Financial Accounting Theory & the Reporting Environment Essay

5. Researchers who develop positive theories and interrogationers who develop normative theories frequently do non sh atomic chassis 18 the same views about the consumptions of their respective go aboutes to guess construction. (a) How do positive and normative theories differ? (b) Can positive theories suffice normative theories, or vice versa? If yes, give an example. If not, why not? prescriptive be research makes policy recommendations and is concerned with what should be done in contrast to explaining why current practice is carried out in the room that it is (positive conjecture). Normative theorists unremarkably attempt to derive either the true income or adopt the finale usefulness approach whereby account reports ar an stimulus into users closings (e.g., to demoralise or sell sh bes, management closings on the financial wealth of firms, etc.). The major issues ar the seismic disturbance of the changing price environment (prices) and the impact on incom e, assets, liabilities and equity. As a consequence many normative theorists are measurement theorists who attempt to incorporate the effects of inflation into accounting reports. In this sense they take a semantic viewpoint relating the figures in the accounting reports to actual objects (assets, liabilities) or events (changes in inflation). To any(prenominal) extent the approach of the IASB is a normative approach. Positive accounting system was a reversion to exam or relating accounting theories back to the facts or experiences of the real world. Examples of such research were forefrontnaires and surveys of bank officers or investors regarding their use of financial reports for decision making or whether inflation adjusted accounting reports actually aided decision making. reliable positive accounting research is aimed at explaining the reasons for actual accounting practices and in predicting the role of accounting data in economical, political and social decision making . Positive possibility has expanded accounting opening from the purely decision making focus of normative theorists into analysis of political and economic factors. apply the normative recommendation of IFRS, that fair values should be used in financial bids, a positive theorists would first undertake a number of empirical tests to see if they are actually useful/used by decision makersin their valuation models. In this sense they complement each(prenominal) some other normative theory the deductive analysis with positive theory the empirical verification.7.Classify the interest hypotheses according to whether they are conclusions of positive or normative theories. Explain your answers. (a) Historical cost accounting should be replaced by a market value system. (b) Historical cost accounting provides data used by creditors. (c) Historical cost accounting is used by many managers to allocate costs in determining divisional motion. (a) normative (b) positive (c) positivePage 1 of 3710.The decision-usefulness approach to theory development can be used to develop theories of accounting. a) Explain what is meant by the decision-usefulness approach to theory development. b) How can the decision-usefulness approach relate to accounting theory formulation? c) Give two examples of decisions that require data obtained from accounting reports.The decision-usefulness approach is an instrumentalist approach (see diagram p.25). In a narrower sense, one handle test of an overall theory of accounting would be to determine whether the output data of the accounting systems, which are constructed on the basis of the overall theory, are useful to users. The data of the accounting systems are utilised by users in their prediction models, and the conclusions (predictions) are because used in their decision models. The caper is that if the prediction is verified, it verifies the prediction model, not the accounting system and its output. There are other variables beside s accounting data that affect the prediction. We do not know how the accounting data were utilised. Also, if the decision turns out to be right, it verifies the decision model, not the accounting system. Interpreting the evidence on decision-making is extremely difficult. We do not know how to interpret the evidence to determine that accounting learning is useful. Thus, a direct test is virtually impossible. Accounting standard setters usually determine usefulness with the weaker, more direct tests which are usually modern by accounting committee setting bodies and include relevance, verifiability, bring outdom from bias, timeliness, comparability, reliability and understandability. Some decisions To invest in a firms bourgeon (i) (ii) To loan funds to a firm (iii) To purchase or buy an asset. GHTHH Chapter 4 1. How do conceptual frameworks of accounting attempt to create a theory of accounting? Describe the components of the IASB Framework and how they contribute to a theory o f accounting.Conceptual frameworks (such as those developed in the United States, Australia and at the IASC/IASB) do not employ the term theory because of the difficulty of demonstrating logical amity and in gathering empirical evidence to corroborate the theory. However, by following a structured program of inter-related concepts, accounting regulators aim to use the conceptual framework to get consistent accounting standards that entrust replace ad hoc solutions to unique(predicate) problems. In this context, the components of the conceptual framework can be viewed as the building blocks of a theory of accounting. The components of the IASB/Australian Framework are objectives of financial statements qualitative characteristics of financial schooling (such as relevance, reliability, comparability, timeliness and understandability) and definitions of the basic elements of accounting reports (such as assets, liabilities, equity, revenue, expenses and profit) and principles and r ules of recognition and measurement of the basic elements, and the nature of the information to be displayed in financial reports. (Refer page 55 of text) 3. What does the IASB Framework describe as the basic objective of accounting? What are its implications? Stewardship looks primarily to the past, asking the question What sinked? Decision making looks to consequences in the forthcoming, asking the question What will happen? A decision-making approach sees accounting information as inputs for the decision-making prediction models of users. If so, then we are concerned about what kind of accounting information is applicable to decision makers. Some believe that current value is implied. Also that statement of financial position accounts and their amounts are as important as those in the income statement. Traditionalaccounting emphasises income.Page 2 of 376. Explain the role of accounting in relation to (a) individuals (b) firms (c) the Australian economy. Accounting information helps to efficiently allocate capital in the economy. The successful operation of a free economy depends, to a large extent, on the good judgements made by individuals about their investment opportunities and the investment opportunities of firms. People need information to watch where to invest or lend, and at what price. In relation to firms, accounting information forms the basis for many contracts, such as debt contracts that include covenants specifying that the firm will not allow its leverage ratio to exceed a accredited level, or management compensation plans that provide managers with bonuses based on account corporate earnings. As such, the firms cash flows are trussed to accounting metrical composition. Since the value of the firm is the present value of all future cash flows and those cash flows are tied to accounting numbers, accounting numbers determine the value of the firm. In relation to the economy, accounting information plays a vital role in the equitable allocation of capital, and it contributes to the effective performance of the price system. The effective operation of our economy means that efficient and ineffective companies moldiness be identified, so that resources are channelled to the former and away from the last mentioned in order to have a successful economic system. What would happen, later a long period of time, if incorrect information is reported? The economic system would become inefficient (because of the existence of many inefficient firms), causing serious economic problems to all. 7. Can accounting ever provide an naive map of economic reality? Why or why not? Yes.Criticisms of neutrality or independence from bias take two forms. First, some argue it is a state of mind that is not attainable, because all of us are affected by personal values that have been determine by our particular beliefs, traditions, environment, background and personality. Granted that this is true, it is still meaningful to chat of ne utrality or freedom from bias. We recognise the existence of these influences on our perceptions. The thinker is to control them within an acceptable range. Second, some contend that neutrality or freedom from bias is not operational, because we cannot be expected to read other peoples minds. However, it is possible to translate neutrality or freedom from bias into operational terms by establishing specific control devices that are external and subject to examination. Control devices are the means by which the judgment of objectivity receives operational meaning. Control devices have to do with making universal or external what is essentially internal or introspective. Rules and procedures under the lintel of disclosure, consistency, comparability, and materiality as well as GAAP are pragmatic control devices. In the accounting literature, practical control devices under the header of objectivity have taken the following three forms to make specific and precise the concepts an d procedures of accounting, and to obtain general agreement on them to determine a consensus of the measure among a number of experts to improve the standards of competence and ethics of the profession. Accountants must construct unbiased or neutral financial maps of economic reality. Otherwise, as Solomons warns, If it ever became accepted that accounting might be used to achieve other than purely measurement ends, faith in it would be destruct.Page 3 of 37