Financial Accounting Theory And Practice

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?

The first of all, it is important to understand the mean by a ‘theory’. According to Contemporary Accounting Theory 4e,

Oxford English Dictionary provides various definitions, including: A scheme or system of ideas or statements held as an explanation or account of a group of facts or phenomena

A positive theory based on some assumptions and, through logical deduction, enables some predictions to be made about the way things will be.

In particular, their success in explaining or predicting particular phenomena will then typically be assessed based on observation. For instance, Watts and Zimmerman’s positive theory of accounting relying on the other researchers such as Jensen and Meckling (1976) and Gordon(1964).

A normative theory based on the norms (or values or beliefs) held by the researchers proposing the theories. For example, Chambers issue has paid attention by researchers, however, they recognised and measured in different ways.

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If I developed a theory to explain how a person’s cultural background influences how they prepare financial statements, I will develop a positive theory. (Word count: 170)

QUESTION 2 - Question 1.3:
What is a conceptual framework, and would it be considered to be a positive or a normative theory of accounting?

According to IFRS website shows, the definition of Conceptual Framework follows: The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements.

It is a practical tool that assists the IASB when developing and revising IFRSs. The objective of the Conceptual Framework project is to improve financial reporting by providing the IASB with a complete and updated set of concepts to use when it develops or revises standards.

In term of accounting, the conceptual framework of accounting should be considered as a normative theory of accounting. Because of a normative theory based on the norms (or values or beliefs) held by the researchers proposing the theories. (Word count:111)

QUESTION 3 – Question 1.27 (NEW):

The International Accounting Standards Board has a number of roles, including formulating accounting standards and developing a conceptual framework. Is the work they do in developing an accounting standard or the conceptual framework normative or positive in nature?

In the given circumstance, the conceptual framework of accounting is an example of a normative theory of accounting. Relying on various assumptions about the types or attributes of information useful for decision-making, The CFA provides guidance on how assets, liabilities, expenses, income and equity should be defined, when they should be recognized, and ultimately how they should be measured.

It also shows in Australia Accounting Standards Board (AASB) website, The original framework document and any previous compiled version can be found using the Browse for pronouncements page In the table below, the Notes column identifies when the framework document listed is a compiled version. “Extra” identifies when additional IASB supporting material (e.g. Basis for Conclusions) is available. (Word count: 117)

QUESTION 4 - Question 1.33 (NEW):

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 theories. They state, ‘there has been a strange herding tendency, especially around legitimacy theory’, as well as stating that they ‘also have a sneaking feeling that institutional theory may be coming up fast as the next theory around which to herd’.

What do they mean by this apparent practice of ‘herding’, and what are some possible advantages and disadvantages that are related to this practice?

In the give circumstance, a common phenomenon in herding is the management of some enterprises, marker behaviour. As inadequate of information and lack of understanding, it is hard for investors to make reasonable expectations of future marker uncertainty, are often extract information by observing the behaviour of those around, in which information is continuously passed, many people will be roughly the same information and reinforce each other, resulting in the herd behaviour. ‘Herding’ is a kind of nonlinear mechanism of the non-rational behaviour resulting from individual rational behaviour of the collective.

The advantages of the performance of ‘herding’ for the adoption of specific or temporary situation advantage concept and the way of behaviour is accepted on the long-term nature of the dominant idea and behaviour way. However, people will follow the public agree, to their own opinions with default negation, and not subjective thinking about the meaning of events. (Word count: 149)

QUESTION 5 – Question 1.35 (NEW):

Do we really need financial accounting theory if all we are interested in doing is developing accounting standards?

In the given question, people really need financial accounting theory if people interested in developing accounting standards.

The progresses of theories are indicate how accounting should be done, describe and explain current accounting practices, predict accounting practice, provide principles to take into account when taking action or making decisions, and help to identify problems and deficiencies with current accounting practice and improve accounting practice

Therefore, theories can prepare accounting standards state that fair value should be used when calculating goodwill on acquisition, depreciation should be calculated on the basis of useful economic life, etc. A theory of capital budgeting helps us with choosing among investments; a theory of revenue recognition helps to determine when and how revenue should be recognised; it might reveal deficiencies in the way we presently measure profit; or understanding deficiencies may promote change. Hence, the conceptual framework is used as a basis for drafting accounting standards. (Word count: 150)