Please write a separate reply for each attached case, each reply must be at least 350 words in length. Your replies should be a substantive critique and add new information concerning the subject matter of your other classmates' cases. Each reply must cite at least 3 sources. Acceptable sources include peer-reviewed journal articles, FASB Codification, the textbook, and the Bible. Each Reply must be in APA format.

FINANCIAL ACCOUNTING THEORY - GROUP 1, CASE 15-7 1 Group DB Forum 5 - Case 10-7 Theoretical Implications of Various Theories of Equity Angela Kimble Liberty University ACCT 632 - Advanced Financial Accounting Theory Dr. Wendy Achilles June 23, 2016 FINANCIAL ACCOUNTING THEORY - GROUP 1, CASE 15-7 2 Theoretical Implications of Various Theories of Equity Introduction Equity is defined as the basic risk capital of an enterprise. The theories of equity have been instrumental in providing a frame of reference in the presentation and measurement of information which is reported in financial statements. Investors that are perplexed as to whether they should invest in a company's stock must weigh that concept against the existence of the company's liabilities. This may represent a risk or loss on investments, and the potential to earn high returns from this financial leverage. Financial theorist and researchers have championed and examined practical evidence to discern whether or not the different mixtures of debt and equity in a firm's capital impact the overall value of the firm. There has been a discrepancy between the perspective from which the IASB thinks financial statements should be presented and the perspective actually underlying the definition, recognition and measurement of the elements of financial statements (van Mourik, 2014). Modigliani and Miller found that an enterprise's cost of capital is not affected by the mix of debt and equity, with the exception of tax deductibility of interest, (Schroeder, Clark & Cathey, 2014). This writer will explore further the proprietary, entity and funds theories. The proprietary theory, the entity theory, and the funds theory are three approaches to accounting for equities. a. Describe briefly each of these theories. The proprietary theory FINANCIAL ACCOUNTING THEORY - GROUP 1, CASE 15-7 3 The proprietary theory indicates that there is no fundamental distinction drawn between the legal entity and its owners for accounting purposes. The main objective of the proprietary theory is both the determination and analysis of the proprietor's net worth. The assets are owned by the proprietor and the liabilities are owed to him. The corresponding accounting equation is assets - liabilities = proprietorship/capital. In this theory, the assets are valued and the balance sheets are prepared in efforts to measure the changes in the proprietary interest or wealth revenues and expenses. Net income is reflected as an increase in the proprietor's wealth to be added to capital. Losses, interest on debt, and corporate income taxes are expenses, while the dividends are withdrawals of capital. The entity theory The entity theory views the business and other organizations as a separate entity which has an accountability of its own and is perceived as the center of the accounting interest. Being that the company has a distinct identity from its owners; it can be viewed as an economic and legal unit of business. The theory is most applicable to large corporations which stand separate and distinct from its owners. The business will possess ownership of the resources of the company and will be liable to claims from shareholders, creditors and other stakeholders. The corresponding accounting equation is said to be assets = equities. The assets are rights accruing to the entity, while equities represent sources of the assets, consisting of both the liabilities and the shareholders' equity. This theory considers liabilities as equities; both the shareholders and the creditors are considered to be equity holders with totally different rights and legal standing in the business with respect to income risk, control and liquidation. The income earned is the property of the entity until it is distributed as dividends to FINANCIAL ACCOUNTING THEORY - GROUP 1, CASE 15-7 4 the shareholders. Being that the business itself bares the responsibility for meeting the claims of the equity holders, the entity theory is considered to be income centered and income statement oriented. Under the entity theory, the consolidated financial statements should be reflective of the total business. The funds theory In the fund theory assets are acquired in order to contribute to an increase of their service potentials. This theory views assets and liabilities as having restrictions which represents the specific economic functions or activities they are designated for. Under the fund approach, the measurement of net income is made to play a secondary role to satisfying the special interests of management, governmental agencies and the overall process of credit extensions and investments. The corresponding accounting equation is assets = restrictions on assets. Its three features: fund, assets and restrictions are applied to each homogeneous set of activities and functions within the organization. This allows