University of the South Pacific

School of Accounting and Finance

AF301 ACCOUNTING THEORY AND APPLICATIONS

Semester 2, 2014 (Face to Face Mode)

Final Examination

Duration

Reading time 10 minutes, Writing time 3 hours

Instructions

This examination carries a 50% weighting towards your overall course grade.

To secure a pass mark in the course, you must score a mark of at least 50% over all

assessment AND a mark of at least 40% in this examination.

You may use a non-programmable calculator

There are eight pages in this examination paper, including this cover page.

Page 2 of 8

Section A 20 marks

This section is COMPULSORY. It contains 10 multiple choice questions, worth 2 marks each.

Answer this section on the special answer sheet provided.

Use the following information to answer Questions 1 and 2

On 1 July, a company purchased 2,000 units of inventory for $10.00. During the month, it sold all the

units for $15.00. On 31 July, the cost of inventory is $13.00.

Question 1

To maintain its physical capital, the company should recognise a profit of:

A $10,000

B $7,000

C $6,000

D $4,000

Question 2

Which of the following statements is incorrect? To maintain its financial capital, using current cost accounting, the company

A Should record a holding gain of $6,000

B Should record an operating profit of $10,000

C Ignores any potential reduction in operating capacity

D Focuses on the ability to recover monetary investment in the business

Use the following information to answer Questions 3 and 4

The amounts in the following table are provided on a historical cost basis. All current assets and

current liabilities relate to the purchase and sale of inventory.

Account 2013 2014

Cash 5,000 7,000

Accounts Receivable 22,000 24,000

Inventory 9,000 5,000

Accounts Payable 18,000 20,000

Goodwill 100,000 90,000

Inventory Price Index 100 108

General Price Index 100 104

Page 3 of 8

Question 3

Assume the company uses current cost accounting. In 2014, it should recognise:

A A loss on monetary items of $400

B A gain on monetary items of $680

C A loss on monetary items of $800

D A loss on monetary items of $1,360

Question 4

Assume the company uses exit price accounting. The value of goodwill at 31 December 2014 should be:

A Adjusted by the general price index

B The average of opening and closing balances

C Based on an impairment test and independent valuation

D Zero

Use the following information to answer Questions 5 and 6

I) A business could be sold as a whole (rather than selling individual assets)

II) Businesses need to replace existing assets

III) Problem of additivity

IV) Businesses are constantly adapting to changing circumstances

Question 5

Which of the following apply to exit price accounting?

A Ignores I and recognizes II

B Refutes II and ignores III

C Ignores I and addresses both III and IV

D Addresses I, III and IV

Question 6

Which of the following apply to current cost accounting?

A Addresses II, but ignores III

B Ignores II and addresses I

C Ignores III and addresses IV

D Addresses III and IV

Page 4 of 8

Use the following information to answer Questions 7 to 10

A company commenced business on 1 January 2013. On that date, it purchased a building for

$300,000. The building is depreciated at 2% annually.

On 31 December 2013, the building has a current cost of $310,000 and a selling price of $330,000.

On 31 December 2014, the building has a current cost of $320,000 and a selling price of $350,000.

Question 7

Under current cost accounting, depreciation on the building for 2014 is:

A $6,000

B $6,200

C $6,300

D $6,400

Question 8

Under current cost accounting, back-log depreciation on the building for 2014 is:

A $100

B $300

C $400

D None of the above

Question 9

Under current cost accounting, the company should recognise

A a current cost reserve relating to the building of $10,000 in 2014

B a current cost reserve relating to the building of $5,000 in 2014

C a holding gain on the building of $10,000 in 2013

D A holding gain on the building of $5,000 in 2013

Question 10

Under exit price accounting, the price variation adjustment on buildings for 2014 is:

A $10,000

B $20,000

C $30,000

D None of the above

Page 5 of 8

Section B 60 marks

This section contains 3 COMPULSORY questions. Each question is worth 20 marks.

