A304 exam 1 questions n answers
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Conflicting incentives - correct answer ✔✔Principle-agent conflict where what’s best for the
principle may not be what's best for the agent. Solution: realign incentives.
information asymmetry - correct answer ✔✔principle-agent conflict where one party (often the
agent) has more information than the principle. Two types include adverse selection and moral
hazard. solution: provide information
Adverse Selection - correct answer ✔✔occurs when one party in a transaction has more
information than the other, leading to a negative consequence for the party without the
relevant information
Moral Hazard - correct answer ✔✔occurs when one party in a transaction (the principle or
agent) assumes additional risk that negatively affect the other party. It can exist when one party
takes a risk but does not have to suffer the consequences. Often the party is not acting in good
faith or has provided false information
Relevence - correct answer ✔✔qualitative characteristic in which financial reporting
information must be capable of making a difference in decisions made by users
Faithful Representation - correct answer ✔✔qualitative characteristic in which the numbers and
descriptions accurately depict the economic substance or activity they purport to represent
Comparability - correct answer ✔✔one of the attributes that enhance qualitative
characteristics. Ensures that information can be compared across companies over time
rated A+ already passed
Conflicting incentives - correct answer ✔✔Principle-agent conflict where what’s best for the
principle may not be what's best for the agent. Solution: realign incentives.
information asymmetry - correct answer ✔✔principle-agent conflict where one party (often the
agent) has more information than the principle. Two types include adverse selection and moral
hazard. solution: provide information
Adverse Selection - correct answer ✔✔occurs when one party in a transaction has more
information than the other, leading to a negative consequence for the party without the
relevant information
Moral Hazard - correct answer ✔✔occurs when one party in a transaction (the principle or
agent) assumes additional risk that negatively affect the other party. It can exist when one party
takes a risk but does not have to suffer the consequences. Often the party is not acting in good
faith or has provided false information
Relevence - correct answer ✔✔qualitative characteristic in which financial reporting
information must be capable of making a difference in decisions made by users
Faithful Representation - correct answer ✔✔qualitative characteristic in which the numbers and
descriptions accurately depict the economic substance or activity they purport to represent
Comparability - correct answer ✔✔one of the attributes that enhance qualitative
characteristics. Ensures that information can be compared across companies over time
