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financial accounting theory

Questions and Answers of Financial Accounting Theory

Review Accounting Headline 10.6(a newspaper article entitled ‘An indication of what’s in the pipeline’) and explain the reason for the change in the prices of the Commonwealth Bank’s shares.
Some recent capital markets research investigates whether accounting information reflects the valuations that have already been made by the market (as reflected in share prices). In a sense, it
What is the point of modelling the decision-making processes of different financial statement user groups (that is, for example, identifying how they appear to weight particular cues when making
The International Accounting Standards Board (IASB) in conjunction with the Financial Accounting Standards Board (FASB) are going through a process of revising the conceptual framework (the Framework
From a critical perspective, what is the role of a conceptual framework project?
3. An investor's utility function is with regard to risk and expected return. U(a) = 3 - 2
As noted in Section 3.8, the FASB states in SFAC 1:Information about enterprise earnings based on accrual accounting generally provides a better indicator of an enterprise's present and continuing
a. State the decision usefulness approach to accounting theoryb. What two questions arise once the decision usefulness approach is adopted?c. What primary constituency of financial statement users
Marie has $1,000 that she wishes to invest for one year. She has narrowed her choices down to one of the following two actions:a1: Buy bonds of Risky Mining Ltd. These pay 14.4% interest, unless
A rational investor has $1,000 to invest. She is contemplating investing the full amount in shares of Company A (a1) or investing it in a risk-free government bond (a2).The investor identifies two
Ajay is a rational, risk-averse investor with $5,000 to invest for one year. He has decided to invest this amount in a high-technology fem and has narrowed his choice down to either AB Lid or XY Ltd.
The article "GM to Take Charge of $20.8-Billion here reproduced from The Globe and Mail (February 2, 1993) describes the potential impact of SFAS 106, "Accounting for Postretirement Benefits Other
What is the difference between a positive theory of accounting and a normative theory of accounting?
If you developed a theory to explain how a person’s cultural background influences how they prepare financial statements, would you have developed a positive theory or a normative theory?
What is a conceptual framework, and would it be considered to be a positive or a normative theory of accounting?
In an article that appeared in the Age (‘Way cleared for Turnbull to challenge’, by Michelle Grattan, 12 September 2008), Peter Costello, former federal treasurer, is quoted as saying, ‘| have
Why would it not be appropriate to reject a normative theory of accounting because its prescriptions could not be confirmed through empirical observation?
The IASB and the FASB are currently developing a revised conceptual framework of financial reporting. If you have been asked to review the framework—which is an example of a normative theory of
If a normative theory of financial accounting has been developed to prescribe how we should do financial accounting, is it possible that we can decide to reject the theory because we do not agree
What is the difference between developing a theory by induction and developing a theory by deduction?
Is the study of financial accounting theory a waste of time for accounting students?Explain your answer.
In the 1960s a number of accounting researchers concentrated on developing theories of accounting based on observing and documenting the behaviour of practising accountants. Do you think that such
Gray, Owen and Maunders (1987, p. 66) make the following statement in relation to research based on the inductive approach (that is, research based on observing particular phenomena):Studying extant
Explain the meaning of the following paragraph and evaluate the logic of the perspective described:In generating theories of accounting that are based upon what accountants actually do, it is assumed
In 1961 and 1962 the Accounting Research Division of the American Institute of Certified Public Accountants (AICPA) commissioned studies by Moonitz and by Sprouse and Moonitz. These studies proposed
Read the following quotation from Miller and Reading (1986, p. 64). If constituency support is necessary before particular accounting approaches become embodied in accounting standards, does this
The mere discovery of a problem is not sufficient to assure that the Financial Accounting Standards Board will undertake its solution ... There must be a suitably high likelihood that the Board can
As Watts and Zimmerman (1986, p. 7) state, Positive Accounting Theory ‘is concerned with explaining [accounting] practice. It is designed to explain and predict which firms will and which firms
Briefly identify the two branches of ‘decision usefulness’ theories described in this chapter and explain what they are.
Briefly explain the revolutionary perspective of knowledge advancement proposed by Kuhn (1962).