for the ability to provide a separate accounting for each area of economic concern. The fund theory is also relevant to profit-oriented organizations, which use funds for such diverse activities as sinking funds, accounting for bankruptcies and estates and trust, branch or divisional accounting. Liabilities represent a series of both loyal and economic restrictions on the usage of the assets. With the fund theory, neither the balance sheet nor the financial statements are the primary objectives of the financial reporting process. It is the statement of sources and uses of funds that is key in this theory. The statement aids in measuring the operations of the firm in terms of the sources and dispositions of these funds. FINANCIAL ACCOUNTING THEORY - GROUP 1, CASE 15-7 5 b. State your reasons for emphasizing the application of one of these theories to each of the following. i. Single proprietorship The proprietary theory is best applied to single proprietorship entities because a personal relationship exists between the management of the business and the owner. They are oftentimes the same person. ii. Partnership The proprietary theory is also applicable to partnerships as well in cases where the net income is applied to each period of the partners' capital accounts. iii. Financial institutions (banks) I feel that the funds theory would be applicable to banks and other financial institutions that maintains assets or money that is available to borrow. Funds are made available to the borrowers indirectly by savers who allow banks to access their assets. They similarly have regulatory restrictions just as the governmental and nonprofit entities. iv. Consolidated statements When applied to large corporations with subsidiaries, the entity theory has influenced the the consolidation of financial statements. Maurice Moonitz focused on the consolidation of the total business entity, as there were no existing theories which lead to inconsistent and contradictory procedures. He was endeavoring to formulate an outline for consolidating statements using one accounting theory as a basis. FINANCIAL ACCOUNTING THEORY - GROUP 1, CASE 15-7 6 v. Estate accounting The proprietary theory would be beneficially used for estate accounting due to the concept that the ownership of funds and liabilities relate to a single individual or small set of individuals transferring the ownership to new entities or people. The managers of the estates will be specifically directing the assets to where they are best suited. The profits, revenues and liabilities where originally owned by whomever the estate was made out, consequently the proprietary theory would be best suited here. Conclusion Theorists have provided explanations of the various accounting theories and the relationship as to their influences on accounting practice and the rationale for the contradictions between them. The different equity theories are found to have relevance under the many different circumstances of the organization, the economic relationships and the accounting objectives. Therefore it is critical that accounting theory and practice take an eclectic approach to these theories. FASB issued SFAS No. 150, \"Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity\" primary effect has been the reclassification of some amounts which were previously disclosed as equity in the liability section of the company's balance sheet. This reclassification may result in a decrease in reported net income, being that distributions to investors which were previously recorded as dividends must now be recorded as interest expense. It doesn't matter which theory of equity you choose to use. As accountants we must remember that Matthew 6:33 states, \"But seek first the kingdom of God and his righteousness, and all these things will be added to you. Romans 13:7, \"Pay to all what is owed to them: taxes FINANCIAL ACCOUNTING THEORY - GROUP 1, CASE 15-7 7 to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed\". References Schroeder, R.G, Clark, M.W. & Cathey, J.M. (2014), Financial accounting theory and analysis, text and cases, John Wiley & Sons, Inc., 11th ed, p 516, ISBN 978-1-118- 58279-4 van Mourik, C. (2014), The equity theories and the IASB Conceptual Framework, Accounting in Europe, Routledge, Vol 11, Issue 2, pp 219 - 233, ISSN 1744-9480, EISSN 1744-9499, DOI: 10.1080/17449480.2014.949278 Running head: CASE 15-3 1 Case 15-3: Treasury Stock Joshua S. McDonald Liberty University CASE 15-3 2 Case 15-3: Treasury Stock Sometimes companies choose to reacquire shares of their own stock, which are called treasury stock (Schroeder, Clark, & Cathey, 2014, p. 536). These reacquisitions may take place to reduce capital, because shares are underpriced in the marketplace, or to reissue the shares the shares at a later date (for example the issuance of employee stock options) (Schroeder et al., 2014, p. 536). The accounting for treasury stock is dependent on the nature of the purchase, and results in two different accounting methods, cost and par value (Schroeder et al., 2014, p. 536). When shares are acquired with the intention to resell or if \"ultimate disposition\" has not been decided (FASB, ASC 505-30-30-6) the cost method should be used (Schroeder et al., 2014, p. 536). Under