1. What is the relationship among agency theory, economic consequences, and signalling? Explain in depth 2. Benston (1982, p. 102), in an analysis of corporate social accounting and reporting (CSAR), says: “The social responsibility of accountants can be expressed by their forebearing from social responsibility accounting.” However, in a critique of Benston’s analysis, Schreuder and Ramanathan (1984, p. 414) state: The comments . . . do not purport to convey the message that there is no value at all in analyzing the potential of CSAR from a shareholder perspective and proceeding from the (implicit) assumption of perfect and complete markets. We do, however, wish to point out that this may not be the most appropriate perspective as (1) CSAR is addressed toward a more inclusive group of stakeholders and (2) one of its main objectives is to include in the accounting system those aspects of corporate behavior that are decidedly not handled well by the market. Therefore, the perspective implied in Benston’s analysis is of very limited value at best. Required: CSAR assumes there is a legitimate interest or “stake” in the corporation beyond the stockholders’ interests, and that these other stakeholders’ interests are not well served by traditional financial statements. Therefore, it follows that within a broad political economy of accounting, CSAR is an important policy-making issue. Critically evaluate this proposition and indicate your agreement or disagreement and the underlying reasons for your position. 3. Discuss the economic consequences issues that are present in each of the following transaction situations. SFAS No. 13 allows lease contracts to be set up so that the transaction can usually be set up as an operating lease rather than a capital lease. When SFAS No. 19 was passed, medium-sized petroleum exploration firms campaigned hard to set it aside. SFAS No. 19 would have allowed successful efforts only, whereas the lobbying firms wanted an unrestricted choice between full costing and successful efforts. A securities industry group objected to part of APB Opinion No. 10, which would have required that all convertible debt be broken down into debt and equity portions at the time of issue. The debt portion (bonds payable plus premium or minus discount) would be booked at the effective rate without the conversion privilege with the equity portion credited to paid-in capital. The industry group was pleased by APB Opinion No. 14, which did not break out the equity portion of convertible debt except if detachable stock warrants were issued. Why was the securities industry group (which represented investment bankers who floated large loans for industry) unhappy with Opinion No. 10 and pleased with Opinion No. 14? SFAS No. 87 does not show the full pension obligation or liability in the balance sheet (although a “minimum” liability may be present). SFAS No. 96 made it much more difficult to recognize deferred tax assets as opposed to deferred tax liability (a more even-handed treatment was used in recognizing deferred tax assets and liabilities in SFAS No. 109, which superceded SFAS No. 96). The FASB tried to include the cost of stock options as an expense but they were prevented from doing so by vociferous opposition from the business community, although it now is going to happen under SFAS No. 123R. 4. Although a recent study by Barton and Waymire indicates that there are incentives for higher quality financial information under unregulated financial reporting, why is this finding not an effective one in support of unregulated financial reporting? 5. Etzioni (2009) argues that the 2008 financial crisis points towards widespread regulatory capture resulting in special interests benefiting from the capture. Rather than pursue more or less regulation, Etzioni argues for capture-proof regulations. Evaluate Etzioni’s proposals.
> The measurement process itself is quite ordinary and routine in virtually all situations. Comment on this statement.
> Is accounting theory, as the term is defined in this text, exclusively developed and refined through the research process?
> Comment on the following statement: Cash flow from operating activities is the most important section of the SCF. Hence, analysis should be focused on this section.
> How can political factors be an input into accounting policy-making if the latter is concerned with governing and making the rules for financial accounting?
> Of the three inputs to the accounting policy-making function, which do you think is the most important?
> 1.Refer to either a current intermediate accounting text or a guide to current “generally accepted accounting principles.” Give at least one example for each of the four cells of Exhibit 9-1 (your instructor may desire to modify this problem). 2. Compare
> Williams and Ravenscroft (2015) question decision usefulness as the basis for accounting standards. Take a position and argue its merits.
> Do you see an evolutionary process involving the documents and reports presented in this chapter? Explain.
> How can accounting move more toward becoming a science rather than an art? Discuss.
> What role should the AICPA assume in the possible development of “baby GAAP” standards?
> If you could relate materiality, disclosure, and conservatism to types of measurements (nominal, ordinal, interval, and ratio scale), how would you do so?
> How permanent do you think the postulates and principles underlying historical costing will be?
> The FASB and AICPA are considering the addition of “baby GAAP” for private companies. Take a position and argue why two GAAPs should or should not exist?
> The value of the firm is equal to the discounted value of the firm's free cash flows. Is it possible to forecast distant free cash flows? If not, what is the alternative?
> Why have management consulting operations created problems for the public accounting industry? How has SOX affected these problems?
> Is accounting theory really necessary for the making of accounting rules? Discuss.
> Every fall U.S. News and World Report comes out with a much awaited ranking of American colleges and universities (you may have even used it yourself). While there has been much criticism of the methodology that the magazine employs as well as some “fudg
> What are the implications of Young (2006) on the standards promulgated by standards setting bodies?
