MPA804 Accounting Theory- markets hypothesis and human judgement theory


Review Questions:

1. Does consensus always imply accuracy in studies of accounting decision making ? Justify your response

2. Why do individuals form lobby groups to influence companies’ behaviour and information disclosures?

3. Reconcile normative accounting studies and human judgement theory
4. Compare and contrast the efficient markets hypothesis and human judgement theory. Are they inconsistent with each other? Explain

5. What is more important for an organisation – the ‘right’ physical assets or the ‘right’ people? Explain

6.Early positive research investigated the relationship between share price changes and corporate disclosures. However, such research did not explain why particular accounting methods were selected in the first place. How did Positive Accounting Theory resolve this issue?

7. Positive Accounting Theory (PAT) presents simplistic assumption that all individuals’ utility functions are maximised by actions that lead to a maximisation of their own wealth. Are the predictions of PAT less useful as a result of this?

8. Assume that Beta Ltd has elected to undertake an upward revaluation of its non-current assets just prior to the end of the financial year, the effect is an increase in the value of the total asset of the firm, which ultimately leads to an increase in 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.

9. ABC Ltd is a publicly traded firm listed on the Australian Stock Exchange (ASX). Over the past two years, ABC Ltd has gained a lot of media attention as result of the adverse effect of its operation on the environment. Various environmental activists’ group have call for tighter regulation for the industry as whole and a levy on the activities of ABC Ltd specifically. In hearing before a select committee of the Parliament of Australia, ABC Ltd argued that the company has complied with all the environmental and has not committed any act which is in breach if the said regulation. Additionally, the company presented its compliance certificate for the period in support of its assertion. Furthermore, the firm insinuated that the attack from various environmental group were simply political motivated and had no merits to it.


Using the political cost hypothesis, explain what action ABC Ltd is likely to take.

10. How does price protection work in management contracts and debt contracts under positive accounting theory?

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