Financial Accounting Theory (R. Scott)
Practice Exam With Questions And
Correct Verified Answers | 2026/2027
Cycle | Guaranteed Pass | Brand
New!!!!!!
According to Ramanna, what drives shareholders' demand for accounting information. That is,
what are the shareholders' problems that accounting helps solve? - CORRECTANSWER-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. - CORRECTANSWER-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. - CORRECTANSWER-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. - CORRECTANSWER-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. - CORRECTANSWER-Economic Theory: accrual properties
(verifiability/relevance/conservatism), main users are shareholders, matching principal
-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? - CORRECTANSWER-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
What are the fundamental elements of financial statements? Is there one element that is "more
fundamental" than the other elements? Explain. - CORRECTANSWER-Assets are the most
fundamental
-Defines what assets, liabilities, revenue and expenses are but to figure out liabilities, revenue
and expenses must go through assets first
The FASB started in 1973. At that time, the definitions of assets and liabilities found in the
professional literature were circular. Explain. - CORRECTANSWERProblem- defined assets as
whatever GAAP said it was, "expected benefits"
- cannot define liabilities without the definition of assets, and vice versa
Storey and Storey talk about two views of income. Explain. - CORRECTANSWER1) Asset-Liability
View
-Definitions of income should depend on assets and liabilities
2) Revenue-Expense View
- Matching principal, assets and liabilities are the product of the matching process
Questions for 9/13 - 9/14 - CORRECTANSWER
, SFAC 1 (1978) - CORRECTANSWEROutlines what the objective of financial reporting is.
-provide useful information to those with limited access to financial data (external users,
investors, creditors)
-emphasizes cash flows vs accrual bases (CF is more important)
SFAC 2 (1980) - CORRECTANSWERDesirable qualitative characteristics of accounting
information, that are used to judge the usefulness of info
- Hierarchy of Qualities (relevance vs reliability)
SFAC 3 - CORRECTANSWERREPLACED by SFAC 6
SFAC 5 (1984) - CORRECTANSWERRecognition and measurement in financial statements
-identifies basic 5 financial statements and their recognition criteria (when/where to include
items)
-addresses measurement criteria and what dollar amount items are recorded at
5 Statements - CORRECTANSWERBalance Sheet
Income Statement
Comp. Income
Cash Flows
Retained Earnings
4 Recognition criteria - CORRECTANSWERElement
Measurable
Relevant
Reliable
Practice Exam With Questions And
Correct Verified Answers | 2026/2027
Cycle | Guaranteed Pass | Brand
New!!!!!!
According to Ramanna, what drives shareholders' demand for accounting information. That is,
what are the shareholders' problems that accounting helps solve? - CORRECTANSWER-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. - CORRECTANSWER-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. - CORRECTANSWER-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. - CORRECTANSWER-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. - CORRECTANSWER-Economic Theory: accrual properties
(verifiability/relevance/conservatism), main users are shareholders, matching principal
-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? - CORRECTANSWER-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
What are the fundamental elements of financial statements? Is there one element that is "more
fundamental" than the other elements? Explain. - CORRECTANSWER-Assets are the most
fundamental
-Defines what assets, liabilities, revenue and expenses are but to figure out liabilities, revenue
and expenses must go through assets first
The FASB started in 1973. At that time, the definitions of assets and liabilities found in the
professional literature were circular. Explain. - CORRECTANSWERProblem- defined assets as
whatever GAAP said it was, "expected benefits"
- cannot define liabilities without the definition of assets, and vice versa
Storey and Storey talk about two views of income. Explain. - CORRECTANSWER1) Asset-Liability
View
-Definitions of income should depend on assets and liabilities
2) Revenue-Expense View
- Matching principal, assets and liabilities are the product of the matching process
Questions for 9/13 - 9/14 - CORRECTANSWER
, SFAC 1 (1978) - CORRECTANSWEROutlines what the objective of financial reporting is.
-provide useful information to those with limited access to financial data (external users,
investors, creditors)
-emphasizes cash flows vs accrual bases (CF is more important)
SFAC 2 (1980) - CORRECTANSWERDesirable qualitative characteristics of accounting
information, that are used to judge the usefulness of info
- Hierarchy of Qualities (relevance vs reliability)
SFAC 3 - CORRECTANSWERREPLACED by SFAC 6
SFAC 5 (1984) - CORRECTANSWERRecognition and measurement in financial statements
-identifies basic 5 financial statements and their recognition criteria (when/where to include
items)
-addresses measurement criteria and what dollar amount items are recorded at
5 Statements - CORRECTANSWERBalance Sheet
Income Statement
Comp. Income
Cash Flows
Retained Earnings
4 Recognition criteria - CORRECTANSWERElement
Measurable
Relevant
Reliable