> Bradbury and Harrison (2015) study dissenting opinions in Financial Accounting Standards Board (FASB) standards. What changes, if any, do these opinions suggest need to be made in the conceptual framework?
> If different user groups do have different objectives, how might the situation be handled?
> Murphy, et al (2013) argue “living law” applies to conceptual frameworks. How does this perspective affect current frameworks?
> 1.Revenue recognition, when the right of return exists, was standardized in 1981 by SFAS No. 48. Prior to this, SOP 75-1 provided guidance but was not mandatory (which is why the FASB has brought various SOPs into the accounting standards themselves). As
> 1. Assume that an asset is being examined and it is determined that its cash flows would be $10,000 per year for four years (assume that all cash flows are received at the end of the year). The carrying value of the asset is $35,000 and its replacement c
> 1. What are the main distinctions between the Anglo-Saxon and the Continental models relative to accounting and financial reporting? Within the Anglo-Saxon group, how does the United States differ from other members of the group? What developments are le
> Should a CEO be evaluated based on one year's cash flows? Why or why not? (Your answer might be affected by your definition of cash flow.)
> How might the “capture” of auditors by auditees be mitigated?
> Evaluate the costs and benefits of the accounting standard-setting process (versus an unregulated environment).
> Liu and Espahbodi (2014) suggest that a firm’s dividend policy affects its propensity to smooth earnings. How might this finding affect financial statement analysis?
> Moehrle et al. (2010) respond to the FASB regarding possible financial statement presentation changes. Evaluate their response.
> The question of the usefulness of cost allocations (discretionary accruals and management compensation plans) has been introduced in this and previous chapters. What, if anything, would you do about (fixed) cost allocations? Don’t forget to consider poli
> Ball (2009) evokes the question of responsibility for the rash of accounting scandals in the 2000s. What actions do you propose to address the problem, if you agree that one exists?
> In July 2003, the SEC submitted to Congress its Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System. A year later, FASB issued its repl
> It might be said that we are slowly moving toward an asset-liability approach in the balance sheet. Which event situations support this statement?
> The IASB and FASB are pursuing a single, converged conceptual framework. The United States has a good start with SFAC No. 8. What additional changes should FASB make to further improve its conceptual framework?
> Why do we need international accounting standards? Why not simply let each country develop and use its own standards and let it go at that?
> Reexamine Exhibit 13.11. Explain the purpose of each performance measure. As a manager, which performance measure would you want to use. Which measure would you want used to evaluate you? Why? How would your decision change if your firm was experiencing
> To what extent should the liquidity measures revisions be considered if LIFO were to be eliminated from U.S. GAAP? Provide examples of those likely measures that would be affected. . As an interesting side note, what does the 2016 United States Budget es
> How do you think the efficient-markets hypothesis impacts the drafting of accounting standards? Bear in mind that many questions have been raised about the efficient markets hypothesis itself.
> Monsen (2001) proposes using cameral accounting to reduce the difficulties in preparing the Statement of Cash Flows using the direct method. Evaluate Monsen’s proposal from an implementation perspective.
> Broome (2004) recommends that the FASB should provide more guidance on classification of cash flows for the three sections. What guidance would you suggest?
> Why is the use of free cash flows increasing?
> What is cash flow? In your answer, be sure to reference the use to which it is put.
> Do you think that the indirect method of reporting cash flows from operations should be eliminated, allowing only the direct method in the SCFs? Discuss.
> 1. The usefulness of accounting data to investors and creditors for predictive purposes is necessarily forward looking. However, under generally accepted accounting principles, financial statements are constructed primarily as an historical record. Requi
> 1. A crucial question brought up in this chapter concerns the issue of whether the admittedly heterogeneous users of financial statements have highly diverse information needs in terms of their underlying objectives. State as carefully as you can (1) wh
> 1. Critique A Statement of Basic Accounting Postulates and Principles by a study group at the University of Illinois (it should be on reserve or otherwise made available to you). Your critique should cover, but not be restricted to, the following points:
> Why may interindustry income uniformity be more difficult to achieve than intraindustry uniformity, and what are the implications of this in terms of a conceptual framework project, specific accounting standards, and comparability of accounting income nu
> Morunga and Bradbury (2012) find that IFRS adoption may lead to some adverse disclosure results. Discuss their findings.
> What is the relationship between uniformity (both finite and rigid) and disclosure?
> 1. During its long tenure, the CAP produced a total of 51 ARBs. While the CAP was in existence, another committee, the Committee on Terminology of the American Institute of Accountants (the previous name of the AICPA), prepared certain definitions. Asses
> 1. Assume that three accountants have been selected to measure the income of a firm under two different income measurement systems. The results for the first income system (M1) were incomes of $3,000, $2,600, and $2,200. Under the second system (M2), res
> Do you think that the income tax return mandated by the federal government is an example of user heterogeneity? Why or why not?
> Past viewpoints expressed that financial statement preparers are also the largest class of users of financial statements. Hence, the preparer has a “unique ability” to recognize user needs that the FASB does not really appreciate. Critique this viewpoint
> Under an accountability orientation, Ijiri makes a strong case for the use of historical costing including the possibility of general price-level adjustments. Why do you think he has made this choice?
