Accounting Theory & Practice Final -
Weeks 1-5 questions with complete
solutions 2025/2026
Accounting System: Financial - correct answer ✔✔Periodic financial statements and related
disclosures
- Useful to external decision makers (investors, creditors, suppliers, customers)
Accounting System: Managerial - correct answer ✔✔Detailed plans and continuous
performance reports
- Internal Decision Makers (managers throughout the organization)
Double Entry Bookkeeping - correct answer ✔✔Every financial transaction has equal and
opposite effects in two different accounts
Statement of Financial Position (B/S) - correct answer ✔✔Assets, Liabilities, Equity
- Cost
Statement of Financial Performance (I/S) - correct answer ✔✔Revenue, COS, Expenses, Net
Income
Cash Flow Statement - correct answer ✔✔Operating, Investing, Financial Activities
Accrual - correct answer ✔✔Accounting transactions recorded when they occur. Helps measure
firm's performance
,Invisible Hand - correct answer ✔✔Market forces help automatically reach equilibrium in a
market according to supply/demand.
No outside intervention such as government is necessary.
Adam Smith Theory of Market Sentiments: regulatory intervention is in the public interest
Accounting Theories: importance - correct answer ✔✔Help us explain / prescribe, understand,
evaluate, and predict accounting practices.
Without a theoretical understanding, we are not able to assess accounting practices and their
underlying motives.
Accounting Theories: can be based on - correct answer ✔✔1. Scientific/physical laws (gravity
theory), which are particular phenomena always occurs if certain conditions are present
2. Social Phenomena (such as institutional theory)
Accounting Theories: Mainstream Approaches - correct answer ✔✔Mainstream: economic
reality is objective, unique, measurable, independent, and out there for us to find
- Normative (classical theories)
- Market based theories
- Positive Accounting Theories
- Behavioral and contingency theories
Accounting Theories: Alternative Approaches - correct answer ✔✔Economic Reality is
subjective, and socially constructed (analysts accountants/investors are subjective constructors
of firm value)
- Research is Interpretive, Critical, Social Constructivist
- There is no such thing as objective firm value; it is:
- dependent on beliefs, experiences, etc. (then, inform society, interpret, understand and
explain it)
- socially imposed by elites on their benefit (then, alert society, criticism and explain)
, - misleading (then, reconstruct the reality, unearth the hidden meanings, and redesign it)
Mainstream Accounting Theory: Normative (classical) - correct answer ✔✔- Economic reality is
objective, unique, measurable
- Reflected by applying appropriate accounting method
- Unique way to prepare financial statements capturing 'true' and 'fair' picture of an entity
- Guides accounting regulation (IFRS, USGAAP): roles of standards, frameworks, or regulation is
to provide guidance on what should be reported and how
- Example: Stewardship, decision usefulness
- Seeks to correct practice, and aims to ensure consistent use of it (regulation is in the form of
standards, laws- penalties for infringement)
Mainstream Accounting Theories: Market Based Theories - correct answer ✔✔- Economic
reality is objective, unique, measurable
- Markets reflect economic reality (share price is a proxy for 'true value' reflecting the consensus
of all investors)
- Alternative accounting methods can exist; there is no need for unique accounting method
(allows discretion so manager can use information as signal)
- Accounting information useful only if it helps market make better economic decisions
- Investors take part in trading rationally, and make investment decisions to maximize utility
- Aims less regulation: reliance on 'invisible hand' (regulation allows some discretion in
accounting practice - firm value will be set by market)
Market Based Theory: Efficient Market Hypothesis (EMH) - correct answer ✔✔- Prices rapidly
incorporate/reflect all relevant information
- Weak form: prices reflect past information
- Semi Strong form: prices reflect all publicly available information
- Strong form: prices reflect all private and public information
Weeks 1-5 questions with complete
solutions 2025/2026
Accounting System: Financial - correct answer ✔✔Periodic financial statements and related
disclosures
- Useful to external decision makers (investors, creditors, suppliers, customers)
Accounting System: Managerial - correct answer ✔✔Detailed plans and continuous
performance reports
- Internal Decision Makers (managers throughout the organization)
Double Entry Bookkeeping - correct answer ✔✔Every financial transaction has equal and
opposite effects in two different accounts
Statement of Financial Position (B/S) - correct answer ✔✔Assets, Liabilities, Equity
- Cost
Statement of Financial Performance (I/S) - correct answer ✔✔Revenue, COS, Expenses, Net
Income
Cash Flow Statement - correct answer ✔✔Operating, Investing, Financial Activities
Accrual - correct answer ✔✔Accounting transactions recorded when they occur. Helps measure
firm's performance
,Invisible Hand - correct answer ✔✔Market forces help automatically reach equilibrium in a
market according to supply/demand.
No outside intervention such as government is necessary.
Adam Smith Theory of Market Sentiments: regulatory intervention is in the public interest
Accounting Theories: importance - correct answer ✔✔Help us explain / prescribe, understand,
evaluate, and predict accounting practices.
Without a theoretical understanding, we are not able to assess accounting practices and their
underlying motives.
Accounting Theories: can be based on - correct answer ✔✔1. Scientific/physical laws (gravity
theory), which are particular phenomena always occurs if certain conditions are present
2. Social Phenomena (such as institutional theory)
Accounting Theories: Mainstream Approaches - correct answer ✔✔Mainstream: economic
reality is objective, unique, measurable, independent, and out there for us to find
- Normative (classical theories)
- Market based theories
- Positive Accounting Theories
- Behavioral and contingency theories
Accounting Theories: Alternative Approaches - correct answer ✔✔Economic Reality is
subjective, and socially constructed (analysts accountants/investors are subjective constructors
of firm value)
- Research is Interpretive, Critical, Social Constructivist
- There is no such thing as objective firm value; it is:
- dependent on beliefs, experiences, etc. (then, inform society, interpret, understand and
explain it)
- socially imposed by elites on their benefit (then, alert society, criticism and explain)
, - misleading (then, reconstruct the reality, unearth the hidden meanings, and redesign it)
Mainstream Accounting Theory: Normative (classical) - correct answer ✔✔- Economic reality is
objective, unique, measurable
- Reflected by applying appropriate accounting method
- Unique way to prepare financial statements capturing 'true' and 'fair' picture of an entity
- Guides accounting regulation (IFRS, USGAAP): roles of standards, frameworks, or regulation is
to provide guidance on what should be reported and how
- Example: Stewardship, decision usefulness
- Seeks to correct practice, and aims to ensure consistent use of it (regulation is in the form of
standards, laws- penalties for infringement)
Mainstream Accounting Theories: Market Based Theories - correct answer ✔✔- Economic
reality is objective, unique, measurable
- Markets reflect economic reality (share price is a proxy for 'true value' reflecting the consensus
of all investors)
- Alternative accounting methods can exist; there is no need for unique accounting method
(allows discretion so manager can use information as signal)
- Accounting information useful only if it helps market make better economic decisions
- Investors take part in trading rationally, and make investment decisions to maximize utility
- Aims less regulation: reliance on 'invisible hand' (regulation allows some discretion in
accounting practice - firm value will be set by market)
Market Based Theory: Efficient Market Hypothesis (EMH) - correct answer ✔✔- Prices rapidly
incorporate/reflect all relevant information
- Weak form: prices reflect past information
- Semi Strong form: prices reflect all publicly available information
- Strong form: prices reflect all private and public information
