Positive vs Normative Accounting Theory Essay

1032 Words Oct 14th, 2012 5 Pages
Essay Guideline
(brief simple short essay - example only to assist with planning)

TOPIC: Discuss positive accounting theory and contrast it with normative accounting theory. Provide examples where appropriate. The purpose of this essay is to provide an overview of positive accounting theory (PAT) and highlight how this theory differs to normative accounting theory. Definitions and assumptions of both theories will be considered and examples of the theories will be provided. In addition specific theories related to PAT namely agency and the efficient market hypothesis will be

Notice how the essay introduction starts with the purpose of the essay and then highlights the direction of the essay.
Remember in
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In addition, it relies upon traditional economic literature which includes assumptions of self- interest and wealth maximisation. Due to the separation of ownership and control, agency costs (monitoring, bonding) arise in an attempt to minimise opportunistic behaviour in financial management.

Page 2 of 3

Arrange the essay in such a way as that each paragraph flows .
Create the scene in the first few paragraphs and provide definitions if appropriate and then tell the story. Best to discuss the most important items first.
There are many items you can discuss, pick the ones you think most important and arrange accordingly.
Make sure you stick to the word limit.

Agency theory elaborates three primary hypotheses, the bonus plan hypothesis, the debt covenant hypotheses and political cost hypothesis.
For example under the bonus plan hypotheses managers may act opportunistically to increase profits if rewards are attached to profits.
Under the debt covenant hypothesis if managers are nearing a breach of debt covenants they may undertake measures to avoid a breach such as revaluing assets. Under the political cost hypotheses managers may undertake measures to reduce reported profits to make the firm less politically visible and less likely to attract government attention or taxes.

PAT
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