It is common practice for managers to be rewarded in a way that is tied to the profits of the firm, the sales of the firm, or the return on assets. That is, their remuneration is based on the output of the accounting system. Which of the following is a drawback for such bonus schemes?
Bonus schemes tied to the performance of the firm will be put in place to align the interests of the owners and the managers.
Rewarding managers on the basis of accounting profits may induce them to manipulate accounting numbers.
There would be limited incentives for the manager to adopt risky strategies that increase the value of the firm.
The manager may be reluctant to take on optimal levels of debt.
Which of the following statements is not true about Positive Accounting Theory?
It is used to distinguish research aimed at explanation and prediction.
It is designed to explain and predict which firms will, and which firms will not, use a particular method, and also prescribes which method a firm should use.
It focuses on the relationships between the various individuals involved in providing resources to an organisation, and how accounting is used to assist in the functioning of these relationships.
One of the key theories that underpins Positive Accounting Theory is Agency theory.
Which of the following is an example of political costs under the PAT perspective?
Wage and salary deductions paid to unions
Contributions to political parties
Costs associated with increased wage claims
The cost of remaining largely unnoticed by government regulatory agencies
According to Positive Accounting Theory, the existence of debt covenants:
Can be explained from an efficiency perspective, and gives management an incentive to manipulate accounting information from an opportunistic perspective
Can be explained from an opportunistic perspective, and gives management an incentive to manipulate accounting information from an efficiency perspective
Can be explained from both efficiency and opportunistic perspectives
Cannot be explained
The 'bonus plan hypothesis' of Positive Accounting Theory suggests managers of firms with bonus plans tied to reported income are more likely to use accounting methods that: