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Chapter 2—ACCOUNTING THEORY AND ACCOUNTING RESEARCH
TRUE/FALSE
1. The use of research in accounting results in the field being referred to as an academic discipline.
2. The scientific method refers to the formal procedures used to derive the laws and principles that
govern scientific disciplines, such as physics and chemistry, and is therefore not used in the
published research on accounting.
3. An important segment of accounting theory is derived from the research process.
4. Deductive reasoning analyzes empirical data to make inferences about a population.
5. Hypotheses are conclusions derived from the research process.
6. General deductive reasoning is extremely important in accounting theory and policy making.
7. Analytical/deductive research methods are commonly used in accounting research.
8. Positive accounting research attempts to explain behavioral relationships in accounting.
9. Positive accounting research attempts to describe "what is" and determine how things should be.
10. Positive accounting research attempts to be value-free, while normative accounting research is
value judgment oriented.
11. Only a few examples of inductively derived theories are present in accounting literature.
12. Normative theories contain at least one premise stating how things should be.
13. A premise stating that accounting reports should be based on historical costs would indicate a
normative approach.
14. Inductive approaches to accounting theory usually attempt to be descriptive.
15. An important difference between deductive and inductive research is that inductive research is
sometimes global in content, whereas deductive research is usually particularistic.
16. One of the purposes of positive research is to satisfy information demand by managers, auditors,
creditors, and standard setters.
17. Because deductive research is grounded in real-world phenomena, it can realistically focus on
only a small part of the relevant environment.
18. Deductive and inductive research are competing approaches and may not be used together.
19. Inductive research in accounting can help to shed light on relationships and phenomena existing
in the business environment.
20. Inductive research can be useful in the accounting policy-making process in which deductive
reasoning helps to determine rules that are to be prescribed.
21. To be useful, inductive research must be kept value-free.
22. The decision-model approach to accounting research is normative.
Accounting Theory: 8th edition Page 3 of 12
23. Accounting research of two generations ago was purely normative.
24. The decision-model approach to accounting research seeks to determine what information users
of accounting information want.
25. The normative nature of the decision-model approach has led to criticism that this method is non-
scientific.
26. Empirical research shows that prices of publicly traded securities react slowly and in an erratic
manner to new information.
27. The efficient-markets hypothesis states that the return of a security is based on its risk.
28. Because of the efficient-markets hypothesis, the impetus for increased disclosure with less
concern for choice among accounting alternatives has grown stronger.
29. Much of the accounting research in the behavioral area uses laboratory subjects in carefully
controlled experimental situations.
30. An argument against using students as subjects in behavioral research experiments is that they are
not representative of the broad population of accounting information users.
31. Agency theory studies are always inductive.
32. One hypothesis of agency theory is that management attempts to maximize its own welfare by
minimizing the various agency costs arising from monitoring and contracting.
33. Agency theory holds that management always tries to maximize the value of the firm.
Accounting Theory: 8th edition Page 4 of 12
34. Information economics research is usually inductive in nature.
35. Information economics has relatively recently included agency theory assumptions in its analysis.
36. Critical accounting discourages active social roles for accountants.
37. Critical accounting research assumes a sharp separation between the researcher and his or her
field of investigation.
38. Of the research methods discussed in the text, the critical accounting approach is the closest to
the standard-setting function.
39. Currently accepted alternative depreciation methods illustrate that accounting is closer to an art
than a science.
40. Because accounting is not very much concerned with the human element, we can expect it to be
more precise in its measurement and predictions than are the natural sciences.
MULTIPLE CHOICE
1. Which of the following examines or tests data, usually from a sample of a population, to make
inferences about the population?
a.
Deductive reasoning
b.
Inductive reasoning
c.
Subjective reasoning
d.
Objective reasoning
Accounting Theory: 8th edition Page 5 of 12
2. When the premises of a theory are constructed so that they can be tested by statistical inference,
they are usually called:
a.
Postulates.
b.
Inferences.
c.
Hypotheses.
d.
