Question 1 (15 marks)

Alex is a researcher who studies how managers make decisions about measuring assets. Alex
carries out a study looking at the financial statements of Australia’s largest 100
manufacturing companies and records if they use historical cost or fair value for assets in
Property, Plant and Equipment (PPE). Alex finds that 89 of these companies use historical
cost, and 11 use fair value. Alex concludes that managers prefer the historical cost method
over fair value, and predicts that companies will continue to use historical cost to measure
assets.

(a) What type of reasoning is Alex using in this study? Ensure you carefully explain your
answer by defining the different types of reasoning we have covered in the course.
Week 2
Alex: Induction: Specific-------General 归纳
Definition: Induction involves the formulation of generalisations on the basis of the
observation of specific occurrences.

Alex sample 100 manufacturing companies in which 89 of these companies use historical
cost, and 11 use fair value, thus he gets inductive conclusion: managers prefer the historical
cost method over fair value, and predicts that companies will continue to use historical cost to
measure assets.

Deduction involves the logical derivation of propositions relating to specific events or

entities, from a general rule or premise

Deduction : General->Specific

(b) Is Alex adopting a normative, positive, or critical approach in this study? Explain your
answer, ensuring that you define each of these three approaches in your response.
Week 2
Alex should adopt PAT as he mainly focus on the inductive method
1.Positive Accounting Theory (PAT) is heavily empirically based
Empirical analysis is usually conducted on large samples using statistical methods
Deductive reasoning also used but given lower emphasis

2.Normative Accounting Theories attempt to identify the best method of accounting (either in
general or in specific circumstances)

Many normative accounting theories are based on a process of deduction (logical argument)
rather than induction (observing practice), therefore cannot be evaluated on the basis of
whether the theories reflect actual accounting practice. Example: Conceptual Framework of
Accounting

3. Critical approach???????
12.1
In the critical world, there is no single established theory or approach, and little consensus on
how to proceed, aside from an absolute horror of modernity and neo-classical economics.

a critical perspective does not consider issues such as which accounting methods should be
used in which situations (an issue that often dominates the thoughts of many other accounting

Page 1 of 11
researchers)—rather, it tends to dismiss most of accounting as being against the interests of
many people in society, and often views accounting as a major contributor to perceived social
problems and inequities
批判性观点并未考虑诸如在哪种情况下应使用哪种会计方法的问题（这个问题通常在
许多其他会计研究人员的思想中占主导地位），而是倾向于忽略大多数会计方法。违
背了社会上许多人的利益，并经常将会计视为造成社会问题和不公平现象的主要因素。
“批判性观点”认为会计是一种高度偏执的活动，通常认为会计不是中立的或无偏见的
过程（在概念框架项目等工具中促进中立，客观和类似特征），但趋向于支持那些控
制资本的人.

(c) Provide two (2) criticisms of the approach Alex has taken to her study.

Criticisms:
1. How do we know how many observations to make before generalising? Here, how many
manufacturing companies should we sample to make decisions that before generalising
2. Theory dependence of observation –
2.11
(d) Suggest one (1) different way that Alex could study how managers make decisions about
measurement, using any other applicable theory or concept from the course.

Please limit your response to no more than 800 words

Question 2 (15 marks)

The new Conceptual Framework for Financial Reporting (CF) was finally released in 2018,
after over 10 years of negotiation and development by the International Accounting Standards
Board (IASB). Governments around the world (through their accounting regulatory bodies
like the Australian Accounting Standards Board - AASB) will now decide whether to adopt
this new standard into each country. The new CF may have a large impact on the practice of
accounting.

Write a short essay discussing whether this new standard might be adopted, drawing upon
your understanding of the CF, and using three different perspectives on regulation: the free-
market view, the pro-regulation perspective, and the critical perspective.

