Accounting Theory 5th. e. Hendriksen - Ebook download as PDF File .pdf) or read book online. ACCOUNTING. THEORY. Eldon S. Hendriksen, Ph.D., C.P.A.. Professor of Business The approach to accounting theory presented is based primarily on. View Accounting Theory - Eldon S. from MARH at Universidade Federal do Espírito Santo. Fourth Edition. ACCOUNTI G THEORY.

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Accounting theory may also be used to explain existing practices to obtain a If it is possible to develop an accounting theory (Hendriksen and McDonald) then. Get this from a library! Accounting theory. [Eldon S Hendriksen; Michael F Van Breda]. Fourth Edition. ACCOUNTING. THEORY. Eldon S. Hendriksen. Professor of Business Administration. University ofSanta Clara. L~bestthing.infoD D. IRWIN .

Normative theory tries to argue what accounting policies firms should adopt. Normative theory answers questions about how the world should be, and how people and firms should behave. Or in other opinion a normative statement expresses a judgment about whether a situation is desirable or undesirable.

Notice that there is no way of disproving this statement. If you disagree with it, you have no sure way of convincing someone who believes the statement that he is wrong. Positive theory tries to explain accounting practice and the relation between accounting and other variables e. Positive theory answers questions about why the world is the way it is, and what will happen if one decides to act one way or another, given certain conditions.

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Or in other opinion. Or in other opinion a positive statement is a statement about what is and that contains no indication of approval or disapproval. Notice that a positive statement can be wrong.

Positive theory also offers testable predictions about what will happen if certain accounting practices are adopted, or what accounting practices one should expect to see under certain contractual arrangements with creditors, etc. This might help managers and others decide on what accounting policies to adopt and lobby for, and it might help policy makers decide what accounting policies to promulgate. Why do some firms use straight line and others use accelerated depreciation?

Why do some firms choose Big4 auditors while others choose smaller auditors? What are some of the major strengths and weaknesses of historical cost accounting? Historical cost is a generally accepted accounting principle requiring all financial statement items be based upon original cost. Historical cost means what it cost the company for the item. It is not fair market value. This means that if a company downloadd a building, it is recorded on the balance sheet at its historical cost. It is not recorded at fair market value, which would be what the company could sell the building for in the open market.

Weakness: Historical cost method, over a period of time has been subject to many criticisms, especially as it considers the acquisition cost of an asset and does not recognize the current market value. A historical cost is only interested in cost allocations and not in the value of an asset.

While it tells the user the acquisition cost of an asset and its depreciation in the following years, it ignores the possibility that the current market value of that asset may be higher or lower than it suggests.

Another main criticism of historical accounting method is its obvious flaws in times of inflation. The validity of historic accounting rests on the assumption that the currency in which transactions are recorded remains stable, i.

Another main point with regards to inflation is rise in prices for an asset. An asset downloadd at a point in time may be expensive in future.

The traditional accounting principles record all assets at an original cost and continue to use these historic figures throughout the asset's life, while economists make a more intelligible assumption that money has a time-value attached to it. The economist's approach is broadly embraced in the corporate finance model whose objective is centered on value creation for the shareholders. In addition effects of inflation may not be the same for all the companies in the market and historical cost accounts become almost unhelpful when comparing corporate performance.

Strength: The historical cost system provides managers with a significant range of alternatives in recognizing, reporting and measuring economic information. One of the advantages of using historical costs it helps the managers to forecast future operational costs based on past data.

The basic function of historical accounting is to tell a user "the cost of a thing". Without knowing the original costs future projections are almost hampered. Historical costs play an important role here providing this necessary information.

Historical cost is based on recording actual transactions. Not only is there a record of actual transactions, but also the figures are reliable. For current cost or exit price accounting, changes in prices are recorded but these are not based on actual transactions. Financial statements based on historical cost have been found to be useful. Empirical evidence indicates that people find the conventional statements useful.

No other method of accounting can provide exact information at a glance on the change in trends in the company's working like the historical costs method. What are some of the major strengths and weaknesses of current cost accounting applying replecement cost?

Current cost accounting attempts to provide more realistic book values by valuing assets at current replacement cost, rather than the amount actually paid for them.

This contrasts with the usual historical cost approach.

Intangible Capital

The current cost is usually calculated by adjusting the historical cost for inflation, in addition to the usual adjustments such as depreciation. Current cost accounting is more complex than historical cost accounting, and attempts to implement it tend to create controversy over what adjustments are appropriate.

This has some interesting comments on the reasons for the failure of attempts at inflation accounting. The problems that current cost accounting and other approaches to accounting for inflation attempt to solve are obviously linked to inflation.

Interest in inflation accounting tends to be greatest when inflation is high and low when inflation is low. Strength: Differentiating operating profit from holding gains and losses can enhance the usefulness of information provided holding gains different to trading income as due to market-wide movements that are often beyond managements control Better comparability of various entities performance Weakness: Replacement cost of assets may not be the same for all firms some firms may not choose to replace the asset If the entity requires replacement assets it may be more efficient and less costly to acquire different assets Replacement cost does not reflect what the asset would be worth if sold Often difficult to determine replacement costs Allocating replacement cost via depreciation is still arbitrary as with historical cost accounting Chambers claimed products of CCA were irrelevant and misleading 6.

