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business
financial accounting theory

Questions and Answers of Financial Accounting Theory

Do conventional financial accounting practices, principles and definitions encourage or assist corporations to adopt sustainable business practices?Explain your answer.
Why would a company produce a sustainability report?
Are ‘economic rationality’ (as defined by economists) and ‘sustainability’ mutually inconsistent?
Would advocates of Positive Accounting Theory (as explained in Chapter 7 ) believe that organisations will embrace sustainable development in the way described by The Brundtland Report ? Explain your
What is an externality, and why do financial accounting practices typically ignore externalities?
What is stakeholder engagement and why might it be important to the success of an organisation?
Think about an organisation that you know and then:(a) Identify at least one positive and one negative externality generated by the organisation and identify the stakeholders affected by the
Explain how any assessment undertaken by management about why they are reporting will have an effect on the audience for the reports (that is, to whom they are reporting).
(a) From your own perspective, and in broad terms, what are the social responsibilities of business organisations? Further, do you believe that the responsibility of business organisations is
What is a social audit and why would a profit-seeking entity bother with one?
Why do you think the European Union called for a ‘redefinition of accounting concepts, rules, conventions and methodology so as to ensure that the consumption and use of environmental resources are
What is triple bottom line reporting, and what has it to do with sustainable development?
What is personal social responsibility and what role does it play in relation to the goal of sustainable development?
Explain and evaluate the following statement by Chandler (2010): Let’s get beyond the idea that firms are inherently evil. Such a perspective does not absolve firms of responsibility, but
Do you think that triple bottom line reporting can actually lead to separate ‘bottom lines’ for the social, environmental and economic performance of an entity? Explain your view.
Explain what is meant by the following statement:… in the long term, environmental sustainability is necessary for both social and economic sustainability, so attention to minimising impacts in
Of what relevance to the accounting profession is sustainable development?
Why do you think that the accounting profession has generally not released any accounting standards pertaining to the disclosure of social and environmental information?
If corporate managers adopted views consistent with those of Milton Friedman, do you think that any quest towards sustainable development would be realistic?
Evidence shows that business entities and business associations typically make submissions to government which argue in favour of maintaining the voluntary status of social and environmental
Collison (2003, p. 861) states:Attention to the interests of shareholders above all other groups is implicit in much of what is taught to accounting and finance students.The very construction of a
If a particular social or environmental incident occurs that involves an organisation and that generates negative media attention, how would you expect the organisation to react from a disclosure
Evaluate the following statement:While discounting liabilities to their present value makes good economic sense (indeed it is not questionable that a dollar in the future is worth less than a dollar
How would the following theories (addressed in Chapters 7 and 8 ) explain CSR reporting?(a) Positive Accounting Theory(b) Legitimacy Theory(c) Stakeholder Theory(d) Institutional Theory
In publicly released reports a number of organisations are referring to their ‘licence to operate’. What do you think they mean by this, and is there a theoretical perspective that can explain
What is ‘enlightened self-interest’?
Some people argue that fixating on maximising corporate profits and increasing shareholder value will ultimately lead to benefits for all people within society (perhaps through a ‘trickle-down
(a) How do you think that information, such as CSR-related information, could be used to manage an organisation’s relationships with its powerful stakeholders?(b) Do you think that this is an
Read the following statement from the Business Council of Australia (2005) and then explain whether such a perspective ties in well with the very real need for corporations to embrace sustainable
Consider how the concept of sustainable development, as it applies to business entities, compares with the accountant’s notion of a ‘going concern’.Do you believe that they are similar, or are
What is a cap-and-trade system and what accounting issues does it create?
Is gross domestic product (GDP) a ‘good measure’ of national performance? Explain your views.