Please limit your response to no more than 800 words

Week 6
Free-market:

Arguments in favour of eliminating regulation are often referred to as ‘free- market’

arguments. Advocates of a ‘free-market’ approach typically base their arguments on an
assumption that markets (such as capital markets, labour markets and product markets) are
efficient and that the markets will provide various incentives and penalties to ensure that
managers, on average, do as the market expects. For example, if the capital market expects an
entity’s managers to provide information and the managers elect not to, then the market
might penalise the entity by charging a higher price for funds advanced to the entity (to

Page 2 of 11
compensate the investors for the higher risk that they face as a result of having limited access
to information to enable them to monitor their investment). Further, it is also believed by
some people that the absence of information probably implies that the reporting entity has
bad news that it has elected not to disclose (it is a ‘lemon’). The textbook also identifies a
number of other arguments that have been advanced to support a ‘free-market’ approach to
providing accounting information. These include the following:
• Accounting information is like any other good, and people (financial statement users) will
be prepared to pay for it to the extent it has use. This will, it is assumed, lead to an optimal
supply of information by entities.
• Because users of financial information typically do not bear its cost of production,
regulation will lead to oversupply of information (at cost to the producing firms) as users will
tend to overstate the need for the information.
• Regulation typically restricts the accounting methods that can be used. This means that
some organisations will be prohibited from using accounting methods that management
believe best reflect their particular performance and position. This is considered to impact the
efficiency with which the firm can inform the markets about their operations. This will have
implications for the costs involved when a firm needs to attract investment capital. This
perspective is very critical of the globalised ‘one-size-fits-all’ approach to accounting
standards wherein the IASB is now responsible for developing accounting standards that are
to be used by organisations operating within different industries and within different
countries throughout the world (students should be encouraged to consider whether, for
example, an accounting standard on inventory (IAS 2) is equally relevant for a motor vehicle
manufacturer in China and a food producer in Australia.)
赞成取消监管的论点通常被称为“自由市场”论点。倡导“自由市场”方法的人通常基于
这样的假设，即市场（例如资本市场，劳动力市场和产品市场）是有效的，并且市场
将提供各种激励和惩罚以确保经理平均而言，做到市场所期望的。例如，如果资本市
场希望实体的管理者提供信息，而管理者选择不提供信息，那么市场可能会通过对提
供给实体的资金收取更高的价格来对实体进行惩罚（以补偿投资者承担的较高风险）
面对信息获取有限的结果，使他们无法监控自己的投资）。此外，一些人还认为，缺
少信息可能意味着该报告实体有一个坏消息，即它选择不公开（这是一个“柠檬”）。
该教科书还指出了许多其他论点，这些论点已经被提出来支持“自由市场”方法来提供
会计信息。其中包括：
•会计信息与其他任何商品一样，人们（财务报表使用者）将愿意为使用范围内的信息
付费。可以假定，这将导致实体最佳地提供信息。
•由于财务信息的用户通常不承担其生产成本，因此监管将导致信息供过于求（以生产
公司的成本为代价），因为用户将倾向于夸大对信息的需求。
•法规通常会限制可以使用的会计方法。这意味着将禁止某些组织使用管理层认为最能
反映其特定绩效和职位的会计方法。人们认为这会影响公司向市场通报其运营情况的
效率。当企业需要吸引投资资本时，这将对所涉及的成本产生影响。这种观点对于全
球化的``一刀切''的会计标准非常批评，IASB 现在负责制定会计标准，供在不同行业和
世界不同国家/地区运营的组织使用（应当鼓励学生考虑，例如，库存会计标准（IAS
2）是否与中国的汽车制造商和澳大利亚的食品制造商同等重要。）

Pro-market
Some of the arguments in favour of regulating the practice of financial accounting are
provided in the text and include the following:
• Markets for information are not efficient and without regulation a sub-optimal amount of
information will be produced.

