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01 Introduction to financial accounting theory (what is a theory?…
01 Introduction to financial accounting theory
what is a theory?
definitions
a coherent set of hypothetical, conceptual and pragmatic principles forming a general framework of reference for a field of inquiry
functionality of theories
Why is accounting theory an important field of study for accountants?
in order to
evaluate the suitability of current accounting practices
develop improved accounting practices where current practices are unsuitable for changed business situations
defend the reputation of accounting where accounting practices are wrongly blamied for causing companies to fail
central issues
what and how to meassure
incitements and motivators shaping the decision process of managers in selecting the type of
accounting info provided
accounting methods used
supporting or lobbying regulators
the outcome of selected accounting practices on stakeholders and how they react
capital markets
whether there is a true measure of income
theories of accounting
paradigms
positive accounting theory
predictive accounting theories
focus on explaining and predicting the behavior of managers and accountats
managers/accountants adopt particular accounting methods in preference to others
important preceding conditions
accounting based rewarding systems
close to breach negotiated performance measures
whether they are subject to political scrutiny
inductive accounting theories
method
criteria
number of observations needs to be large in order to make a valid generalization
oberservations must be repeated under a wide variety of conditions
no accepted observation can conflict with the derived universial law
developing theory through observation
focus on describing current practises
critizism
against
concentrates on status quo, and is reactionary in attitude
isn't actively affecting any change
for
accounting darwinism
there is value in studying current practices since the remaining ideas has survived the test of time
Given certain preceding conditions a predicted result will follow
prescriptive (normative) accounting theories
focus
describing how accounting should be undertaken, and trying to influence managers to follow prescription
method
normative reserach
critizism
against
isn't using observations and is unscientific
evaluating theories of accounting
schools of thought
carl popper and the falsificationists
a hypothesis/theory is only scientific if observations can falsify it
logic and evidence
logical deduction
an argument is logical to the extent that if the premises on which it is based is true, then the conclusion will be true
evaluation underlying assumptions
homo economicus
utility maximizers
self-interest truimf all
winning the battle vs winning the war
red flags (using tricks to make the argument seem more sound than the underlying logic would have it be)
emotionally toned words
using a statement which all is implied but some is true
diversion
prestige by fale credentials
appeal to authority
ad hominum
etc