> Why has Ijiri advocated the need for a conceptual framework to implement accountability?
> What potential conflicts are present in terms of different user needs?
> Why is income smoothing difficult to research, and what are the research findings to date?
> How do the research orientations of accounting in Chapter 2 compare with SATTA’s organization of research?
> APB Statement 4 defines assets in the following terms: “Assets are economic resources of an enterprise that are recognized and measured in conformity with generally accepted accounting principles. Assets also include certain deferred charges that are not
> Why is the problem of heterogeneous users so critical in the development of accounting theory?
> Do you think that the standards mentioned in ASOBAT are really standards? Why or why not?
> Do you think that the funds flow statement is more “factual” and less “interpretative” than the income statement and balance sheet?
> How do objectives differ from postulates?
> 1. Agency theory takes the view that the corporation is the locus or nexus of many competing and conflicting interests. List as many of these conflicting groups as you can and discuss in detail the nature of their conflicts with other groups. 2. Using th
> 1. Presented in the exhibit for Case 1 (see text) is a graph of accounting income, cash flows from operations, and working capital flows from operations for W. T. Grant Company, a retailer that filed for bankruptcy in 1976. As late as 1973, the company’s
> 1. Discuss as many of the potential trade-offs among the qualities mentioned in SFAC No. 8 as you can and give either a general or a concrete example of each one. 2. Analyze three accounting standards promulgated by the FASB and show how economic consequ
> In 2003, South Africa was the first country to adopt IFRS with fair value accounting. The country does not allow for differential accounting treatment depending on the size of enterprise. What type of response do you expect from this implementation?
> Describe the incentives that might motivate income smoothing, and the ways it could be done.
> The comingling of legal and contingent liabilities exists under current GAAP accounting. Discuss potential problems this creates and propose alternatives to address them.
> Since the FASB makes the standards that are used by business and industry, they make accounting theory. Comment on this statement.
> Do you think that changes brought about in accounting standards by failures of publicly traded companies such as Enron should be classified under political factors or economic decisions? Support your position.
> What type of measurement is the measurement of objectivity in Equation (1.1): nominal, ordinal, interval, or ratio scale?
> Why do the value choices (entry value, exit value, and historical cost) fall within the domain of accounting theory?
> The Trueblood Committee Report advocated the use of financial forecasts. Why do you think that adoption of this suggestion has been very unenthusiastically received by preparers and auditors?
> How has the definition of accounting been modified in recent years?
> The statement of Herbert Miller (footnote 33) is closest to which theoretical approach delineated in SATTA?
> If a division manager of a firm were fired due to poor operating results, would this be an example of stewardship?
> What is the relationship between “stewardship” and “accountability”? Discuss.
> As a potential investor, what do you feel would be the most useful attribute of measurement for each of the following: inventories held for sale, inventories held for production, and long term debt? Would your answer differ if you were a potential lender
> Why would “fairness” in financial reporting be difficult to implement?
> Why is comprehensive income an application of proprietary theory?
> Why is it difficult to evaluate the regulation question?
> How do protective and informative disclosures differ?
> Multiple approaches have been advocated concerning the definition of accounting elements and the relationship between the balance sheet and income statement. What are these approaches and how do they differ?
> Why is there no matching problem for periodic costs, and what are some examples?
> An individual who was appraising accounting education had the following premises (assumptions): • Accounting professors used to do more consulting with accounting practitioners than they do today. • Accounting professors have become more interested in re
> What is the efficient-markets hypothesis?
> The limitation of the accounting classification system depicted in Exhibit 11-1 was referred to throughout the chapter. What is meant by this? Give some examples. Why is the accounting classification system the foundation of the accounting discipline?
> Why is it difficult to determine the historical acquisition cost of self constructed assets? Do definitions of accounting elements and general principles of recognition and measurement resolve the controversy over full absorption costing and variable cos
> What is the purpose of balance sheet classification? How useful is the information produced from a classified balance sheet? What are some alternative classification systems that could be used?
> When dealing with earnings per share, why is less really more with SFAS No. 128?
> If a separate statement of comprehensive income is presented, do all elements of comprehensive income appear in this statement?
> Describe how definitions of income, revenues, and expenses have changed in statements issued by successive standard-setting bodies.
> How does the freedom from bias mentioned in ASOBAT compare to the quality of neutrality mentioned in SFAC No. 8?
> How does earnings as discussed in SFAC No. 5 differ from net income?
> Are simple transactions really examples of rigid uniformity? Why or why not?
> Does the ability to swiftly-and at no cost-download music files convert this music from a private good to a public good?
> What is due process in financial accounting standard-setting?
> Why do you think that operating ratios (return-on-assets) are more sensitive to the combined effect of immateriality items than would be the case with solvency ratios (debt-to-equity and current ratios)?
> Do you see any inconsistency between the present value of assets and liabilities in SFAC No. 7 since the latter is based on a firm-specific discount rate and the former does not use a firm-specific rate? Discuss.