Page 3 of 11
• While proponents of the ‘free-market’ approach may argue that the market on average is
efficient, such on average arguments ignore the rights of individual investors, some of whom
can lose their savings as a result of relying upon some unregulated disclosures.
• Those who demand information can often do this as a result of power over scarce resources.
Parties with limited power (limited resources) will generally be unable to secure information
about an organisation, even though that organisation may impact upon their existence.
• Investors need protection from fraudulent organisations that may produce misleading
information, which due to information asymmetries, cannot be known to be fraudulent when
used.
• Regulation leads to uniform methods being adopted by different entities, thus enhancing
comparability.
• Regulation helps provide confidence to investors in capital markets, and it is often
considered that such confidence is important to societies.
There was also a view that major adverse events such as the Great Depression, and more
recently, collapses such as Enron, WorldCom, HIH and Lehman Brothers were due to the fact
that financial information being provided about particular entities was misleading and did not
enable readers to be aware of impending problems. Whether a ‘better’ system of accounting
could have reduced the likelihood of events such as the Great Depression or unexpected
corporate collapses is however, a highly debatable point.
案文中提供了一些有利于规范财务会计惯例的论点，其中包括：
•信息市场效率不高，如果没有监管，将会产生次优的信息量。
•尽管“自由市场”方法的支持者可能会认为市场平均而言是有效的，但平均而言，这种
论点忽略了个人投资者的权利，其中一些投资者可能会由于依赖一些不受监管的披露
而失去储蓄。
•那些需要信息的人通常可以通过对稀缺资源的控制来做到这一点。权力有限（资源有
限）的各方通常将无法获得有关组织的信息，即使该组织可能会影响其存在。
•投资者需要保护免受可能产生误导性信息的欺诈性组织的保护，由于信息不对称，使
用这些信息可能会导致误导信息。
•监管导致不同实体采用统一的方法，从而增强了可比性。
•监管有助于向投资者提供对资本市场的信心，通常认为这种信心对社会很重要。
还有一种观点认为，诸如大萧条之类的重大不利事件，以及最近发生的安然，世通，
HIH 和雷曼兄弟之类的倒闭事件，是由于以下事实：提供有关特定实体的财务信息具
有误导性，并不能使读者受益注意即将发生的问题。然而，“更好的”会计制度是否可
以减少发生诸如大萧条或公司意外倒闭的可能性，这是一个值得商 de 的观点。

3. What are two possible motivations for regulators to introduce new

regulation?

总起
Accounting standard setters throughout the world typically consider the
economic and social implications that could potentially arise, if
particular accounting rules were put in place. That is, while a particular
method of accounting might be considered to provide the most accurate and
efficient reflection of a reporting entity’s financial position and
performance (and of course, this in itself will be based on views about
what are the most appropriate ways to measure and recognise elements of
accounting—and there is much debate here), if it is considered that the
proposed method might lead to unacceptable economic or social hardship for

Page 4 of 11
some members of the community, inclusive of the reporting entity, then the
method may not be introduced even though it was otherwise considered to be
the best method available.
1.反对监管
Free market
Regulation typically restricts the accounting methods that can be used. This means that some
organisations will be prohibited from using accounting methods that management believe
best reflect their particular performance and position. This is considered to impact the
efficiency with which the firm can inform the markets about their operations. This will have
implications for the costs involved when a firm needs to attract investment capital. This
perspective is very critical of the globalised ‘one-size-fits-all’ approach to accounting
standards wherein the IASB is now responsible for developing accounting standards that are
to be used by organisations operating within different industries and within different
countries throughout the world
2.支持监管
There are various theories available to describe what motivates regulators to introduce new
legislation. There is the public interest theory of regulation(Pro regulation perspective),
which proposes that regulation is introduced to protect the public. This protection may be
required as a result of inefficient markets. Public interest theory assumes that the regulatory
body (usually government) is a neutral arbiter of the ‘public interest’ and does not let its own
self-interest impact on its rule-making processes. According to Scott (2003, p. 448),
following public interest theory, the regulator ‘does its best to regulate so as to maximise
social welfare’. Therefore, under this theoretical view, regulators are motivated by the ‘public
interest’ when introducing new legislation.
2.Another view, which is often referred to as private interest theory (or economic interest
group theory), is proposed by researchers such as Stigler (1971) and Peltzman (1976).

By considering various costs and benefits as part of the process of developing accounting
standards, the final result will be that the accounting standards themselves will be an outcome
of various cost/benefit trade-offs and political considerations ( economic interest group
theory) . It could therefore be argued that given the process involved in developing
accounting standards, in which various cost/benefit decisions are made and in which various
lobbying submissions are considered, then the standards themselves are not developed in an
objective manner. Without objectively-developed accounting standards it is questionable
whether financial reports developed in accordance with the standards can themselves be
objective.

This theory relaxes the assumption that regulations are initially put in place to protect the
public interest, as well as the assumption that government regulators are neutral arbiters not
driven by self-interest. Stigler (1971) proposes that governments are made up of individuals
who are self- interested and will introduce regulations more likely to lead to their re-election
or reappointment. In deciding on a particular regulation they will consider the impacts on key
voters, or other decision makers, as well as on election campaign finances. Individuals with
an interest in particular legislation are deemed more likely to get their preferred legislation if
they can form themselves into large organised groups with strong cohesive voting power.
Therefore, this theoretical perspective assumes that the actions of legislators, as with all other
people, are driven by self-interest rather than some consideration of the ‘public interest’.

