Topic: Positive accounting theory
QUESTION 1
Early positive research investigated evidence of share price changes as a result of the disclosure of accounting information. However, such research did not explain why particular accounting methods were selected in the first place. How did Positive Accounting Theory fill this void?
QUESTION 2
Explain the management bonus hypothesis and the debt hypothesis of Positive Accounting Theory.
QUESTION 3
Organisations typically have a number of contractual arrangements with debtholders, with many covenants written to incorporate accounting numbers.
(a) Why would an organisation agree to enter into such agreements with debtholders?
(b) On average, do debtholders gain from the existence of such agreements?
QUESTION 4
If senior managers within a company were rewarded by way of accounting-based bonus plans then would they, or the owners/shareholders (or both), prefer the use of conservative accounting methods? Explain the reasoning for your answer.
QUESTION 5
Assume that Kahuna Company Ltd decides to undertake an upward revaluation of its non-current assets just prior to the end of the financial year, the effect being that the total assets of the company increases, as does the total shareholders' equity.
(a) Explain the decision of management to undertake an asset revaluation in terms of the debt hypothesis of Positive Accounting Theory.
(b) Explain the decision of management to undertake an asset revaluation in terms of the management compensation hypothesis of Positive Accounting Theory.
QUESTION 6
Zhang (2008) argues that if a borrower adopts conservative accounting methods this will reduce the risk exposure of the lender and will lead to a reduced interest cost for the borrower. What is the basis of this argument?