Asked by Griffin Skubish on Jul 26, 2024
Verified
Which of the following statements is true with regards to the political cost hypothesis?
A) Political costs arise as a result of an entity's relationships with shareholders and lenders.
B) Managers of financial institutions may prefer to increase profits to reduce government pressure to pass on interest rate cuts.
C) Smaller entities are more likely to be the target of environmental groups.
D) Managers of entities that are more politically visible are expected to choose accounting policies that reduce profit in order to avoid political costs.
Political Costs
Wealth transfers imposed on the entity, resulting from political processes.
Political Cost Hypothesis
A theory suggesting that larger firms are more likely to be subject to government scrutiny and regulation, thus incurring additional costs to comply with political expectations.
Accounting Policies
Specific convictions, understructures, modes, prescriptions, and regimens enacted by an entity for the generation and proclamation of financial analyses.
- Acquire knowledge on the repercussions of political and debt assumptions on the determination of accounting policies and their subsequent impacts.
Verified Answer
MA
Maryam AdepitanJul 30, 2024
Final Answer :
D
Explanation :
The political cost hypothesis states that managers of entities that are more politically visible are expected to choose accounting policies that reduce profit in order to avoid political costs. Option A is incorrect as political costs arise due to political relationships, not shareholder or lender relationships. Option B may be true in certain cases, but it is not related to the political cost hypothesis. Option C is unrelated to the political cost hypothesis and does not address the visibility of an entity in politics.
Learning Objectives
- Acquire knowledge on the repercussions of political and debt assumptions on the determination of accounting policies and their subsequent impacts.