If a major Australian mining company reports record profits, is this profit figure misleading if the same company has polluted various river systems and has emitted various toxic substances into the
Review the approaches to reporting embraced by Baxter International and Watercare Services, as shown in this chapter, and identify some strengths and limitations of the respective reporting
In 1995, the Institute of Chartered Accountants in Australia (ICAA) established an Environmental Accounting Task Force (which subsequently became the Triple Bottom Line Issues Group, which ultimately
Read Accounting Headline 9.14 and consider the implications (externalities) associated with the promotion of tobacco use by cigarette companies. If the allegations made against the tobacco companies
Read Accounting Headline 9.8 and discuss how the HSBC will account for the job losses it creates. Do you think it is a limitation of financial accounting that the HSBC can show an increase in profits
Read Accounting Headline 9.15, which discusses the health effects caused by tobacco, and then:(a) Explain how or why tobacco companies can report accounting profits even though the consequences of
Read the following extract from an article entitled ‘Coopers is ale and hearty for growth’ by Christopher Russell (The Advertiser , 1 June 2013, p. 67) and then answer the questions that
An article appearing in the Independent newspaper (UK, 18 April 2005, p. 20) entitled ‘The ethical revolution sweeping through the world’s sweatshops’identified how organisations such as Nike
Read Accounting Headline 9.16 and then, drawing on material covered in this chapter, identify some ways in which you think corporations would respond to such allegations.
What is the role of capital markets research?
What assumptions about market efficiency are typically adopted in capital markets research? What do we mean by ‘market efficiency’?
If some research is undertaken that provides evidence that capital markets do not always behave in accordance with the Efficient Markets Hypothesis, does this invalidate research that adopts an
What is an event study and why would an event study be of relevance to an accounting standard-setter?
Contrast an ‘event study’ (which looks at how, or whether, the release of particular information leads to a share price change) with a study that looks at the association between changes in share
What would be the implications for capital markets research if it was generally accepted that capital markets were not efficient in assimilating information?
If an organisation releases its earnings figures for the year and there is no share price reaction, how might capital market researchers explain this finding?
How would a researcher undertaking capital markets research typically justify that a particular item of information has ‘value’ to investors?
If individuals have access to insider information and are able to make large gains on a securities market as a result of using information that is not widely known, then is this an indication that
Evaluate the following statement: If an item of accounting information is released by a corporation and there is no apparent change in the share price of the company, the information is not relevant
Explain what is meant when we say that the information content associated with unexpected earnings (profits) announcements is expected to be inversely associated with the size of an organisation.
What, if any, effect would the size of an entity have on the likelihood that the capital market will react to the disclosure of accounting information?
Contrast some of the main differences between capital markets research and behavioural research.
What does it mean to say that capital markets researchers treat individual decision making as occurring within a ‘black box’?
With respect to capital markets research, explain what a potentially confounding event represents.
Evidence shows that share prices might not fully react to financial accounting information immediately and that abnormal returns might persist for a period of time following the release of
If an organisation’s operations rely heavily on the specialised expertise of its management team, would you expect there to be a higher or a lower correspondence between the net assets recognised
Would you expect an earnings announcement by one firm within an industry to impact on the share prices of other firms in the industry? Why or why not?
The following is an extract from a newspaper article entitled ‘Westpac chief in $3bn parting shot’ (by George Lekakis in the Advertiser , 2 November 2007, p. 72):OUTGOING Westpac chief David
The following is an extract from a newspaper article entitled ‘Record profit in pipeline for Exxon as oil price soars’ (by Steven Mufson, Canberra Times , 3 February 2008, p. 27):BUOYED by
Researchers such as Chambers and Sterling have made numerous claims that historical cost information is meaningless and useless. Are the results of capital markets research consistent with this
Accepted assumptions about market efficiency mean that it is the information content of disclosure, and not the form of the disclosure, that is valued by the market. Therefore, it should not matter
Some recent capital markets research investigates whether accounting information reflects the valuations that have already been made by the market(as reflected in share prices). In a sense, it
Refer to Accounting Headline 10.3 and explain why investors might have reacted to the false rumour. Is the reaction of investors to this false rumour consistent with the view that the capital market
Review Accounting Headline 10.7 and explain the reason for the change in the price of Wesfarmers shares. Also, what might have caused the price changes in the shares in the other retail organisations?
