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Chr 1 F a Theory Introduction (1)

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  Chapter 1 – Financial Accounting Theory1.1 What is Financial Accounting Theory? Henderiksen (1970) – Theory is defined as:A coherent set of hypothetical, conceptual and pragatic principles foring the general frae!ork of reference for a field of in uiry# $A%& – a coherent syste of interrelated o'ecties and fundaentals that can lead to consistent standards# Introduction – theories of financial accounting Accounting is a huan actiity and !ill consider such thing as people*s 'ehaior and+or people*s needs as regards financial inforation, or the reason !hy people !ithin organiations ight select to supply particular inforation to particular stakeholder group#Theories !ill include consideration of:  -rescri'e ho!, asset should 'e alued for e.ternal reporting purpose (noratie theories – /urrent cost accounting), 'ased on a particular perspectie of the role of accounting#  -redict that anagers paid 'onus on the 'asis of easures such as profits !ill seek to adopt those accounting ethod that lead to an increase in reported profit (i#e# -ositie Accounting theory)  -redict that the relatie po!er of a particular stakeholder group#  %eek to e.plain ho! an indiidual*s cultural 'ackground !ill ipact on the types of accounting inforation to proide to people outside the organiation#  -redict that organiation seeks to 'e perceied 'y the counity as legitiate and that accounting inforation can 'e used as a eans of gaining, aintaining or regaining the legitiacy to the organiation (i#e# egitiacy Theory)  Chapter 1 – Financial Accounting Theory 1.2 A brief overvie of theories of accounting ifferent researchers hae different perspecties of the role of accounting theory#a#%oe researchers 'eliee that the principal role of accounting theory should 'e to 2 e!plain and predict  particular accounting3related phenoena#'#4ther researchers 'eliee that the role of accounting theory is to #prescribe  particular approaches to accounting 'ased on a perspectie of the role of accounting# 5#g# a theory that prescri'es the assets should 'e alued on the 'asis of arket alues rather than historical costs#5arly deelopent of accounting theory relied on the process of induction, that is, the deelopent of ideas or theories through observation. -eriod 1 (1960s to early 190s)$ro the 1960s to the 190s, theories of accounting !ere predoinantly deeloped on the 'asis of o'seration of !hat accountant actually did in practice# That is, they !ere deeloped 'y the process referred to as 2induction8# This can 'e contrasted !ith a process !herein theories are deeloped 'y deductie reasoning, !hich is 'ased ore upon the use of logic rather than o'seration#-eriod 6 (190s and 1970s)hile soe accounting researchers continued to adopt an inductie approach, a different approach 'ecoes popular in the 190s and 1970s# This approach sought to  prescribe particular accounting procedures , and as such !as not drien 'y e.isting practices# #e# theories 'eing deeloped 'ased on deelopent of arguents a'out what the researchers considered accountant should do # ;ather than 'eing deeloped on the 'asis of inductie reasoning, these theories !ere 'eing deeloped on the 'asis of deductie reasoning#-eriod < (ate 1970s)n the id to late 1970s, there !ere further changes in the focus of accounting research and deelopent and a great deal of accounting research had the aor ai of explaining and predicting accounting  practice , rather than prescri'ing particular approach#  Chapter 1 – Financial Accounting Theory 1.$ %ositive research and nor&ative research ;esearch that seeks to predict and e.plain particular phenoena is classified as positie research and the associated theories are referred to as positie theory#A positie theory 'egins !ith soe assuption(s) and, through logical deduction, ena'les soe prediction(s) to 'e ade a'out the !ay things !ill 'e#f the prediction is sufficiently accurate !hen tested against o'serations of reality, then the story is regarded as haing proided an e.planation of !hy things are as they are# 5#g# A positie theory of accounting ay yield a prediction that, if certain conditions are et, then particular accounting practice !ill 'e o'sered#-ositie theories can initially 'e deeloped through soe for of deductie (logical) reasoning# Their success in e.plaining or predicting particular phenoena !ill then typically 'e assessed 'ased on o'seration –that is, o'sering ho! the theory*s predictions corresponded !ith the o'sered facts# -ositie Accounting Theory is deeloped 'y atts and =ieran, !hich seeks to predict and e.plain !hy anagers elect to adopt particular accounting ethods in preference to others# The theory relied in great part of !ork undertaken in the fields of econoics, and central to the deelopent of -ositie Accounting Theory !as the acceptance of econoics 'ased >rational econoic person assuption8#That is the assuption that an accountant are priarily otiated 'y self3interest, and that the particular accounting ethod selected !ill 'e dependent on certain conditions#$actors 3 $AT1#Assuption : self3interest6#-reises : a#The accountant is re!arded in ters of accounting3'ased 'onus?'#The organiation they !ork for is close to 'reaching negotiated accounting 'ased de't coenants#  Ho!eer, -AT does not seek to tell us that !hat is 'eing done in practice is the ost efficient or e uita'le process# Chapter 1 – Financial Accounting Theory 1.' (or&ative research hile positie theories tend to 'e 'ased on epirical o'seration, there areother theories 'ased not on o'seration 'ut rather on hat the researcher believes should occur in particular circu&stances. Theories that prescribe particular actions are called nor&ative theory. $or e.aple, /ha'ers /ontinuously conteporary accounting descri'es ho! financial accounting should 'e undertaken# t is prescriptie and central to this theory is a ie! that ost useful inforation a'out an organiation*s assets for the purpose of econoic decision is inforation a'out their current cash e uialent#@oratie theories of accounting are not necessarily 'ased on o'seration and therefore cannot (or should not) 'e ealuated on !hether they reflect actual accounting practice#The conceptual frae!ork of accounting is an e.aple of a noratie theory of accounting# ;elying on arious assuptions a'out the types or attri'utes of inforation useful for decision aking, The /$A proides guidance on ho! assets, lia'ilities, e.penses, incoe and e uity should 'e defined, !hen they should 'e recognied, and ultiately ho! they should 'e easured#
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