Difference between normative and positive accounting theory

Reference no: EM132934308

1. What is the difference between normative and positive accounting theory? Give examples of each.

2. Explain the three types of agency costs and their relationships to each other in the context of:
(a) debt contracts
(b) equity contracts.

3. Bonus plans are used to reduce the agency costs of equity. Describe the agency relationship giving rise to the agency cost of equity and explain how bonus plans can reduce particular types of agency problems.

4. Explain the main agency costs of debt, and how debt contracts can be designed to reduce those costs. In particular, explain how accounting specifications within the contracts can be used to reduce the agency problems.

5. Explain the efficiency perspective and opportunistic perspective of Positive Accounting Theory. Why is one considered to be ex post and the other ex ante?

6. When Kezza Ltd approached Steffs Banking Corporation Ltd for an unsecured loan of $100 million, Kezza Ltd had a good credit rating. However, the economy was depressed and Steffs Banking Corporation Ltd was concerned about lending such a large sum. You have been asked by Steffs Banking Corporation Ltd to provide a short report to the finance manager, Mike Hanshe, explaining how debt agreements and restrictive covenants can be used to safeguard debt in general. Mike wants the report to explain which agency costs of debt are controlled by specific covenants. Furthermore, he is interested to know how accounting numbers can be used in the debt covenants to help control any opportunistic behaviour on the part of Kezza Ltd.

7. What is the debt hypothesis? Explain the logic (theory) underpinning it.

8. What are the costs of breaching a debt covenant? How significant do you think these costs might be?

9. Why might managers choose accounting methods that increase current period reported earnings?

10. Why might managers choose accounting methods that reduce current period reported earnings?

Reference no: EM132934308

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