Early positive research investigated evidence of shares price changes as a result of the disclosure of accounting information. However, such research did not explain why particular accounting methods were selected in the first place. How did Positive Accounting Theory fill this void? Positive Accounting Theory based on central economic assumption that all individuals action derived by self interest and that individuals will act in an opportunistic manner to the extent that the actions will increase their wealth.

Ripley, professor of economics at Harvard, made an attack on the accounting practices of the 2 New York Stock Exchange Faci Book p. He argued that this information should avoid misleading the stockholders in any respeet and should aid them in determining the true value of their investments. These changes are evident in the literature and in the pronouncements of several interested organizations before and after It is interesting to note that these changes in accounting thought were not the direct result of the stock market crash of nor the depression ofthe s, but rather they were the result of institutional ehanges that had begun rnuch earlier and to which accountants had not as yet adapted themselves.

They were, of course, made more urgent by the events of the period. One of the most significant of these changes was the shift in emphasis from the balance sheet to the income statement oecurring in the United States and in Europe during the period from about World War I to the late s.

As early as , Schmalenbach in Germany had pointed out that annual accounts should provide information about the operations of a business as weU as about the state of its capital. The effect of this was, as we sha11see from the writings and pronouncements of the s and s, to foeus attention on the nature of allocations and accruals and their consequent effect on income.

There is also evidence of an increasing arbitrary use during this period af deferrals of losses and income items to 3 William Z. Ripley, "Stop, Look, Listen! Little, Brown, Hoxsey, "Accounting for lnvestors," Journal af Accouniancy, October , pp.

Ch"ptcl' 2 permit a smoothing of income from one yeal' to the next. This led to the attempts in the s to establish better standal'ds for the pl'esentation of the income statement. A second step was taken in when a committee of the Association was appointed to formulate definitions of technical accounting terms in order to give uniformity to their meaning.

Subsequent pronouncements were intended to standardize audit procedures and to facilitate the presentation of financiaI statements useful to bankers. After this memorandum was approved by the council ofthe Institute and the Federal Trade Commission, it was presented to the Federal Reserve Board for consideration. The Federal Reserve Board gave it tentative endorsement and submitted it to bankers and banking associations throughout the country for their consideration and criticism.

The edition, like the edition, set forth suggestions for the verification and preparation of statements specifically for credit purposes. It stated, however: Government Printing Office, , p.

See also Journal of Accountancy, May , pp.

Departures from the cost basis were permitted if disclosure was made regarding the basis of the appraisal. The following observations relating to the profit and loss statement were suggested in the bUlletin: The revision of the bulletin was prepared and published by the American Institute of Accountants and entitledExamination ofFinancial Statements by Independent Public Accountants.

This bulletin serves as an interesting contrast to the edition. The preface to this edition states: Developments of acconnting practice during recent years have been in the direction of increased emphasis on accounting principIes and consis- tency in their application,and of fuller disclosureof the basis on which the accountsare stated.. The suggestionscontainedin this bulletin are intendedto applyto examinationsby independentpublicaccountants offinanciaistatements prepared for credit purposesor forannual reports to stockholders.

The general objective of accounting statements is changed: FinanciaI statements are prepared for the purpose of presenting a periodicalr,eviewor report on progressby the management and deal with the status af the investment in the business and the results achieved during the period under review.

New York: January , p. Ch lptel" 32 2 2. An increased emphasis on the cost basis and the going-concern concept is specifical1y statec1: Oneofthe important accountingconventionsis that the balancesheet of a goiugcoucemshall be prepared onthe assumptionthat the concemwill continue in business.

Plant assets 1 permanent investments and intangi.

With the increased emphasis on the cost basis, the writers of the bulletin recognized the need for greater consistency in the application of procedures. Reflecting the need for better information for investors, the need for an improvement in the reporting of income and the recognition of the earning power concept of income are stated in the bul1etin: From an investor's point af view.

The emphasis on the income statement is then reftected in the general approach to the balance sheet-recognizing changes in the balance sheet from year to year, rather than placing significance in a single statement.

The suggested profit and loss statemei1t is more concise than that recommended in Nonoperating or extraordinary charges and credits are included in the "other income" and "other charges" captions.

The item "net income for the period" is then eliminated, and the final figure is ca11ed"net profit loss for period carried to surplus. The balance sheet audit was first heard of about and achieved widespread popularity by The desire on the part of clients to save audit expenses and the fact that its special conservatism was acceptable to bankers appear to ha ve been the main factors responsible for the popularity of the balance sheet audit.

Its popularity was very important to the development of accounting theory because it temporaril View Full Document. I cannot even describe how much Course Hero helped me this summer.Your rating has been recorded.

Accounting theory

WiIliams, 'JI'homasH. The emphasis on the income statement is then reftected in the general approach to the balance sheet-recognizing changes in the balance sheet from year to year, rather than placing significance in a single statement. Accounting Theory: There is also evidence of an increasing arbitrary use during this period af deferrals of losses and income items to 3 William Z.

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