Assumptions.
3. Judging a theory by observing evidence rather than simply by its internal logic is called:
a.
Subjective reasoning.
b.
Inductive reasoning.
c.
Deductive reasoning.
d.
Objective reasoning.
4. Which of the following is not a characteristic of good inductive accounting theory research?
a.
It must carefully specify the problem that is being examined.
b.
It must be based on a hypothesis that is capable of being tested.
c.
It must test the entire population under investigation.
d.
It must employ the requisite tools of statistical inference.
5. Which of the following types of research can realistically examine only rather narrowly defined
questions and problems?
a.
Inductive research
b.
Normative research
c.
Deductive research
d.
Nonempirical research
6. The basic set of premises in a theory are also sometimes called all of the following except:
a.
Hypotheses.
b.
Assumptions.
c.
Postulates.
d.
Positions.
7. Empirical research that attempts to determine why particular accounting alternatives are selected
by management is an example of:
a.
Normative research.
b.
Deductive research.
c.
Positive accounting research.
d.
Analytical research.
Accounting Theory: 8th edition Page 6 of 12
8. Which of the following statements is not true?
a.
Inductive and deductive methods can be used together.
b.
It is impossible to keep inductive research completely value-free.
c.
Inductive approaches to accounting theory usually attempt to be descriptive.
d.
Deductive research makes inferences about a population based on tests of data.
9. Which of the following characteristics does not apply to the decision-model approach to
research?
a.
It asks what information is needed for making decisions.
b.
It asks what information users want.
c.
It concentrates on what information is useful for particular decisions.
d.
It has a normative and deductive orientation.
10. Which one of the following statements is true regarding the decision-model approach to research?
a.
A premise underlying this research approach is that decision makers may need to be taught
how to use information they are unfamiliar with.
b.
This approach has become more important with the rise of empirical research in
accounting.
c.
Some advocates of newer approaches have declared that this approach is too scientific.
d.
The decision-model approach does not parallel those of standard-setters because standard-
setters must cope with the politics of the regulatory process.
11. Which of the following statements is not true regarding the efficient-markets hypothesis?
a.
It stems primarily from the discipline of finance.
b.
It assumes that market prices of publicly traded securities reflect fully all publicly
available information.
c.
As a result of this proposition, the impetus for less disclosure with more concern for
choice among accounting alternatives has grown stronger.
d.
It states that the return of a security is based on its risk.
12. Which of the following statements regarding behavioral research is true?
a.
It is a normative approach.
b.
The main concern of this type of research is how users of accounting information make
decisions and what information they need.
c.
Many studies have shown that there are no discrepancies between normative decision
models and the actual decision process of users.
d.
Since behavioral research is positive in approach, it is impossible to reach a conclusion
regarding whether or not the usage of accounting data for decision-making purposes could
be improved upon.
Accounting Theory: 8th edition Page 7 of 12
13. Which of the following statements regarding behavioral research in accounting is not true?
a.
Much of this research uses laboratory subjects in carefully controlled experimental
situations.
b.
This approach seeks to understand what accounting information is selected for use and
how it is processed.
c.
This research has found that published financial statements are not often used for
managerial decision-making purposes.
d.
The question of how representative student subjects are to the broad population is a
problem that pervades virtually all behavioral research that uses student subjects.
14. The roots of behavioral research lie in the field(s) of:
a.
Economics.
b.
Finance.
c.
Psychology and sociology.
d.
Accounting.
15. Agency theory studies are a special case of:
a.
Capital markets research.
b.
The decision-model approach.
c.
Critical accounting.
d.
Behavioral research.
16. Which of the following is not true regarding agency theory?
a.
It is also called contracting theory.
b.
Its underlying assumption is that individuals act in their own best self-interest.
c.
Few agency relationships between parties may be defined or governed by accounting
numbers.
d.
It is concerned with the various costs of monitoring and enforcing relations among
management, owners, creditors, and government.
17. The objective of information theory analysis is:
a.
