Issues in accounting-topics 1-4

Question 1

What is regulation?

Answer 1

Is designed to control or govern conduct

Question 2

What is the free market perspective?

Answer 2

(anti-regulation) That even in the absence of regulation, there are private economics-based incentives for organisations to provide credible information about its operations and performance to certain parties, otherwise its operating costs rise.

Question 3

What is a stakeholder?

Answer 3

A person, group, organisation, member or system that affects or can be affected by an organisations actions.

Question 4

What are free-market theories?

Answer 4

Market for managers
Market for corporate takeovers
Market for lemons

Question 5

What is market for managers?

Answer 5

A market in which managers negotiate their salaries on the basis of their ability and performance. Information about past performance is assumed to be known by participants in this market.

Question 6

What is market for corporate takeovers

Answer 6

A market in which corporations are bought and sold. Managers will try to maximise form value to minimise the likelihood that outsiders could seize control of the organisation at low cost.

Question 7

What is positive accounting theory?

Answer 7

A theory that seeks to predict and explain why managers and/or accountants elect to adopt particular accounting methods in preference to others.

Question 8

What is normative or prescriptive theory?

Answer 8

Based on the norms or values or beliefs held by researchers proposing the theories, it is usually based on a process of deduction rather than induction. (prescribes what accounting actions should be undertaken)

Question 9

What is positive research?

Answer 9

Explaining/predicting based on observation.

Question 10

What is normative research?

Answer 10

Prescribes what should be done.

Question 11

What is ‘free market’?

Answer 11

A market in which the supply of goods and services, and the respective prices, are determined on the basis of the forces of supply and demand.

Question 12

What are pro-regulation arguments?

Answer 12

Public interest theory

• Capital market
• Information market
• stakeholder power

Question 13

What is public interest theory?

Answer 13

A theory of regulation which suggests that regulation is developed in the ‘public interest’. Regulators are assumed to be motivated by public interest and will select regulation on the basis that the social benefits of the regulation exceed the social costs.

Question 14

What are anti-regulation theories?

Answer 14

Capture Theory and Private interest theory

• Capital markets
• information market
• firm efficiency

Question 15

What is capture theory?

Answer 15

This theory suggests that although regulation is often introduced to protect the public, the regulatory mechanisms are often subsequently captured so as to protect the interests of particular self-interested groups within society, typically those whose activities are most affected by the regulation.

Question 16

What is private interest theory?

Answer 16

Also known as economic interest theory, it proposes that the regulators introduce regulation that best serves the regulators’ own private interest. That is, regulators are motivated not by the public interest but by their own self-interest.

Question 17

What is the free market approach?

Answer 17

An approach wherein somebody believes that how and whether a good or service is produced should be left to market forces of supply and demand.

Question 18

What are market for lemons?

Answer 18

The theory that the failure to provide information is viewed the same as providing bad information, so this perspective provides an incentive for managers to release information in the absence of regulation as failure to do so will have implications for the manager’s wealth.

Question 19

How can differences in accounting naturally arise?

Answer 19

• culture (cultural values)
• religion
• legal systems
• owner structure, financing
• tax systems

Question 20

What are types of measurement of accounting?

Answer 20

• Fair value
• Present value
• Mixed measurement model of accounting

Question 21

What is fair value?

Answer 21

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 22

What is present value?

Answer 22

The value of an item to be received or paid for in the future expressed in terms of its value today

Question 23

What is a mixed measurement model of accounting?

Answer 23

an approach to accounting wherein a variety of measurement approaches are used to measure assets and liabilities.

Question 24

What are historical costs?

Answer 24

Assets that are recorded at the amount of cash or cash equivalents paid, or the fair value of the consideration given, to acquire them at the time of their acquisitions.

Question 25

What is Current Purchasing Power Accounting (CPPA)?

Answer 25

was developed on the basis of a view that, in times of rising prices, if an entity were to distribute unadjusted profits based on historical costs the result could be a reduction in the real value of an entity. It relies upon the use of indices, and is considered easier and less costly to apply.

Question 26

What is Current cost accounting (CCA)?

Answer 26

using current costs as opposed to historical costs (HC), and differentiates between profits from trading and those gains that result from holding an asset.

Question 27

What is CoCoA?

Answer 27

Continuously contemporary accounting, is a form of current cost accounting that is based on valuing assets at their net selling prices (exit prices) at the end of the reporting period and on the basis of orderly sales.

Question 28

What is a 'conceptual framework'?

Answer 28

A set of coherent ideas and concepts organised in a manner that makes them easier to communicate.

Question 29

What are building blocks 1 of the conceptual framework?

Answer 29

Users, reporting entities, objectives, qualitative characteristics, and elements of financial statements

Question 30

What are building blocks 2 of the conceptual framework?

Answer 30

Recognition and measurement

Question 31

What is the definition of the element of asset?

Answer 31

A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Question 32

What is the definition of the element of liability?

Answer 32

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 33

What is the definition of the element of equity?

Answer 33

a residual interest in the assets of an entity after deduction of its liabilities.

Question 34

What are the important elements of the objective of stewardship?

Answer 34

Relevance | Faithful representation

Question 35

What are the important elements of the objective of decision usefulness?

Answer 35

Comparability Verifiability (faithful representation of economic phenomena) Timely Understandable

Question 36

What is the definition of the element of expense?

Answer 36

A decrease in economic benefits during the period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity other than those relating to distributions to equity participants.

Question 37

What is the definition of the element of income?

Answer 37

an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants.

Question 38

When should defined elements be recognised?

Answer 38

If, a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and b) the item has a cost or value that can be measured with reliability

Question 39

How are the elements measures?

Answer 39

On a historical cost basis and current value basis