this method the shares are recoded at cost and be shown as a reduction to equity separately from capital stock, additional paid-in capital, and retained earnings (FASB, ASC 50530-30-6). Upon subsequent reissuance, the difference between the repurchase price and sales price would be adjusted through additional paid-in capital and retained earnings (Schroeder et al., 2014, p. 536). When shares are reacquired for the purpose of retirement, the par value method of accounting is used (Schroeder et al., 2014, p. 536-537). Since the stock is retired, the par value of the stock is recorded as a reduction to the capital stock account (Schroeder et al., 2014, p. 537). Any difference between the repurchase price and par value should be recorded as a reduction to additional-paid in capital or retained earnings if there is not sufficient additional paid-in capital (FASB, ASC 505-30-30-8). CASE 15-3 3 Compare and contrast the cost method and the par value method for each of the following: Purchase of shares at a price less than par value Under the cost method in this scenario, the reacquisition cost would be recorded as a reduction to equity (Schroeder et al., 2014, p. 536). This would happen by debiting an account called \"Treasury Stock.\" Under the par value method, the capital stock account would be reduced by the par value of the stock and additional paid-in capital would be increased by the difference in par value and purchase price (Schroeder et al., 2014, p. 537). Therefore, the journal entry for this transaction would include a debit to capital stock and a credit to additional paid-in capital. In these two scenarios, the major difference lies in what accounts are used to record the transaction. Under the cost method, the use of the treasury stock account indicates that it is being held by the company for the purpose of reselling at a later date. Under the par value method this would not be the case, as capital stock is reduced, this demonstrating the retirement of the shares. Purchase of shares at a price greater than par value In this scenario, the repurchase would be treated the same way under the cost method, with a reduction to equity through use of the treasury stock account. According to the par value method, the par value of the stock acquired would reduce capital stock and the remainder of the repurchase price would be allocated to additional-paid in capital or retained earnings if there is not sufficient paid-in capital to support the reduction (Schroeder et al., 2014, p. 537). The journal entry would show a debit to capital stock for the par value and a debit to additional paidin capital or retained earnings. CASE 15-3 4 Like the first scenario, the cost method demonstrates an intention to resell, while the par value method demonstrates retirement by the reduction of capital. Subsequent resale of treasury shares at a price less than the purchase price but more than par value Under the cost method, the treasury stock account would be reduced (or an increase to equity) by the cost and the difference would be a reduction to additional paid-in capital (Schroeder et al., p. 536). The journal entry would have a credit to treasury stock and a debit to additional paid-in capital. The par value method would contain in increase to capital stock by the par value of the stock and an increase to additional paid-in capital by the difference. The journal entry would contain a credit to capital stock and a credit to additional paid-in capital. When considering this scenario, it is much more likely for this transaction to take place under the cost method, as par value reacquisitions take place with the intention to retire the shares (FASB, ASC 505-30-30-8). Subsequent resale of treasury shares at a price greater than both the purchase and par value The cost method would dictate that equity increase through a reduction of the treasury stock account and an increase to additional paid-in capital (Schroeder, 2014, p. 536). The journal entry would include a credit to treasury stock and a credit to additional paid-in capital. The par value entry would be the same as the previous scenario. Effect on net income Under both scenarios net income would not be affected, as gains and loses cannot be the product of investments and distributions by owners (Schroeder et al., 2014, p. 537). CASE 15-3 5 Biblical Consideration One concept from scripture that should be viewed when considering treasury stock is the appropriate treatment of employees by employers. According to Colossians 4:1 \"Masters, treat your bondservants justly and fairly, knowing that you also have a Master in heaven (ESV).\" This shows that there is a call among Christian employers to treat their employees with fairness. One way that this can be done is through compensation, specifically incentive stock options. In order for this to happen a company would need to reacquire shares to be used as compensation at a later date. In this manner, treasury stock can be an important tool for Christian employers. CASE 15-3 6 References Financial Accounting Standards Board (FASB). (n.d.). ASC 505-30-30. Retrieved from FASB ASC Database Schroeder, R.G., Clark, M.C., & Cathey, J.M. (2014). Financial Accounting Theory and Analysis: Text and Cases (11th Ed.). Hoboken, NJ: Wiley