What is a ‘paradigm’ and would you expect accounting researchers to embrace more than one paradigm when undertaking research? Explain your answer.In your opinion, can accounting research be
What role do value judgements have in determining what particular accounting theory a researcher might elect to adopt to explain or predict particular accounting phenomena?
If an accounting researcher adopts a particular accounting theory to predict which firms will make particular accounting disclosures, how much supporting evidence must the researcher gather before he
Assume that you have been asked to evaluate a particular theory of accounting.What factors would you consider before making a judgement that the theory appears‘sound’?
If you were trying to convince another party to support your theory about a particular facet of financial accounting, would you be inclined to use emotive or colourful language? Why, or why not?
What do we mean when we say that ‘theories are abstractions of reality’? Do you agree that theories of accounting are necessarily abstractions of reality?
What is a ‘hypothesis’ and do you consider that accounting research should necessarily involve the development of empirically testable hypotheses?
Would you reject as ‘insignificant and useless’ a positive theory of accounting on the basis that in a particular research study the results derived failed to support the hypotheses and the
If a researcher tested a theory on a particular sample of companies, what considerations would you examine before you would agree with the researcher that the results can be generalised to the larger
What expectations do accounting standard-setters have about the accounting knowledge of financial statement readers?
Do you think that users of financial reports should have a sound working knowledge of the various accounting standards in use? Explain your answer.
Do you believe that the media portray accounting numbers, such as profits, as some sort of ‘hard’ and objective performance indicator? Why do you think they might do this, and, if they do, what
Briefly outline some arguments in favour of regulating the practice of financial accounting.
Briefly outline some arguments in favour of eliminating the regulation pertaining to financial accounting.
Do you think that a general increase in the extent of separation between the ownership and management of organisations leads to a greater or a lesser amount of accounting regulation? Why?
Pursuant to capture theory, how, by whom and why would a regulator be captured?
Stigler (1971) proposes a theory (private interest theory) in which it is proposed that regulatory bodies (including accounting standard-setters) are made up of individuals who are self-interested,
If regulators acted in accordance with predictions provided by the private interest theory of regulation, which assumes that all individuals (including politicians and regulators) are motivated by
If you believed that regulators acted in accordance with either capture theory or the private interest theory of regulation, would you believe that accounting standardsetters will develop accounting
Because accounting standard-setters throughout the world typically consider the potential economic and social consequences of the accounting standards they develop, it has been argued that reports
Why would ‘free-market’ advocates argue that the regulation of financial reporting leads to an oversupply of accounting rules and standards?
What is the basis of an argument that states that accounting regulation can act to undermine the efficiency with which the reporting entities present information about their financial performance and
According to Hines (1991), it is in the interest of the accounting profession to promote publicly a view that the information it generates is ‘objective’. Why do you think this is the case?
Solomons (1978, p. 69) quotes the American Accounting Association:Every policy choice represents a trade-off among differing individual preferences, and possibly among alternative consequences,
‘While it is difficult to criticise a process that considers potential impacts on others, at the same time it is difficult to accept that accounting standards are neutral or unbiased.’ Evaluate
Hines (1991, p. 313) stresses a view that ‘financial accounting practices are implicated in the construction and reproduction of the social world’. What does Hines mean by this statement? Do you
Why might accountants be construed as being powerful individuals?
Explain what the following statement by Handel (1982, p. 36) means and provide an argument to either support or oppose the contention.Things may exist independently of our accounts, but they have no
What is regulation?
As this chapter indicates, some people argue that the extent of regulation relating to financial accounting is excessive and should be reduced.(a) What arguments do these people use to support this
What is the basis of the ‘market for lemons’ argument?
Given the process involved in developing accounting standards, do you believe that accounting standards can be considered to be ‘neutral’ (that is, not serving the interests of some constituents
The website of the FASB (as at the end of 2008) states:The FASB is committed to following an open, orderly process for standard setting that precludes placing any particular interest above the
What is meant by saying that financial accounting information is a ‘public good’?
Is regulation more likely to be required in respect of public goods than other goods?Why?
Why would an ‘accounting standards overload’ occur?
Can regulatory intervention be explained on fairness or equity grounds? If so, what is the basis of this argument?