This chapter has emphasised that the capital market appears to respond to information from many sources, including but not limited to accounting. As an illustration of how non-accounting information
Read Accounting Headline 10.9 and then consider why we might expect, or not expect, the market to react to radio announcements made by Alan Jones.Would a market reaction imply anything about the
Read Accounting Headline 10.10 and, relying on some of the capital markets studies considered in this chapter, explain why the share prices of the pharmaceutical companies might have reacted in the
Read Accounting Headline 10.11 and then explain how a capital markets researcher would differentiate between the component of the share price change of UAL that related to market-wide movements and
From what other discipline (other than accounting) does behavioural research mainly originate?
Why should students of accounting be aware of the insights provided by behavioural research in accounting?
Contrast behavioural research with capital markets research.
Provide an example of how behavioural accounting research can be used to address anomalies that might arise in capital markets research.
Can behavioural research complement research undertaken using other paradigms (for example, capital markets research)? Explain your answer.
How and why would the accounting profession use the results of behavioural research in accounting?
Why would the management of individual reporting entities be interested in the results of behavioural research in accounting?
Briefly explain the Brunswik Lens Model and its relevance to explaining the various facets of the decision-making process.
What is a ‘heuristic’ and why could it be beneficial for a group of financial statement users to be informed that they are applying a particular heuristic?
What is the rationale for modelling the decision-making processes of different financial statement user groups (that is, for example, identifying how they appear to weight particular cues when making
If the results of behavioural research indicate that a particular accounting-related information item (cue) is not used by individuals when making decisions, should this be grounds for the accounting
There have been a number of behavioural studies in financial accounting and auditing that have generated conflicting results. What are some possible reasons for the disparity in results?
What is ‘protocol analysis’ and what are some of its strengths and weaknesses?
Identify an advantage that protocol analysis has over other research that embraces the Brunswik Lens Model.
What are some general strengths and limitations of behavioural research?
How generalisable are the results derived from behavioural accounting research?
Positive Accounting Theory and agency theory make certain central assumptions about what influences people’s decisions. How does this differ from perspectives embraced within behavioural research
The International Accounting Standards Board (IASB) is going through a process of revising the Conceptual Framework for Financial Reporting. This process is expected to take a number of years to
A newspaper article entitled ‘Emotional investing ends in tears’ written by Tony Boyd appeared in The Australian Financial Review on 22 January 2013(p. 40). The article included the following
What is a critical perspective of accounting?
What are some of the fundamental differences between the research undertaken by critical theorists, relative to the work undertaken by other accounting researchers?
From a critical perspective, what is the role of the IASB Conceptual Framework for Financial Reporting ?
From a critical perspective, can financial statements ever be considered objective or neutral? Explain your answer.
If it is accepted that there are many inequities within society, would critical theorists argue that introducing more accounting, or improved methods of accounting, would or could help, or would they
Critical theorists would challenge the work of authors whose work is grounded within Positive Accounting Theory. What is the basis of their opposition?
Roslender (2006, p. 265) states:Critical Theory makes no pretence of being objective. Those who embrace a Critical Theory perspective do so because they recognise and value its partiality.Explain the
Organisations need various resources to operate. Two such resources are labour and equity capital. Providers of labour and equity capital receive payments in return for their resources. Payments to
Critical theorists would challenge the work of authors whose work is grounded within Legitimacy Theory. What is the basis of their opposition?
If accounting is deemed to be complicit in sustaining social inequities, how would critical theorists argue that accounting can be ‘fixed’?
Tinker, Merino and Neimark (1982) argue that ‘the social allegiances and biases of accounting are rarely apparent; usually, they are “masked”pretensions of objectivity and independence’.

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