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Key Ethical Questions in Finance Exam

The document contains sample exam questions for a finance/ethics/BIS course. The questions cover topics like the benefits of behaving ethically, cognitive biases in decision making, seminal works in behavioral finance, the importance of ethics, and accounting adjustments to capitalize research expenses. The questions range from 1 to 4 marks and would be used to assess students' understanding of key concepts in these subject areas.

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Adarsh Kumar
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41 views2 pages

Key Ethical Questions in Finance Exam

The document contains sample exam questions for a finance/ethics/BIS course. The questions cover topics like the benefits of behaving ethically, cognitive biases in decision making, seminal works in behavioral finance, the importance of ethics, and accounting adjustments to capitalize research expenses. The questions range from 1 to 4 marks and would be used to assess students' understanding of key concepts in these subject areas.

Uploaded by

Adarsh Kumar
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Sample exam questions for Finance/ethics/BIS

For accounting samples refer to lecture materials

Question 1. 1 MARK

Behaving ethically can______

A. Increase the likelihood of lawsuits and criminal charges


B. Increase transaction costs
C. Lead to higher market values
D. All of the above

Question 2. 1 MARK

Often we can have biases that are beyond our conscious thought. One of these biases is:
A. Reward positive outcomes when the intention and efforts are not sound.
B. Reframe or flip the problem on its head to see if we are viewing the situation in either
positive or negative framework.
C. Redefine the problem from here on and ignore the old problem to avoid escalation of
unnecessary commitment.
D. Develop system review processes that leave you a committed ‘out’ possibility when
trying to ‘cut the losses’.
E. All of the above.

Question 3. 1 MARK

Kahneman and Tversky are the fathers of behavioural finance. In their seminal work in the
1970s they proposed a number of biases as being particularly important. These are:

A. Overconfidence, Status Quo, Framing

B. Representativeness, Availability, Anchoring

C. Representativeness, Status Quo, Framing

D. All of the above.

Question 4. 1 MARK

Ethics is important because it:

A. Represents the rules, laws and policies of society.


B. Represents the opinions of everyone in society as a whole.
C. Is what you think is right and/or wrong.
D. Provides a means of deciding a course of action to achieve goals.
Question 5. 3 MARKS

Is a weak ethical firm likely to have a higher or lower market price to book value per share
relative to an otherwise equivalent more ethical firm? Explain your answer.

Question 6. 4 MARKS

Explain four (4) of the five (5) ethical blind spots as stated in the lectures.

Question 7. 4 MARKS

A company reported $120 million in research expenses on its income statement. An analyst


believes that the total amount of the research expenses should be capitalized. Please list six
accounting adjustments to capitalize research expenses, assuming 3-year straight-line
amortization, 8 months of amortization for the current year, and zero tax rate for the
company.

Question 8. 4 MARKS

We discussed the case study of Harnischfeger in the class. The company made several
changes to its accounting policies. List four kinds of accounting policy changes made by the
managers to boost earnings. Your answers must be directly relevant to Harnischfeger’s
case.

Common questions

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Behaving ethically can lead to higher market values by increasing public trust and investor confidence, which in turn enhances the company's reputation and reduces the likelihood of costly legal disputes or regulatory penalties .

Among the accounting policy changes made by Harnischfeger were: (1) Extending the useful life estimates of certain assets, reducing annual depreciation expense; (2) Adopting a LIFO inventory valuation method to manage taxable income; (3) Recognizing sales from subsidiaries earlier; (4) Deferring certain operating costs to future periods to show increased current earnings .

Four ethical blind spots include: (1) In-group favoritism, where decisions favor those within a certain group; (2) Conflict of interest, where personal or financial considerations conflict with professional duties; (3) Misuse of confidential information, which can lead to unfair advantages; (4) Rationalization of unethical behavior, where individuals justify unethical actions to mitigate guilt or responsibility .

To capitalize research expenses, the following adjustments are needed: (1) Transfer $120 million from the income statement to the balance sheet as a depreciable asset; (2) Record annual depreciation over three years; (3) Report $32 million as the current year's expense; (4) Adjust the balance sheet to reflect the asset's reduced value; (5) Analyze the impact on net income due to amortization; (6) Recalculate financial ratios to reflect the true financial status of the company, assuming a zero tax rate .

A weak ethical firm is likely to have a lower market price to book value per share compared to an equivalent more ethical firm. This is because unethical behavior can lead to reputational damage, loss of customer trust, potential legal issues, and higher financial risks, which negatively affect firm valuation .

Ethics is crucial because it provides a framework for determining the right course of action to achieve business goals. It informs decision-making processes by aligning actions with societal values and legal standards, thereby fostering trust and sustainability .

Biases influence financial decision-making by skewing perceptions and judgments that can lead to suboptimal decisions. Kahneman and Tversky identified biases such as overconfidence, status quo, framing, representativeness, availability, and anchoring as significant factors affecting financial decisions .

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