Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.

1. Which of the following organizations regulates trading of all securities in Ontario?
   1. Bank of Canada
   2. Ontario Securities Commission (OSC)
   3. Government of Ontario
   4. Toronto Stock Exchange

2. Why have several research studies failed to find strong evidence of the usefulness of the information content of reserve recognition accounting (RRA)?
   1. The relevance of RRA information is low.
   2. The reliability of RRA information is low.
   3. RRA is supplementary information.
   4. RRA uses a 10% discount factor for all oil and gas firms.

3. Which of the following statements best describes the characteristics of the measurement and the information approaches to financial reporting?
   1. The measurement approach uses RRA to recognize assets and liabilities in the statement of financial position.
   2. The information approach has always had a measurement component.
   3. The information approach uses value in use to recognize the year-end values of assets in statements of financial position.
   4. IFRS does not permit assets to be re-valued when a firm uses the measurement approach.

4. Which of the following situations best characterizes the owner-manager agency problem in a firm?
   1. The owner cannot observe the managers effort
   2. The availability of managerial talent is scarce in the economy
   3. Managers do not have control over owners sales of firm shares to other parties
   4. Managers are often compensated by a combination of salary, bonus, and stock options

5. When regulation does not indicate the nature of disclosure, which of the following statements is correct?

1. Accountants need to behave ethically and encourage firms to produce high-quality information.
2. Accountants need not take an active role in encouraging full disclosure because regulation does not prescribe how to report.
3. Full disclosure will lead to lowering of share prices.
4. Voluntary disclosures will eliminate efficient market anomalies.

6. Why is it important for firms to disclose low-persistence accounting items?
   1. Because investors are interested in the extent to which current reported earnings will persist into the future.
   2. Because managerial bonuses are typically based on low-persistence components of net income.
   3. Because low-persistence items reverse.
   4. Because low-persistence items are valued by investors.

7. Which of the following actions of the manager of a borrowing firm might cause a moral hazard problem between the manager and the lender?
   1. The manager pays excessive dividends to the shareholders.
   2. The manager undertakes low-risk projects.
   3. The manager pays off the loan prior to the maturity date.
   4. The manager decides to smooth its net income over time.

8. One of the problems that might cause market failure in the production of financial accounting information is said to be lack of unanimity. Which of the following statements best characterizes the notion of lack of unanimity that might lead to market failures?
   1. Investors disagree amongst themselves about how much information should be produced.
   2. Managers disagree amongst themselves about how much information should be produced.
   3. Managers and auditors disagree about how much information should be produced.
   4. Investors and managers disagree about how much information should be produced.

1. Managerial compensation is often based on the net income of a firm (or bonus) as well as share prices of the firm (or employee stock options, ESOs). Which of the following statements about the efficiency of the resulting managerial compensation plan is correct?
   1. The higher the correlation between net income and share prices, the more efficient the management compensation contract.
   2. When management compensation consists of only a bonus or only ESOs, this leads to an efficient management compensation contract.
   3. The lower the correlation between net income and share prices, the more efficient the management compensation contract.
   4. Using a fixed salary and a bonus to compensate managers results in a more efficient management compensation contract than having a bonus and employee stock options in the contract.

10. Which of the following statements provides the best description of agency cost in a situation where an owner of a firm has entered into an employment contract with the manager of the firm?
    1. The agency cost of a contract is the managers total annual compensation as a percentage of the market value of assets plus the book value of debt.
    2. Agency cost is the amount by which the owners utility from the contract is less than the owners utility for the first-best contract.
    3. The agency cost of a contract is the proportion of the managers total compensation as a percentage of the firms revenues.
    4. The agency cost of a contract equals the managers reservation utility.