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INTRODUCTION TO FINANCIAL ACCOUNTING THEORY - Coggle Diagram
INTRODUCTION TO FINANCIAL
ACCOUNTING THEORY
Theory
US FINANCIAL ACCOUNTING STANDARD BOARD'S
A coherent system of interrelated objectives and fundamentals
that can lead to consistent standard. (FASB, 1976)
HENDRIKSEN (1970 p.1)
A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field
of inquiry
OXFORD ENGLISH DICTIONARY
A scheme or system of ideas or statements held as an
explanation or account of a group of facts or phenomena
WHY WE NEED TO STUDY ACCOUNTING
THEORY?
What motives managers to select particular accounting methods
in preference to others
What motives managers to provide certain type of accounting
information
How and why the capital markets react to particular accounting
information
What motives individuals to support and perhaps lobby
regulators for some accounting methods in preference to others
What the implications for particular types of organization and their stakeholders are if one method of accounting chosen or mandated in preference to others
Whether there is a "true measure" of income
How the various elements of accounting should be measured
Evaluating Theories of Accounting
It is dead philosophical movement
it suffers from a logical incoherence
it is empty and common place
It is imperiously dictatorial
it is a wasted effort
It has provided no accomplishment
it is a kin to a cottage industry
Characteristic
verifiable through testing of hypothesis.
having the quality of authenticity and also authoritative.
Should have descriptive approach in general and a normative approach in particular.
The ability analysing past events and forecast future events
The ability to evaluating and explaining the current events correctly.
The potentiality of solving the problems created by the happening of an event.
Must be wide acceptance
Assumption
Pragmatic - based on observation of the behaviour of the accountants or the users of the information generated by the accountants
Positive - testing or relating accounting hypothesis or based on ‘experiences’ or ‘facts’ of the real world.
Hypotheses are tested against actual events. Predicting the role of accounting information in decision-making
Behavioural - rely on the study of the behaviour of accountants and non-accountants as they are influenced by accounting functions and reports.
Normative - focus on deriving the “true income” for an accounting period, or on discussing the type of accounting information which would be useful in making economic decisions.