Advanced Financial Accounting - Accounting Theory Quiz Solutions

This homework assignment presents solutions to a multiple-choice quiz on accounting theory. The quiz covers various accounting theories, including Public Interest Theory, Legitimacy Theory, Positive Accounting Theory, Stakeholder Theory, and Capture Theory. Each question is answered with the correct option and a brief explanation referencing the provided readings, such as those on opportunistic and efficiency perspectives, normative accounting theories, and the critical perspective. The solutions demonstrate an understanding of key concepts like social contracts, agency relationships, and the relationship between theory and practice. The assignment aims to provide a concise overview of different accounting theories and their applications in financial reporting and corporate behavior.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
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1ADVANCED FINANCIAL ACCOUNTING
Question and answers
(i) X Ltd manufactures electronic components. The entity included a statement in its latest
annual financial report indicating that it only sources components parts from overseas suppliers
that do not engage in unfair labour practices. Which of the following accounting theories
explains this practice?
C As per the reading 1.10, the statement which is provided in page 74 states that regulations in
relation to Public Interest Theory has been brought as a balancing act between social benefits and
social costs of regulations. Therefore, the answer would be Public Interest Theory.
(ii) Choose the correct statement relating to the meaning of ‘legitimacy’ within the context of
legitimacy theory.
C The existence of a ‘social contract’ is fundamental to the concept of legitimacy within
legitimacy theory - the ‘social contract’ represents a variety of expectations that a society has
about corporate behaviour and corporate activities. This is the correct statement as is stated in
reading 1.8 and the same is stated in the first paragraph of page 323 under the head of legitimacy
theory.
(iii) Which accounting theory would best fit the following statement? The aim of introducing
regulation is to benefit society as a whole.
B As per the Public interest Theory which is stated under reading 1.10, third paragraph
effectively shows that the relations which is stated in the statement.
(iv) Choose the correct statement.
D All of the above option is the correct option as per reading 1.6 page 253 shows the positive
theory seek to explain and predict practices. Reading 1.6 page number 257 shows that normative
theory prescribe how a particular practice should be undertaken. The last paragraph of page 257
of Reading 1.6 shows that delegation of decision-making authority from an owner to a manager
is referred to as an agency relationship.
(v) A recent media report illustrated how executive pay arrangements and bonus schemes
were causing businesses to take excessive risks and engage in creative accounting practices.
These actions can best be explained by which of the following accounting theories?
C The opportunistic perspective of PAT effectively is shown in the page 274 of reading 1.7
which effectively shows discussion regarding the opportunistic perspective of PAT.
(vi) Choose the incorrect statement.
C Stakeholder theory focuses on the expectations of society in general, while legitimacy theory
focuses on particular groups within a society. The supporting arguments are present in reading
1.9 page 346 which covers the aspects of stakeholder’s theory.
(vii) Which accounting theory would best fit the following statement? There is a two-way
relationship between theory and practice. Changes in social practices should bring about changes
in theory. Similarly, the development of new theoretical perspectives can lead to changes in
social practices.

2ADVANCED FINANCIAL ACCOUNTING
B Legitimacy theory would be the appropriate answer as the same is covered under reading 1.8
under the chapter of legitimacy theory and covered in the page 325.
(viii) Which accounting theory explains the practice where coordination between regulated
parties and a regulatory body enables regulated parties to achieve their own private interests or
objectives?
A Capture theory would be the appropriate answer as per reading 1.10 page 75 which deals with
the aspects of capture theory,