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Unformatted text preview: EAT1S08 ©CGA-Canada, 2008 Page 1 of 6 CGA-CANADA ACCOUNTING THEORY & CONTEMPORARY ISSUES [AT1] EXAMINATION September 2008 Marks Time: 3 Hours Note: All references to the Handbook refer to the CICA Handbook . 28 Question 1 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. Note: 2 marks each a. Which of the following is the best argument for decentralized regulation of segment reporting? 1) Segment reporting encourages the release of proprietary information. 2) Segment reporting encourages better risk management. 3) Segment reporting is most decision useful when it is consistent with internal organization. 4) Segment reporting reveals information buried in consolidated totals. b. Which of the following is the most important reason why regulation of financial reporting is socially desirable? 1) There is adverse selection. 2) Signals may not be credible. 3) Managers manage earnings. 4) There is poor disclosure. c. Which of the following statements is the best reason for expensing employee stock options (ESOs)? 1) Models to determine an ESO’s fair value are unreliable. 2) Securities markets are efficient. 3) ESOs dilute shareholders’ ownership interests in the firm. 4) There are economic consequences of expensing ESOs. d. Which of the following statements identifies the best empirical evidence in favour of the debt covenant hypothesis of positive accounting theory? 1) Managers shift reported earnings from present to future accounting periods. 2) Managers shift reported earnings from future to present accounting periods when current earnings are high. 3) Managers use discretionary accruals to manage earnings. 4) Debt covenant slack is managed. e. Which of the following suggestions is most likely to increase the usage of financial statement variables in managerial compensation contracts? 1) Use current (that is, fair) value accounting 2) Replace awarding of ESOs with awarding of restricted stock in compensation contracts 3) Reduce recognition lag 4) Choose the best tradeoff between earnings sensitivity and precision Continued... EAT1S08 ©CGA-Canada, 2008 Page 2 of 6 f. Prior probability is an important concept under Bayes’ theorem. Prior probability reflects which of the following statements? 1) Probability of the occurrence of prior events 2) Probability of the occurrence of states of nature based on what an investor knows at a particular point in time 3) Revised probability of the occurrence of states of natures based on new information available to an investor 4) Objective probability of the occurrence of states of nature g. An information system is a powerful tool to understand the usefulness of information statements. An information system is a powerful tool to understand the usefulness of information statements....
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