Financial Accounting Theory
2026 Exam All Answers and
Illustrations Given
Questions for 9/6 - 9/7 -
According to Ramanna, what drives shareholders' demand for accounting
information. That is, what are the shareholders' problems that accounting
helps solve? - 🧠 ANSWER ✔✔-Rely on managers for the future of the
company
-Having the right controls in place, and projections are conservative
,-Shareholder vs. manager, manager taking care of assets (not risk taking),
investors want accrual info as well.
-Shirking and risk could potentially harm future profit/growth of company,
information asymmetry-managers can skew that information
Ramanna notes that managers have an information advantage over
shareholders and can use that information advantage to their benefit.
Explain. - 🧠 ANSWER ✔✔-Down playing bad news, overemphasizing good
news
-Mislead investors because of lack of verifiability and conservatism
Ramanna says that accounting practices and principles arose organically to
meet the demands of the firms' stakeholders. Explain. - 🧠 ANSWER ✔✔-
Use of BS helps prevent managers investing in risky projects , mangers will
be held accountable
-IS prevents shirking (can see if managers are shirking)
-Stakeholders demand information about future prospects, shirking and
risk. Auditing existed before SEC said public companies needed FS to be
audited: audit will prevent information asymmetry and add credibility
,Ramanna identifies 3 broad purposes for accounting: helping stakeholders
understand a firm's future prospects, helping stakeholders by controlling
agency costs, and "disciplining" future-looking forecasts issued outside of
the financial statements (e.g., management earnings forecasts, analysts
earnings forecasts, etc.). Explain how accounting performs each of these 3
roles. - 🧠 ANSWER ✔✔-Managers have conference calls with analysts who
can predict forecasts
-Knowledge of hard number benchmark, disciplines managers to give a
number
-Harder accounting number means more discipline for forecast
-Needs to be more verifiable and conservative
*3 characteristics-matching, verifiability, and conservatism
Ramanna contrasts the Economic Theory of Financial Reporting with the
FASB Theory of Financial Reporting. Describe the biggest differences
between these two theories of financial reporting. - 🧠 ANSWER ✔✔-
Economic Theory: accrual properties (verifiability/relevance/conservatism),
main users are shareholders, matching principal
COPYRIGHT©NINJANERD 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE. PRIVACY
STATEMENT. ALL RIGHTS RESERVED
3
, -FASB: FV accounting (comparability/understandability/timeliness/
verifiability), main users are potential shareholders
-Managers misuse information to their advantage, FASB assumes not a
problem for shareholders (verifiability not necessary, info should be neutral/
no matching) and looks if transaction gives rise to asset or liability
Storey and Storey describe the history behind the FASB's Conceptual
Framework. Discuss the reasons why the FASB embarked on the
Conceptual Framework project. Why did the FASB believe a Conceptual
Framework was needed. What is the purpose of the Conceptual
Framework. Who uses it, and how? - 🧠 ANSWER ✔✔-Initiated a conceptual
framework project to reason the underlying procedures and a standard by
which procedures would be judged
-Will lead to increased public confidence in financial statements and aid in
preventing proliferation of accounting methods
-The board uses it as a coherent system of interrelated objectives and
fundamentals that is expected to lead to consistent standards and that
prescribes the nature, function and limits of financial accounting and
reporting. Expected to serve the public interest by providing structure and
direction to financial accounting
2026 Exam All Answers and
Illustrations Given
Questions for 9/6 - 9/7 -
According to Ramanna, what drives shareholders' demand for accounting
information. That is, what are the shareholders' problems that accounting
helps solve? - 🧠 ANSWER ✔✔-Rely on managers for the future of the
company
-Having the right controls in place, and projections are conservative
,-Shareholder vs. manager, manager taking care of assets (not risk taking),
investors want accrual info as well.
-Shirking and risk could potentially harm future profit/growth of company,
information asymmetry-managers can skew that information
Ramanna notes that managers have an information advantage over
shareholders and can use that information advantage to their benefit.
Explain. - 🧠 ANSWER ✔✔-Down playing bad news, overemphasizing good
news
-Mislead investors because of lack of verifiability and conservatism
Ramanna says that accounting practices and principles arose organically to
meet the demands of the firms' stakeholders. Explain. - 🧠 ANSWER ✔✔-
Use of BS helps prevent managers investing in risky projects , mangers will
be held accountable
-IS prevents shirking (can see if managers are shirking)
-Stakeholders demand information about future prospects, shirking and
risk. Auditing existed before SEC said public companies needed FS to be
audited: audit will prevent information asymmetry and add credibility
,Ramanna identifies 3 broad purposes for accounting: helping stakeholders
understand a firm's future prospects, helping stakeholders by controlling
agency costs, and "disciplining" future-looking forecasts issued outside of
the financial statements (e.g., management earnings forecasts, analysts
earnings forecasts, etc.). Explain how accounting performs each of these 3
roles. - 🧠 ANSWER ✔✔-Managers have conference calls with analysts who
can predict forecasts
-Knowledge of hard number benchmark, disciplines managers to give a
number
-Harder accounting number means more discipline for forecast
-Needs to be more verifiable and conservative
*3 characteristics-matching, verifiability, and conservatism
Ramanna contrasts the Economic Theory of Financial Reporting with the
FASB Theory of Financial Reporting. Describe the biggest differences
between these two theories of financial reporting. - 🧠 ANSWER ✔✔-
Economic Theory: accrual properties (verifiability/relevance/conservatism),
main users are shareholders, matching principal
COPYRIGHT©NINJANERD 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE. PRIVACY
STATEMENT. ALL RIGHTS RESERVED
3
, -FASB: FV accounting (comparability/understandability/timeliness/
verifiability), main users are potential shareholders
-Managers misuse information to their advantage, FASB assumes not a
problem for shareholders (verifiability not necessary, info should be neutral/
no matching) and looks if transaction gives rise to asset or liability
Storey and Storey describe the history behind the FASB's Conceptual
Framework. Discuss the reasons why the FASB embarked on the
Conceptual Framework project. Why did the FASB believe a Conceptual
Framework was needed. What is the purpose of the Conceptual
Framework. Who uses it, and how? - 🧠 ANSWER ✔✔-Initiated a conceptual
framework project to reason the underlying procedures and a standard by
which procedures would be judged
-Will lead to increased public confidence in financial statements and aid in
preventing proliferation of accounting methods
-The board uses it as a coherent system of interrelated objectives and
fundamentals that is expected to lead to consistent standards and that
prescribes the nature, function and limits of financial accounting and
reporting. Expected to serve the public interest by providing structure and
direction to financial accounting
