mid sems 2010 - Your Name:.Your Student Number THE...

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Your Name :…………………………………………. Your Student Number ………… THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF ACCOUNTING ACCT 3563 Issues in Financial Reporting and Analysis ACCT 3573 Issues in Financial Reporting and Analysis (Honours) Mid-Session Examination Session 1 – 2010 Question 1 . A company has a debt contract in place which requires that the company’s working capital ratio (current assets / current liabilities) must never fall below 2 (meaning that current assets must be at least twice current liabilities). As balance date approaches, the company estimates that the working capital ratio will be 1.8 and the company may default on its debt contract unless remedial action is taken. Which of the following actions, consistent with Positive Accounting Theory, will increase the company’s working capital ratio? (a) Collection of cash for accounts receivable (b) Sales of inventory at cost price (c) Reclassification of borrowings due within 12 months to non-current liabilities (d) Reduction of accounts payable by cash payments (e) All of the above Question 2. A management compensation plan allows for a bonus equal to 5% of profit, provided that profit exceeds $5,000,000. The bonus is capped at a maximum of $400,000 per year. The initial calculation of profit for the current year is $5,500,000. Positive Accounting Theory implies that the manager will choose accounting policies that: (a) Decrease reported profit as much as possible (b) Decrease reported profit to $5,000,000 (c) Increase reported profit as much as possible (d) Increase reported profit as much as possible up to $8,000,000 (e) Make no change to the initial calculation of profit Question 3 . A company has a debt covenant in place that limits the amount it can borrow to 60% of its total tangible assets. If the company’s actual value for that ratio is approaching the 60% limit then, according to Positive Accounting Theory, management would try to relax the constraint by: (a) Recognizing development costs as an asset (b) Allocating goodwill and intangible assets with an indefinite useful life to a single cash-generating unit so that annual impairment testing is not required in other cash generating units (c) Selecting the revaluation basis of measurement instead of the cost basis of measurement for a very valuable license (d) Revaluing the firm's fleet of motor vehicles upwards to current market value
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(e) Using the cash balance to purchase land Question 4 . Which of the following is the best description of agency theory? (a) Agents will act in their own self-interest and this gives rise to conflicts of interest between agents and principals of the firm. The principals anticipate the divergent behaviour of agents and this will cause a loss of firm value. The agents are therefore motivated to enter into monitoring and bonding arrangements with the principals to minimise the loss of firm value. These are contractual arrangements and they are all defined over accounting information. (b)
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mid sems 2010 - Your Name:.Your Student Number THE...

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