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Caa 301: Financial Accounting Theory Question Paper
Caa 301: Financial Accounting Theory
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
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UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR STAGE 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAA 301: FINANCIAL ACCOUNTING THEORY (SUNDAY CLASS)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
a) i) Describe what is meant by the term “accounting theory” and the purpose it has
Served over time (5 Marks)
ii) Distinguish between normative and descriptive accounting theories (4 Marks)
b) i) Is accounting a science or Art? Explain (3 Marks)
ii) Describe two main objectives of accounting (3 Marks)
iii) What are the limitations of accounting? (3 Marks)
iv) According to Slavin a professor in accounting” conceptually, accounting is the
discipline that provides information for external and internal users of information
which may base decisions that result in the allocation of resources in society”
c) Describe accounting as an information system (3 Marks)
QUESTION TWO
The general purchasing power of the dollar has declined considerably because of inflation in recent
years. To account for this changing value of the dollar, any accountant suggests that financial
statements be adjusted for general price-level changes. Three independent, unrelated statements
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regarding general price-level adjusted financial statements follow. Each statement contains some
fallacious reasoning.
Statement I
The accounting profession has not seriously considered price-level adjusted financial statements
before because the rate of inflation usually has been small from year to year that the adjustments would
have been immaterial in amount. Price-level adjusted financial statements represents a departure from
the historical cost basis of accounting. Financial statements should be prepared on the basis of facts,
not estimates.
Statement II
When adjusting financial data for general price-level changes, a distinction must be made between
monetary and non-monetary assets and liabilities, which , under the historical cost basis of accounting ,
have been identified as “current” and “non current” when using the historical cost basis of accounting,
no purchasing power gain or loss is recognized in the accounting process, but when the financial
statements are adjusted for general price-level changes, a purchasing power gain or loss will be
recognized on monetary and non-monetary items
Statements III
If financial statements were adjusted for general price-level changes, depreciation charges in the
income statement would permit the recovery of dollars of current purchasing power and, thereby, equal
to cost of new assets to replace the old ones. General price-level adjusted data would yield statementsof
–financial position amounts closely approximating current values. Furthermore, management can
make better decisions if constant dollar financial statements are published.
Required
Evaluate each of the independent statements and identify the areas of fallacious reasoning in each
and explain why the reasoning is incorrect. Complete your discussion of each statement before
proceeding to the next statement. (20 Marks)
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QUESTION THREE
a) The arguments for and against financial reporting regulations forces us to consider why we
regulate, who benefits and who pays the cost
i) Why can’t the optimal regulation be determined? If optimal accounting regulation
cannot be determined how can a regulatory such as FASB make good decisions
(8 Marks)
ii) How do agency theory and the cod rational view point differ in assumptions about the
behavior of individuals? (7 Marks)
QUESTION FOUR
You are engaged to review the accounting record s of Jeremy Roenick corporation prior to the closing
of the revenue and expenses accounts as of December 31 the end of the current fiscal year. The
following information comes to your attention.
1. During the current year, Jeremy Roenick corporation changed its policy in regard to
expensing purchases of small tools. In the past, these purchases had always been expensed
because they amounted to less than 2% of net income, but the president has decided that
capitalization and subsequent depreciation should now be followed, it is expressed that
purchases of small tools will not fluctuate greatly from year to year.
2. Jeremy Roeneck Corporation constructed a warehouse at a cost of $1,000,000. the company
had been depreciating the asset on a straight-line basis over 10 years. In the current year, the
controller doubled depreciation expense because the replacement cost of the warehouse had
increased significantly.
3. The company decided in October of the current fiscal year to start a massive advertising
campaign to enhance the Marketability of their product. In November, the company paid
$800,000 for advertising time on a major advertising television network to advertise their
product during the next 12 months. The controller expensed the $800,000 in the current year
on the basis that “once the money is spent, it can never be recovered from the television
network”.
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4. When the balance sheet was prepared, detailed information as to the amount of cash in
deposit in each of several banks was omitted. Only the total amount of cash under a caption
“cash in banks “was presented.
5. On July 15 of the current year, Jeremy Roenick Corporation purchased an undeveloped tract
of land at a cost of $320,000. The company spent $80,000 in subdividing the land and getting
it ready for sale. An appraisal of the property at the end of the year indicated that the land was
now worth $500,000. Although none of the lots were sold, the company recognized revenue
of $180,000, less related expenses of $80,000, for a net income on the project of $100,000.
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