Reference no: EM132494660

Question 1: Positive Accounting Theory (PAT) assumes that principals are aware that agents will act opportunistically, so principals stipulate in any bonus contract the accounting methods to be applied. This means that:

Select one:

1. while the range of accounting treatments may be reduced, the cost of stipulating all the methods for all circumstances is too high, so there will always be scope for agents to opportunistically select accounting methods
2. it is more efficient in terms of the assumptions of PAT not to use bonus plans for agents
3. a carefully worded contract is assumed by PAT to remove the potential for the agent to overstate profits
4. agents will not be permitted to negotiate elements of the bonus contract relating to the stipulation of accounting methods