Question 3 (15 marks)

Page 5 of 11
In your own words, explain what a heuristic is in behavioural accounting research. Explain
the three types of heuristics and provide an example of how each heuristic might be helpful in
understanding the decisions made by auditors.
没思路

(exam continued next page)

Page 6 of 11
Question 4 (20 marks)

Jo has been the CEO of a listed pharmaceutical corporation for 20 years. Jo is about to retire
at the end of this year. At the start of this year, Jo’s company is considering investing in a
therapeutic drug-related project. There are two investment options. Both require an
immediate cash spending of $1 million. However, the first option will result in an estimated
profit of $10 million in two years time, while the second option will result in an immediate
estimated profit of $100,000 by the end of the year. Jo has the discretion to pick either of the
projects.

(a) Identify and explain at least three possible agency relationships that could be present in
Jo’s firm.
Week 4
o CEO (principal) – Staff (agent)
o Supplier (principal) –Manager/Business (agent)
The firm(agent) –debtholders(principal)
Shareholder(principal)—CEO(agent)

(b) When choosing the projects, would Jo prefer option one or option two? Would the
company’s shareholders prefer option one or option two? Explain the reasoning for your
answer.
Week 5
Jo is about to retire, he is potentially choose $100K
Shareholder will care about the long term profits. 10 Million

(c) Explain the potential agency problems/costs that are likely to arise from Jo’s choice of
investment option? What mechanism(s) may be employed to reduce these potential
problems/costs.
The initial 1 million dollars.
(1) The relationship between debtholders and the firm (shareholders) is a principal(the
shareholders)-agent (the firm) relationship.
When a shareholders provide money to the firm it surrenders discretionary control over
those funds, the returns to the creditor are partially a function of the investment behaviour
of the agent (debtor). With respect to a shareholder who has “limited liability” (e.g.
companies), a clear incentive problem exists. There is incentive for such a managers
(CEO) to employ borrowed funds in projects with high expected return and also high
risks. This is because, in the case of a successful project outcome, the borrower repays the
bank and skims off a healthy profit. If the project is unsuccessful the shareholders may
bear most of the loss.
(2) Monitoring and bonding
Monitoring includes the mechanisms by which the performance of the agent (manager) is
monitored by the principal (outside equity holder).
 Increased emphasis on corporate governance as a monitoring mechanism since the
collapses of major companies at the turn of this century
 Corporate governance: is the system by which companies are directed and controlled
(Cadbury Committee 1992, para2.5)
 internal mechanisms such as board of directors and audit committee

Page 7 of 11
 external mechanisms such as government regulations, takeovers, labour market for
managers
Bonding
 incentive contracts
 bonus schemes
 Employee option schemes

(d) Assume that Jo has a complete discretion over the firm’s accounting policies. With
regards to his firm’s investment cash spending of $1 million, Jo has the option to
expense（当成 expense） it or capitalise (当成 assets)it. Which accounting policy is
Jo likely to choose? Why?
Week 5
Jo will choose capitalise the initial investment cash spending of $1 million as Jo is about to retire
and he will choose the best way to make financial report look better(bonus scheme incentive),
which will be capitalization because expense method will reduce the profits of the firm.
Apart from entities with poor profitability, entities with senior managers approaching retirement
might also undergo a reduction in expenditure on research (assuming managers are motivated by
self-interest). For example, if a manager was on a profit-sharing scheme and if that manager was
about to retire then he or she might elect to curtail research expenditure because any positive
effects might not arise for many years, whereas the impacts the expenditure will have on profits will
be immediate. A retiring manager will not share in the subsequent benefits the research will
generate (unless they own shares or share options) and hence they would reduce the entity’s
research expenditure.

it meant that many intangible assets that were previously recognised as assets within the
statement of financial position (balance sheet) were no longer eligible for capitalisation.
Rather, they were required to be expensed as incurred. This would conceivably have caused a
reduction in the acquisition of such assets, particularly for organisations that were close to
breaching accounting-based debt contracts, such as debt to equity ratios

Please limit your response to no more than 800 words

Question 5 (20 marks)

In May, BHP announced the appointment of Edgar Basto as ‘President Minerals Australia’,
effective 1 July 2020, making Mr Basto as the second-most senior person at BHP (under the
CEO). Assume that immediately after making the announcement there was no apparent
change in the share price of the company.