For each question, a good answer will be between 1 and 2 pages.

Question 11 Positive Accounting Theory

Avarua Ltd is negotiating a $5 million loan from the Commonwealth Bank. This loan will finance the

construction of a new shopping complex. In the loan agreement, the bank intends to include a debt

covenant which requires Avarua Ltd to maintain a debt to equity ratio below 40%.

Required

a) Advise the Commonwealth Bank of three agency problems of debt which may arise if it does not

enforce any debt covenants.

b) The debt hypothesis predicts managers’ policy choices as a firm approaches the limits of its debt

covenant. Use this hypothesis to predict the type of policies that Avarua Ltd’s managers will

choose as the debt to equity ratio approaches 40%.

Question 12 Social and Environmental Accounting

Social and environmental disclosures may be provided in the unaudited section of the corporate

annual report, in a separate report (sometimes known as a Sustainability Report) or through an

organisation’s website.

Required

a) Using two system-oriented theories which you have learnt in this course, discuss what motivates

organisations to provide social and environmental disclosures.

b) A firm may disclose some aspects of its social and environmental performance within its audited

financial statements. Explain three limitations of this approach.

Page 6 of 8

Question 13 Behavioural Accounting

You manage an investment portfolio of $3 million which is currently allocated equally between

shares in two companies (A and B). You ask three colleagues to review the following information

and suggest investment strategies.

Company Recent announcements and developments

A This company has just announced a new capital investment project, which will commence in the next 3 months. The project is expected to increase future profits.

B This company is being sued by customers, who claim that its products have harmed their health and may increase the chances of developing cancer.

C This is a newly registered company, which has just released its prospectus. The business plan and projected financial statements look very similar to another highly successful company. The two companies also have some common directors.

Your colleagues’ responses are provided below.

Name Suggested Strategy

Allen Sell all shares in B and use the money to buy shares in A

Marjorie Sell 10% of the shares in B in order to increase shareholding in A and acquire shares in C

Seini Ask investors for more money in order to buy shares in C

Required

a) Explain which decision-making heuristic is most evident in the strategy outlined by each of your

colleagues.

b) Instead of using heuristics, you could use an approach based on the Brunswik Lens Model.

Discuss which approach would result in a better investment decision.

Page 7 of 8

Section C 20 marks

This section contains 4 questions. Answer ONLY 1 question. Each question is worth 20 marks

In answering these questions, you may apply relevant theories from the course. You may also

discuss the findings and conclusions from your group research project.

A good answer will be between 1 and 2 pages.

Question 14 Accounting and Culture

Gray (1988) devised values for the accounting profession, based on earlier work by Hofstede.

Required

a) Discuss how accountants’ ethnic culture may affect disclosure and measurement in financial

statements. Use suitable examples from your own culture to illustrate your arguments.

b) Research shows that accountants do not always behave as Gray predicted. Provide some

possible explanations for such research findings.

Question 15 Harmonisation of Accounting

International Financial Reporting Standards (IFRS) have been adopted in many countries around the

world. There is a separate IFRS for Small and Medium Enterprises (SMEs).

a) Discuss how specific stakeholders are likely to benefit from the global adoption of IFRS.

b) Explain whether adoption of IFRS is beneficial for Pacific Island countries and SMEs.

Question 16 Accounting and Gender

At USP, more females than males graduate with accounting degrees. However, most accounting

professors and audit partners in Fiji are male.

a) Discuss the reasons for gender inequality in accounting.

b) Explain how gender inequality in the accounting profession can be reduced.

Page 8 of 8

Question 17 Accounting in the Public Sector

Proponents of sector neutrality assert that accounting practices from the private sector should also

be adopted in the public sector. However Barton (2005) argues that the public sector is distinct from

the private sector.

a) From an accounting perspective, discuss how the public sector differs from the private

sector.

b) Explain whether sector neutral accounting policies will improve or distort financial reporting

in the public sector.

THE END