Financial Accounting Theory Essay

The growth in EPS suggests increased productivity and although net income did increase from $54,587 in 2013 to $66,176 in 2014, the average number of shares outstanding decreased from 69,710,500 in 2013 to 65,394,500 in 2014. The increased EPS in 2014 is mostly due to the decrease in shares outstanding rather than increased productivity.

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Assess the degree to which the firm’s accounting reflects the underlying business reality. Identify accounting distortions and evaluate their impact on profits and the sustainability of profits.

Positive Accounting Theory (PAT) aims to make good predictions of actual world events and convert them to accounting transactions. Its general objective is to understand and predict the choice of accounting policies across conflicting firms. It recognises that economic consequences exist. In relation to PAT, because there is a need to be efficient, the firm will want to minimise costs associated with the performance indicators used by the firm.

Accountants are relied upon to be trustworthy and maintain high ethical standards. It is because of the nature of the profession that puts them in a position of trust with people who rely on their professional judgment and guidance in making decisions. These decisions are extremely important in accounting and more so that companies that have high ethical standard or main good ethical culture spend enormous time to train the staffs about the conduct that is expected of them.

A. accounting functions must be performed by an "outsider" (rather than by an employee of the business) in order to avoid conflicts of interest

1. Ethical Obligations and Decision in Accounting Shawn M. Mintz and Roselyn E. Morris page 248

To over view the knowledge we learnt from accounting theory and practice, the main thing I can conclude that is the tendency of accounting will shift away from technical way to people’s behaviour way. By understanding what should do, we should ask why and how we could improve and change it into a better way. This essay aims to explain how the theoretical material that we learn in lectures can be developed under a real practical manner.

3. What potential implications arise for the accounting firm if they issue an unqualified report without the going-concern explanatory paragraph?

If some research is undertaken that provides evidence that capital markets do not always behave in accordance with the Efficient Market Hypothesis, does this invalidate research that adopts an assumption that capital markets are efficient?

One explanation of why firms might choose to put into practice conservative accounting practices lies in efficient contracting theory, for example, conservative accounting can be used as part of a firms strategy to ease the conflicts that arise among the many claimants of a firm’s net assets. This is because conservative accounting methods place restrictions on the distribution of those net assets thereby limiting the scope for self-serving opportunistic behavior. Conservative accounting can also help in bringing into line the interests of managers and shareholders through its impact on accounting earnings measures that are regularly used in management compensation contracts (Iyengar & Zampelli, 2010).

This report investigates the application of conservatism in accounting and its role in financial reporting. We also examine and compare the advantages and disadvantages associated with conservatism and provide our opinion about conservatism. Conservatism may be a controversial accounting measurement principle but it has a long history and its use is far-reaching. Conservatism by definition is that all probable losses or expenditures will be recognized as they

92). The main objective of normative accounting theories is to provide guidance to individuals to enable them to select the most appropriate accounting policies for given circumstances (Deegan, 2003, p. 90).

It has been become an issue of great concern that the accounting profession must find a common theory in order to address and put the issue at rest. This therefore, has called for the study of this topic under review “the demand for and supply of accounting theories: the market for excuses. As a result of this several questions have been raised. For instance, the question of why accounting theories are predominantly normative has been put forward by this article? Secondly, why no single theory in accounting profession that is generally or widely accepted? It has been argued that the financial accounting theories have been found to be ineffective most especially in the area of impacting accounting practice and policy, though, this has been

Consistency. When the company chooses the accounting method, it should continue using it throughout. It should be the same from period to period and year to year. If the company chooses to change the method, it should be disclosed and explained why the company made such a change. This concept can also be described as logical coherence among parts or things, when the same sequence is followed from one period to another.