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financial accounting theory

Questions and Answers of Financial Accounting Theory

In the early 1990s, the US Financial Accounting Standards Board’s chairperson Dennis Beresford claimed that the US accounting and reporting system was regarded by many as ‘the most comprehensive
Do you think it is realistic to expect that there will eventually be an internationally uniform set of accounting standards? What factors would work for or against achieving and maintaining this aim?
Prior to recent international actions to adopt IFRS, would you expect that large international companies domiciled in a particular country would have adopted different accounting policies from
Evaluate how reasonable it is to assume that the inflow of foreign investment into Australia would have been restricted if Australia, through the decision of the Financial Reporting Council, had not
Explain barriers to ongoing standardisation of financial accounting across all EU member states. Given these barriers, do you think that the European Union has been naive in embracing the
What are some perceived benefits that flow from the decision that a country will adopt IFRS?
On the basis of recent actions to standardise accounting across countries, does it appear that organisations such as the AASB and the IASB are ignoring academic research that signals why we would
It is often argued that the accounting standards of the FASB are rule-based, whereas the accounting standards issued by the IASB are principles-based. Rules-based standards by their nature can be
ls it appropriate for accounting standard-setting bodies to consider culture and religion when devising accounting regulations, particularly given that the output of financial reporting is expected
What are some possible reasons for historical differences in accounting rules operating within Australia, the United States and the United Kingdom?
Does the standardisation of accounting standards on a global basis necessarily equate with a standardisation in accounting practice?
The IASC (1998, p. 50) stated that ‘many developing and newly industrialised countries are using International Accounting Standards as their national requirements, or as the basis for their
|n considering the relevance of IFRS to developing countries, Chand and White(2007, p. 606) state:While the forces of globalisation and convergence are moving accounting practices towards a unified,
Ball (2006, p. 17) makes the following comment:In sum, even a cursory review of the political and economic diversity among IFRSadopting nations, and of their past and present financial reporting
Irvine (2008, p. 127) makes the following comment:Global accounting technologies, including IFRS, provide developing nations with legitimacy. Similarly, emerging economies, if they wish to gain
The website of the FASB (as at early 2009) states:The Board’s work on both concepts and standards is based on research aimed at gaining new insights and ideas. Research is conducted by the FASB
The website of the FASB (as at early 2009) states that FASB intends:To promulgate standards only when the expected benefits exceed the perceived costs. While reliable, quantitative cost-benefit
Ball (2006, p. 17) states:Under its constitution, the IASB is a standard setter and does not have an enforcement mechanism for its standards: it can cajole countries and companies to adopt IFRS in
Ball (2006, p. 22) provides the following statement:In the presence of local political and economic factors that exert substantial influence on local financial reporting practice, and in the absence
The European Commission made the following statement in a press release issued in 2002:European Commission has welcomed the Council’s adoption, in a single reading, of the Regulation requiring
Prepare the income statement for year 2 and the balance sheet at the end of year 2 for P.V. Ltd. in Example
Verify the expected net income for P.V. Ltd. for year 1 in Example2.2 by calculating the expected value of ex post net income. How much is expected net income for year 2? Show calculations. Explain
Sure Corp. operates under ideal conditions of certainty. It acquired its sole asset on January 1, 2008. The asset will yield $500 cash at the end of each year from 2008 to 2010, inclusive, after
Rainy Ltd. operates under ideal conditions of uncertainty. Its cash flows depend crucially on the weather. On January 1, 2008, Rainy acquired equipment to be used in its operations. The equipment
QC Ltd. operates under ideal conditions of uncertainty. On January 1, 2008, it purchased a capital asset that will last for two full years and then will be retired with zero salvage. The purchase
On January 1, 2008, ABC Ltd. started its business by purchasing a productive oil well. The proved oil reserves from the well are expected to generate $7,000 cash flow at the end of 2008, $6,000 at
The following RRA information is taken from the December 31, 2008, annual report of FX Energy, Inc. FX Energy, Inc.Required a. Prepare an income statement for FX Energy for 2008.b. FX Energy reports
The following RRA information is taken from the 2008 annual report of Moonglo Energy Inc.Requireda. Prepare 2008 income statements for Moonglo on an RRA basis.b. Moonglo reports a profit on its 2008
The text states that matching of costs and revenues is a major challenge of historical cost accounting. A related challenge is revenue recognition, that is, when to recognize revenue as realized, or
