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ACCOUNTING THEORY CONSTITUTION, POSITIVE THEORY, NORMATIVE THEORY, VS -…

- - - - Directly related to the measurement of performance and financial status of an entity and include assets, liabilities, capital, revenue, expenses, income and transactions
    - - Determines the rules which are applied to accounting procedures
    - - The various activities concerned with processing transactions
- - - - :warning:It does not consider the quality of an accountant’s action
        :warning:Does not provide for accounting practices to be challenged
        :warning:Focuses on accountants’ behaviour not on measuring the attributes of the firm
  - - - :warning:Some users may react in illogical manner
        :warning:Some users might have a preconditioned responses
        :warning:Some users may not react when they should
- - - - :check:The efficiency perspective is taken into Positive Accounting theory as researchers explain how various managers choose accounting methods that show a true representation of the firm's performance
        :check:Accounting practices adopted by firms are often explained on the basis showing the true image of financial performance of the firm.
    - - :check:The opportunistic perspective holds the view that managers, who are agents to the principal, act to their self-interests.
        :check:They only adopt accounting policies that allow them to gain, in the view that the firm also gains.
        :check:With this in mind, the optimal set of accounting policies are described as a compromise between fixing accounting policies to minimise contract costs and providing flexibility in times of changing circumstances (considering the effects of opportunistic behaviour)
        :check:Different hypotheses had been developed to answer the questions like
        :pencil2:managers’ incentives to maximize bonuses based on their companies’ profits,
        :pencil2:their incentives to use accounting techniques to divert attention from their high profits if those profits would attract public or government scrutiny, and perhaps lead to higher taxes.
  - - - :check:Ceteris paribus, managers of firms with bonus plans are more likely to choose accounting procedures that shift reported earnings from future periods to the current period to inflate the current reported net income.
        :check:Managers who have accounting incentives, or their remuneration that is tied up with the firm's accounting performance will tend to manipulate accounting method and figures to show the accounting performance better than it should be.
    - - :check:Ceteris paribus, the larger a firm’s debt/equity ratio, the more likely the firm’s manager is to select accounting procedures that shift reported earnings from future periods to the current period to inflate the current reported net income
        :check::To increase reported net income will reduce the probability of technical default as most debt agreements contain covenants for the borrowing firm to maintain specified level of debt-to-equity ratio, interest coverage, working capital and etc.
        :check:If the firm is not fulfilling the stated requirement then the lender (debt agreement) may impose penalties such as constraints on dividends or higher interest cost or additional borrowing facilities, to avoid such penalty, management may adopt accounting policies to raise current earnings.
    - - :check:Ceteris paribus, the larger the firm, the more likely the manager is to choose accounting procedures that defer reported earnings from current to future periods.
        :check:Allowing lower profits steers away any attention by the public and the eyes of the government who will place higher regulation on high earning firms.
        :check:High political costs can be imposed due to high profitability such as high taxes, reduced government subsidies or grant.