Chapter 1 – Financial Accounting Theory 1.1 What is Financial Accounting Theory? Henderiksen (1970) – Theory is defined as: A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry. FASB – a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. Introduction – theories of financial accounting Accounting is a human activity and will consider such thing as people’s behavior and/or people’s needs as regards financial information, or the reason why people within organizations might select to supply particular information to particular stakeholder group. Theories will include consideration of: • …show more content…
E.g. A positive theory of accounting may yield a prediction that, if certain conditions are met, then particular accounting practice will be observed. Positive theories can initially be developed through some form of deductive (logical) reasoning. Their success in explaining or predicting particular phenomena will then typically be assessed based on observation –that is, observing how the theory’s predictions corresponded with the observed facts. Positive Accounting Theory is developed by Watts and Zimmerman, which seeks to predict and explain why managers elect to adopt particular accounting methods in preference to others. The theory relied in great part of work undertaken in the fields of economics, and central to the development of Positive Accounting Theory was the acceptance of economics based ‘rational economic person assumption”. That is the assumption that an accountant are primarily motivated by self-interest, and that the particular accounting method selected will be dependent on certain conditions. Factors - FAT 1. Assumption : self-interest 2. Premises : a. The accountant is rewarded in terms of accounting-based bonus; b. The organization they work for is close to breaching negotiated accounting based debt covenants. However, PAT does not seek to tell us that what is being done in practice is the most efficient or equitable process. Chapter 1 –
Page 3 Page 7 Page 12 Page 17 Page 20 Positive Accounting Theory Ethics in Accounting Accounting for Physical Assets & Intangible Assets Accounting for Assets in Mining & Agricultural Industries ounting Accounting for Provisions
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.
A. accounting functions must be performed by an "outsider" (rather than by an employee of the business) in order to avoid conflicts of interest
3. What potential implications arise for the accounting firm if they issue an unqualified report without the going-concern explanatory paragraph?
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.
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.
1. Ethical Obligations and Decision in Accounting Shawn M. Mintz and Roselyn E. Morris page 248
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?
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.
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
A second disadvantage of using interpretivist methods of research is that the results are not representative. Using interpretivist research methods
The definition of accounting theory according to Coetsee (2010) is described in two different ways. The first philosophy concludes that accounting theory is a set of general principles that guide the evolution of accounting practice. The other philosophy describes accounting theory as activity of explaining and predicting accounting practice. What the viewer can see from the statement of the first philosophy is that the accounting theory exists before accounting practices meanwhile the latter states that the accounting practice exists before the theory. Since there are many arguments about this matter, many academic researchers have concluded that accounting theory can be divided into two categories which are positive and normative theory.
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).
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).
Accounting is the art of measuring and communicating financial information. To maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules or principles are classified as concepts and conventions. One of the important concept in accounting is “Measurement” (Mattessich, 1977)