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EAT1S05 ©CGA-Canada, 2005 Page 1 of 6 CGA-CANADA ACCOUNTING THEORY 1 EXAMINATION September 2005 Marks Time: 3 Hours Note: All references to the Handbook refer to the CICA Handbook . 26 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. According to the bonus plan hypothesis of the positive accounting theory (PAT), managers who receive bonuses based on the level of the firm’s net income have incentives to manipulate earnings upwards by using accounting accruals. Since accruals reverse, this will tend to lower reported earnings in the future periods, thus reducing future bonuses. In spite of this, managers benefit by manipulating increases in current reported net income. Why? 1) This reduces managerial risk. 2) This increases a manager’s value in the managerial labour market. 3) This results in higher share prices, and benefits managers who have stock options in their compensation package. 4) This increases the present value of a manager’s utility from his/her future bonus stream by shifting it to the present. b. Which of the following is the most significant problem with using the clean surplus model to estimate firm value? 1) Estimating the firm’s cost of capital 2) The clean surplus procedure ignores analysts’ forecasts 3) Estimating the duration of abnormal earnings 4) Estimating current return on equity c. A.A. Christie and J. Zimmerman, in their 1994 article, examined whether managers of firms that eventually became takeover targets adopted opportunistic accounting policy choices to protect their jobs and reputations prior to being taken over. The authors argued that firms would be deemed to have adopted opportunistic accounting policies if they had reported which of the following? 1) Reduced net income prior to takeover 2) Smoothed net income prior to takeover 3) Increased net income prior to takeover 4) Maintained net income at the same level every year prior to takeover Continued. ..
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EAT1S05 ©CGA-Canada, 2005 Page 2 of 6 d. J. Jones, in 1991, studied the earnings management activities of U.S. firms to lower their reported earnings during import relief investigations. The U.S. government may provide relief to U.S. firms whose earnings are adversely affected by unfair foreign competition. In particular, Jones examined discretionary accruals adopted by U.S. firms and concluded that U.S. firms do manipulate their earnings downwards when import relief claims are being investigated. On which of the following findings are her conclusions based? 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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