watts and Zimmerman's Positive Accounting Theory. They understand it to be: q5

• 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 are correct.

Q6: Liam, Evelyn, and Rohan are studying for their accounting exam. They are discussing a research by Ball and Brown. They want to understand what share prices responded to in the research. Can you help them?

• A. 

  Expected earnings announcements

• B. 

  Forecast earnings announcements

• C. 

  Unexpected earnings announcements

• D. 

  All of the given options are correct.

Q7: 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

Q8: Which of the following is not true about Positive Accounting Theory? 

• A. 

  A positive theory seeks to explain and predict particular phenomena.

• B. 

  A positive theory focuses on the relationships between various individuals and how accounting is used to assist in the functioning of these relationships.

• C. 

  A positive theory prescribes how a particular practice should be undertaken.

• D. 

  All of the given options are correct.

Q9. The 'debt/equity hypothesis' of Positive Accounting Theory predicts which of the following? 

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

• D. None of the given options are correct.

Q10. It is common practice for managers to be rewarded in a way that is tied to the profits of the firm, the sales of the firm, or the return on assets. That is, their remuneration is based on the output of the accounting system. Which of the following is a drawback for such bonus schemes? 

• A. 

  Bonus schemes tied to the performance of the firm will be put in place to align the interests of the owners and the managers.

• B.

  Rewarding managers on the basis of accounting profits may induce them to manipulate accounting numbers.

• C.There would be limited incentives for the manager to adopt risky strategies that increase the value of the firm.

• D. The manager may be reluctant to take on optimal levels of debt.