June 05 - CGA-CANADA ACCOUNTING THEORY 1 EXAMINATION June...

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EAT1J05 ©CGA-Canada, 2005 Page 1 of 6 CGA-CANADA ACCOUNTING THEORY 1 EXAMINATION June 2005 Marks Time: 3 Hours Note: All references to the Handbook refer to the CICA Handbook . 30 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. The standardized measure (SM) of discounted future net cash flows reflects the fair value of proved oil and gas assets of a company under reserve recognition accounting (RRA). For which of the following reasons is SM different from the historical cost basis (using successful efforts or full cost methods) of assets? 1) SM measures the discounted present value of future net cash flows from proved oil and gas properties whereas historical cost is based on the exploration cost of oil and gas properties. 2) SM measures the market value of oil and gas properties whereas historical cost is based on exploration cost. 3) Under RRA, amortization of capitalized exploration costs could be positive or negative, which is not the case with the historical cost basis. 4) Under GAAP, oil and gas properties have to be recorded at historical cost but GAAP does not require RRA. b. Under ideal conditions with certainty, net income plays no role in the valuation process. Why is this true? 1) Revenues have all information needed to value firms. 2) The balance sheet has all information needed to value firms. 3) Banks and financial institutions find it difficult to value liabilities. 4) Manufacturing companies’ assets are mostly tangible assets. c. Relevance and reliability are two important characteristics of financial statements. What is a reliable financial statement? 1) One which is audited by a large audit firm 2) One for which book values and market values are highly correlated 3) One which is precise and free from bias 4) One which has been examined by the firm’s internal audit department Continued. ..
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EAT1J05 ©CGA-Canada, 2005 Page 2 of 6 d. The compensation committee of the board of directors sometimes varies the proportion of long-term to short-term components of incentive plans for managers. What is the effect of a high proportion of long-term incentive in the compensation package? 1) It produces a longer-term manager decision horizon. 2) It has no effect on the manager decision horizon. 3) It is exemplified by managerial compensation being linked to annual earnings. 4)
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June 05 - CGA-CANADA ACCOUNTING THEORY 1 EXAMINATION June...

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