Your friend explained this event in the following way: “as the information about management
appointments is not accounting information, it is not relevant to the market; therefore firms
do not need to disclose this type of information to the market.”

Critically analyse this statement from your friend, drawing from your knowledge of the
course.
Week 8

Page 8 of 11
Please limit your response to no more than 800 words

1. From a capital markets perspective, and if we assume that equity markets are semi-strong-
form efficient (that is, that all publicly available information, including that available in
financial statements and other financial disclosures, is rapidly and fully impounded into share
prices in an unbiased manner as it is released) then a failure to see a share price reaction
might imply that the information is not relevant to the market.
However, there could be various reasons why the share price did not change. Perhaps there
was other information released on the day that offset the effects of the specific information,
or perhaps the assumptions of market efficiency do not hold.
 there may be a ‘confirmation’ effect. While actual earnings may equal forecast earnings,
the fact that earnings have now been published removes uncertainty as to their amount.
 There may be a ‘volume’ effect. Some investors believe the information is good news,
other think it is bad news, and the two effects cancel each other out in terms of price.
Volume increases however, as these investors ‘swap’ their shares.

The other point that must be made is that share price studies only consider the reactions of
one group of stakeholders—investors. Particular information might be relevant to other
parties who do not directly participate in the capital market, but nevertheless have a right to
know about particular information. Hence, failure to find a share price reaction does not mean
that information is necessarily irrelevant to all stakeholders.

(exam continued next page)

Page 9 of 11
Question 6 (15 marks)

The following historic cost balance sheet information relates to Sheldon Ltd.

1 Jan 2014 ($) 31 Dec 2014 ($)

Assets
Current Assets
Cash at Bank 28,500 119,000
Accounts Receivable 3,000 35,000
Inventory 20,000 26,000
Total Current Assets 51,500 180,000

Non-Current Assets
Buildings 30,000 30,000
less Accum Dep – Buildings 1,000 29,000 1,500 28,500

Equipment 40,000 70,000

less Accum Dep - Equipment 4,000 36,000 9,000 61,000
Total Non-Current Assets 65,000 89,500

Total Assets 116,500 269,500

Liabilities
Current Liabilities
Accounts Payable 5,000 7,000
Provision for Tax 5,000 7,000
Dividends Payable 0 7,000
Total Current Liabilities 10,000 21,000

Non-Current Liabilities
Bank Loan 0 96,000

Total Liabilities 10,000 117,000

Owner's Equity
Paid up Capital 100,000 100,000
Retained Earnings 6,500 52,500
Total Owner's Equity 106,500 152,500

Total Liabilities and Owner’s Equity 116,500 269,500

(exam continued next page)

Page 10 of 11
The balance of retained earnings on 1 January 2014, measured in CPP terms, was $1,642.
You are given the following information regarding the operations of Sheldon Ltd during 2014:

Cash Sales (all occurring on 31 October) $39,000

Credit Sales $77,000
Cash Collected from Customers $58,000
Cost of Goods Sold $29,000
Interest Revenue (all earned in 1st half of year) $500
Final Dividend - declared on September 30 $7,000
Depreciation Expense $5,500
Sales Returns (all occurred on 30 November) $2,500
Other Expenses $30,500
Tax Expense (recognised 31 December) $6,000

Sheldon Ltd purchased a new piece of equipment on 30 June 2014 which had a retail price of
$30,000. The vendor allowed a $10,000 trade-in allowance on this equipment (a trade-in allowance
reduces the cash purchase price and is allowed when the buyer gives the seller their old machinery at
the time of purchase). This new piece of equipment is included in the 31 December 2014 balance
sheet shown above. There was only one purchase of inventory during the year, which occurred on 1
January 2014.

The following CPI data is available:

31 October 2013 98
1 Jan 2014 100
31 Mar 2014 102
30 June 2014 105
30 Sept 2014 109
31 October 2014 110
30 Nov 2014 111
31 Dec 2014 112
Annual Average Index 106

Required:
Prepare the Statement of the Gain or Loss on Holding Monetary Items under CPP Accounting for
Sheldon Ltd for the period 1 January 2014 to 31 December 2014. If necessary, state any assumptions
that you have made in identifying the conversion factors used.
Round all amounts to the second decimal place if necessary. You only need to produce a Statement of
the Gain or Loss on Holding Monetary Items. Journal entries are not required.

-- END OF EXAM --

Page 11 of 11