It is argued by some researchers that even in the absence of information organisations have an incentive to provide credible information about their operations and performance to certain parties
Would you expect independent financial statement audits to exist for listed companies even in the absence of regulation requiring them to be undertaken? Why?
Some companies argue that introducing mandatory reporting requirements will tend to stifle innovation in relation to the reporting. Do you believe that the introduction of mandatory reporting
Read and evaluate the following paragraph extracted from Cooper and Keim (1983;p202):lt should also be noted that the nature and degree of the effect of disclosure requirements (and other aspects of
Private contractual incentives will assist in ensuring that, even in the absence of regulation, organisations will provide such information as is demanded by its respective stakeholders. Evaluate
Why would the managerial labour market motivate the manager to provide information voluntarily to outside parties?
What is the ‘market for corporate takeovers’ and how would its existence encourage organisations to make accounting disclosures even in the absence of regulation?
Market failure has been defined as the inability of market forces to produce a socially‘right’ amount of information, that is, to produce information to the point where its marginal cost to
A newspaper article entitled ‘Hannes “knew of TNT valuation”’ (Australian, 18 June 1999, p. 24) reported a case involving a person who was before the courts on a charge of insider trading. In
What assumptions are made about the motivations of the regulators in:(a) the public interest theory of regulation?(b) the capture theory of regulation?(c) the economic interest theory of regulation?
Is it realistic to assume, in accordance with ‘public interest theory’, that regulators will not be driven by their own self-interest when designing regulations?
Is it in the public interest for regulators to be driven by their own self-interest?
Identify and evaluate the key negative economic and social consequences that might potentially arise following the introduction of an accounting standard with which you are familiar.
Under the economic interest theory of regulation, what factors will determine whether a particular interest group is able to secure legislation that directly favours that group above all others?
What do we mean when we say that financial accounting standards are the outcome of a political process? Why is the process ‘political’?
Is the fact that accounting standard-setters consider the economic and social consequences of accounting standards consistent with a view that accounting statements, if compiled in accordance with
If an accounting standard-setter deems that a particular accounting standard is likely to adversely affect some preparers of financial statements, what do you think it should do? Justify your view.
Read Accounting Headline 3.7 overleaf, and explain the Senate committee’s concerns from a capture theory perspective.
Assume that a government regulator makes a decision that all companies with a head office in Australia must separately disclose, within their annual financial report, the amount of expense incurred
Accounting Headline 3.8 discusses how European banks were able to lobby the European Union (EU) so as to be regulated by a ‘watered-down’ version of the accounting standard IAS 39. Explain
Read Accounting Headline 3.9 and, using a particular theory of regulation (choose’the most appropriate one), explain what factors might be motivating the then president Jacques Chirac to lobby
Read Accounting Headline 3.10, and then answer these questions:What theory of regulation seems to explain the actions of Sir David Tweedie?What theories of regulation would appear to explain the
One of the most pressing problems confronting the world is global warming.To effectively address this issue, governments across the world will be required to introduce regulations to mitigate the
In the context of financial accounting, what is harmonisation and/or standardisation?
Global standardisation of accounting requires the United States to adopt IFRS. Do you think it is likely that the United States will embrace IFRS in the near term, and what do you think are some of
Identify some factors that might be expected to explain why different countries use different systems of accounting.
Does the adoption of IFRS by different countries necessarily mean that the accounting procedures and practices they adopt will be consistent and comparable internationally?
After considering the Hofstede-Gray model, briefly explain the hypothesised link between society values, accounting values and accounting practice.
Any effort towards standardising accounting practices on an international basis implies a belief that a ‘one size fits all’ approach is appropriate. Is this naive?
While it is often argued that within particular countries there should be some association between various value systems and accounting systems, it is also argued(for example, by Baydoun and Willett,
Baydoun and Willett (1995, p. 72) identify a number of problems in testing the Hofstede-Gray theory. They emphasise that many accounting systems are imported from other countries with possibly
As noted in this chapter, Hamid, Craig and Clarke (1993) provide an argument that religion can have a major impact on the accounting system chosen by a particular country and that before
Nobes (1998) suggests that for countries that have organisations that rely relatively heavily on equity markets, as opposed to other sources of finance, there will be a greater propensity for such

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