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Ss Test Far660 Oct 2018
Ss Test Far660 Oct 2018
Question 1
Cushing outlines a series of developments of the double-entry model. They include the
following:
Around the sixteenth century a few changes were made in the bookkeeping
techniques, noticeably, the introduction of specific journals for the recording of
different types of transactions. √
The 16th and 17th centuries saw the evolution of the practice of periodic financial
statement. √
The application of the double-entry system was extended to other types of
organization. √
The 17th century saw the use of separate inventory accounts for different types of
goods. √
Beginning with the East India Company in the 17th century, and continuing with the
growth of corporation following the industrial revolution, accounting acquires a better
status, characterized by the need to inform absentee investors, the need for
auditing, the need for cost accounting, and a reliance on concepts of continuity,
periodicity and accrual. √
(Any 5√ x 1 = 5 marks)
1
SS TEST FAR660/OCT 2018
(Total: 10 marks)
Question 2
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SS TEST FAR660/OCT 2018
(5√ x 1 = 5 marks)
b. Explain five (5) arguments to support the assertion that historical accounting is largely a
syntactic theory.
The theory has semantic content only on the basis of its inputs.
Sterling comments:
If one were to confirm a theory of astronomy, as illustrated by a particular
planetarium, one will check on the accuracy of the observational inputs, and
check for errors in computation. However, at some point, the outputs of the
system would be verified by looking at the sky to see if the stars were in fact in
the position indicated by the planetarium.
Traditional historical cost accounting has also been criticised on the basis of its
syntactic, for example, with respect to the practice of summing several different
money amounts assigned to specific assets (i.e. summing of cash held today with
cash paid for land 20 years ago, which the company still holds today).
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SS TEST FAR660/OCT 2018
For example, valuations are incorporated in balance sheets… but the balance
sheet is not a valuation statement. Fixed assets should be carried at cost … in
historical accounts, unless such cost is no longer meaningful.
Question 3
a. Positive accounting theory can help provide an understanding of the role of accounting√
which, in turn, can form the basis for developing normative theories to improve the practice
of accounting√. Understanding the impact of accounting is a factor that accounting
standard setters consider√ in developing prescription for practice√. Thus, both positive
and normative can co-exist and can complement each other√.
b. Agency relationship explains financial statement as a tool to report about the company
from the agent to the principal√. It also explains the practice of creative accounting in the
financial statement by directors because it could influence the decision to remunerate
them for example to report artificially high profits for their companies to trigger bonus
payment√√.
The main reason why companies use creative accounting is because of the pressure
placed upon management√ to show favorable returns on their investor’s money√. This
idea of seeking to please shareholders is reinforced by Agency theory√. Agency theory
states that individuals seek to maximize their own utility, and act only in the individual’s
best interest√. Financial reports produced by companies are the “basis” of the contract
between each company and its investors√. So, acting in the company’s best interest,
management will use creative accounting to enhance their financial reporting, and
therefore protect the ‘basis’ of their contract√.
In addition, pressure from management can also cause the accountants and auditors to
produce favorable reports to shareholders√ by using creative accounting techniques to
improve results√.
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SS TEST FAR660/OCT 2018
(15 marks)
(Total: 50 marks)