March 05 - CGA-CANADA ACCOUNTING THEORY 1 EXAMINATION March 2005 Marks Time 3 Hours Note All references to the Handbook refer to the CICA Handbook

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EAT1M05 ©CGA-Canada, 2005 Page 1 of 6 CGA-CANADA ACCOUNTING THEORY 1 EXAMINATION March 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. Which of the following factors is most likely to lead to a high earnings response coefficient (ERC)? 1) The firm is high risk. 2) The firm is large in size. 3) Investors’ earnings expectations are diverse. 4) The firm has high growth prospects. b. According to the theories of efficient securities markets and investment decision-making, beta is the only firm-specific risk measure that is relevant to rational, risk-averse investors. Why? 1) Rational, risk-averse investors diversify their investment portfolios. 2) The predictions from the capital asset pricing model (CAPM) have strong empirical support. 3) Transaction costs prevent investors from fully diversifying their portfolios. 4) Beta is the sole determinant of the expected return on a share. c. Which of the following statements represents the most serious limitation of the usefulness of reserve recognition accounting (RRA) to investors? 1) Management does not like RRA. 2) RRA applies only to proved reserves. 3) Frequent and material revisions apply to RRA estimates. 4) RRA is supplementary information only. d. Which of the following factors is the most likely reason why market forces do not drive a socially optimal amount of information production by firms? 1) Signalling theory 2) Much information production is driven by contracts, not markets 3) Standard setting 4) Adverse selection problem Continued. ..
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EAT1M05 ©CGA-Canada, 2005 Page 2 of 6 e. A firm announces unexpectedly high core earnings this year. Yet, the firm’s abnormal share return is almost zero on the day of the announcement. Which of the following is the most likely reason? 1) Securities market inefficiency. 2) A substantial increase in the unemployment rate is announced on the same day. 3) The firm has recorded frequent, material, unusual, and non-recurring charges over the past few years. 4) The firm reports material, unusual, and non-recurring losses this year. f. Researchers, such as Lev & Zarowin (1999), have documented a low ability of net income to explain abnormal share returns, even during a narrow window surrounding the date of release of current earnings (the low R 2 problem). Which of the following possible explanations is most likely, according to these researchers? 1)
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This note was uploaded on 06/19/2011 for the course ACCT 705 taught by Professor John during the Spring '11 term at Seneca.

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March 05 - CGA-CANADA ACCOUNTING THEORY 1 EXAMINATION March 2005 Marks Time 3 Hours Note All references to the Handbook refer to the CICA Handbook

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