National Instrument 51-101 of the Canadian Securities Administrators, effective September 30, 2003, lays down disclosure requirements for Canadian oil and gas firms. These requirements include:Proved
What is the difference between a positive theory of accounting and a normative theory of accounting? LO 1.3
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? LO 1.3
What is a conceptual framework, and would it be considered to be a positive or a normative theory of accounting? LO 1.3
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, ‘I have
Why would it not be appropriate to reject a normative theory of accounting because its prescriptions could not be confirmed through empirical observation? LO 1.3, 1.4
The IASB is currently developing a revised Conceptual Framework for 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? LO 1.4
Is the study of financial accounting theory a waste of time for accounting students? Explain your answer. LO 1.7
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):With this
Explain the meaning of the following paragraph and evaluate the logic of the perspective described:
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
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. LO 1.1
Briefly explain the revolutionary perspective of knowledge advancement proposed by Kuhn (1962). LO 1.6
What is a ‘paradigm’ and would you expect accounting researchers to embrace more than one paradigm when undertaking research? Explain your answer. LO 1.1 , 1.4, 1.6
Is there a difference between financial accounting theory and financial accounting research? LO 1.2
In your opinion, can accounting research be ‘value free’? Explain your answer. LO 1.4
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? LO 1.4
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
Can we ever claim to have finally ‘proved’ a theory? LO 1.5, 1.6
Identify and explain five different criteria that we might use to evaluate a theory as being suitable or appropriate for use in our research. LO 1.5
According to the ‘falsificationists’ what should a ‘good’ theory do? LO 1.6
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? LO
The International Accounting Standards Boards has a number of roles, including formulating accounting standards and developing a conceptual framework. Is the work they do in developing an accounting
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? LO 1.2
If we were to say that a theory provided the most parsimonious explanation of a particular phenomenon then would that be good, and if so, why is that good? LO 1.2
What is a ‘hypothesis’ and do you consider that accounting research should necessarily involve the development of empirically testable hypotheses? LO 1.3, 1.6
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
In this chapter we provided quotes from Gray, Owen and Adams (2010) in which they discuss an apparent herding phenomenon that seems to be occurring in respect of the selection and use of particular
Refer to Figure 1.1 in this chapter and provide an explanation, in no more than 200 words, of what the diagram is trying to emphasise? LO 1.6
Do we really need financial accounting theory if all we are interested in doing is developing accounting standards? LO 1.2, 1.7
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
Do you think it is realistic to expect that accountants are always objective when it comes to the practice of preparing financial statements? Explain your answer.
What is ‘creative accounting’ and why does it occur?
Briefly outline some arguments in favour of regulating the practice of financial accounting.
Is it appropriate to look at changes or trends in corporate profits over time without making any adjustments? Explain your answer.
Briefly outline some arguments in favour of eliminating the regulation pertaining to financial accounting.
What are two possible motivations for regulators to introduce new regulation?
Do you think that a general increase in the extent of separation between the ownership and management of organisations over time has led to a greater or a lesser amount of accounting regulation? Why?
In the early part of the twentieth century accounting rules were developed based upon large-scale analysis of what methods accountants were using, and on the basis of the assumptions and conventions
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 advanced? 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
Prior to recent decades, was the role of financial reporting in European countries different to the role of financial reporting in countries such as the United States, the United Kingdom, Australia
If you believed that regulators acted in accordance with either capture theory or the private interest theory of regulation, would you believe that accounting standard-setters 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 ultimately 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
Provide an example of a situation when the release of a new accounting standard could create social or economic effects that reverberate throughout society?
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.
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 IASB (as accessed in 2013) states:The IASB is the independent standard-setting body of the IFRS Foundation. Its members are responsible for the development and publication of
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?
What is ‘accounting standards overload’, and why might it occur?
Can regulatory intervention be explained on fairness or equity grounds? If so, what is the basis of this argument?

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