Apply relevant ideas from the paper to a) critique the definition of assets provided in the conceptual framework a) compare and contrast fundamental and fiat measurement. Page 2 of 8 Question 4 Positive Accounting Theory 20 marks Spend about 45 minutes on this question. Write 1-2 sentences per mark A bank has lending arrangements with three companies, including a 40% benchmark for the debt/equity ratio. Bank borrowing is the only form of debt which the companies have. Company Borrowing Equity Purpose of Borrowing CEO bonus based on A 150,000 400,000 Building Shares B 150,000 750,000 Fleet of Vehicles Share options C 150,000 2,000,000 Overdraft facility Cash The following table summarises changes in accounting policies in the current year Company Depreciation Doubtful Debts Inventory A No change From 5% to 3% From WAC to FIFO From reducing balance to units of use No change From FIFO to WAC C From straight line to reducing balance From 2% to 4% No change Required i ii IN As a loan manager, briefly outline how the purpose of each loan would affect 2 marks debt covenants with customers. Briefly outline which company is most likely to engage in under investment 2 marks For the company in (ii), explain two ways in which the accounting policy 4 marks changes may have contributed to earnings management For the company in (il), suggest another specific earnings management 2 marks strategy that it may use apart from changing accounting policies Explain whether bonuses based on cash or shares are likely to create more 4 marks value for shareholders. Explain whether bonuses based on shares or share options would be 4 marks preferable for CEOS Briefly outline which company is most likely to encounter political costs, 2 marks providing one example V vi vii Page 3 of 8 Apply relevant ideas from the paper to a) critique the definition of assets provided in the conceptual framework a) compare and contrast fundamental and fiat measurement. Page 2 of 8 Question 4 Positive Accounting Theory 20 marks Spend about 45 minutes on this question. Write 1-2 sentences per mark A bank has lending arrangements with three companies, including a 40% benchmark for the debt/equity ratio. Bank borrowing is the only form of debt which the companies have. Company Borrowing Equity Purpose of Borrowing CEO bonus based on A 150,000 400,000 Building Shares B 150,000 750,000 Fleet of Vehicles Share options C 150,000 2,000,000 Overdraft facility Cash The following table summarises changes in accounting policies in the current year Company Depreciation Doubtful Debts Inventory A No change From 5% to 3% From WAC to FIFO From reducing balance to units of use No change From FIFO to WAC C From straight line to reducing balance From 2% to 4% No change Required i ii IN As a loan manager, briefly outline how the purpose of each loan would affect 2 marks debt covenants with customers. Briefly outline which company is most likely to engage in under investment 2 marks For the company in (ii), explain two ways in which the accounting policy 4 marks changes may have contributed to earnings management For the company in (il), suggest another specific earnings management 2 marks strategy that it may use apart from changing accounting policies Explain whether bonuses based on cash or shares are likely to create more 4 marks value for shareholders. Explain whether bonuses based on shares or share options would be 4 marks preferable for CEOS Briefly outline which company is most likely to encounter political costs, 2 marks providing one example V vi vii Page 3 of 8