To determine how optimal contractual arrangement incentives and risk sharing can be
negotiated.
b.
To determine appropriate alternatives to accrual accounting.
c.
To use inductive research techniques to test hypotheses regarding information usefulness.
d.
To find alternatives to agency theory assumptions.
Accounting Theory: 8th edition Page 8 of 12
18. Critical accounting:
a.
Developed from two other areas of accounting, behavioral accounting and agency theory.
b.
Is concerned with the economic rather than social role of accountants.
c.
Presumes a sharp separation between the researcher and his or her field of investigation.
d.
Views accounting as having a pivotal role in adjudicating conflicts between the
corporation and constituencies such as labor, consumers, and the general public.
19. Which of the following statements is not true regarding critical accounting?
a.
Critical accountants believe that accounting should more strongly emphasize the attempt
to solve broad societal problems.
b.
Critical accounting researchers believe that in viewing and investigating reality, they also
help to shape that reality.
c.
It is the intention of critical accounting researchers to move the field into the mainstream
of accounting research by adopting a conflict-based perspective.
d.
In critical accounting, there is less emphasis upon historical models and more upon
mathematical and statistical models.
20. Which of the following statements is true?
a.
A paradigm is a shared problem-solving view among members of a science or discipline.
b.
In accounting, the shared paradigm has been current valuation.
c.
Criticism of historical cost has increased since inflation lessened during the 1980s.
d.
It appears that a scientific revolution has occurred in accounting because historical cost is
no longer the dominant paradigm.
21. In which of the following research areas do researchers believe that there is not a sharp separation
between the researcher and his or her field of investigation?
a.
Information economics
b.
Critical accounting
c.
Capital markets research
d.
Agency theory
22. Which of the following research areas hypothesizes that management attempts to maximize its
own welfare by minimizing costs of monitoring and contracting?
a.
Information economics
b.
Critical accounting
c.
Capital markets research
d.
Agency theory
23. Which of the following accounting research areas is based on the efficient-markets hypothesis?
a.
The decision-model approach
b.
Behavioral research
c.
Critical accounting
d.
Capital markets research
24. Empirical research is:
a.
Inductive.
b.
Deductive.
c.
Analytical.
d.
None of the above
25. In a scientific approach to accounting:
a.
A great deal of latitude is allowed in measurements.
b.
There is a low degree of objectivity.
c.
The intention is to provide information useful for either predictive or assessment purposes.
d.
The straight-line method of depreciation would always be used.
26. Which of the following accounting research approaches arose as a result of the perceived
separation of interests in the modern corporation between management and ownership interests?
a.
Capital markets research
b.
Behavioral research
c.
Agency theory
d.
Information economics
ESSAY
1. Discuss the differences between each of the following:
•
Normative vs. descriptive theories
•
Inductive vs. deductive reasoning
•
Global vs. particularistic theories
Also identify how these types of approaches relate to one another. (For example: is deductive
research normative or descriptive; is it global or particularistic?)
2. A study by Watts and Zimmerman that explored the question of how corporate management
responds to new standards proposed by the FASB was discussed in the text. Answer the
following questions related to that study.
a.
What was the hypothesis of the study?
b.
Describe the study and discuss its findings.
c.
Was the study inductive or deductive? Explain.
d.
Discuss the criticisms that have been directed at the study and the implications of
those criticisms.
3. Are inductive and deductive research mutually exclusive methods? Give examples to support
your answer.
4. Describe the decision-model approach to accounting research and identify the two major
decisions embraced by this approach.
5. Answer the following related to behavioral research:
a.
What is the main concern of behavioral research?
b.
How does behavioral research differ from the decision-model approach?
c.
What are some of the findings of this research?
6. Answer the following questions regarding agency theory:
a.
What are the assumptions, focus, and hypothesis of agency theory?
b.
How does opportunistic behavior, or moral hazard apply to agency theory?
c.
How does an audit of financial statements pertain to agency theory?
7. What is critical accounting, and in what way does it differ from all of the other research areas
discussed in the text?
