Individual assignment question answers Essay Example

Accounting Theory

9

Accounting Theory

Affiliation

QUESTION 1. ABSTRACT

Accounting theory is described as the logical reasoning of principles that are aimed at providing a general and acceptable frame of accounting reference by the constituency (users) in the market (Barnett 2012). According to Miller (1986, p. 64), a mere discovery of accounting problem would not necessary mean that the financial accounting standards board (FASB) need to commence on its solution in accounting. Personally, I agree with Miller’s reading based on the essence that accounting standards are described as written accounting guidelines and rules that should be consistency in preparing financial statements in any project in the world (Godfrey 2010). Traditionally, such accounting standards are often referred to as codified forms of accounting in developing a credible solution to accounting problem as per the set regulation of FASB. Based on such rationale, I strongly affirm Miller’s statement based on the research conducted and the sources that seem to converge with Miller (1986) accounting preposition and its relevance in the modern accounting.

INTRODUCTION

The world economy has experienced enormous changes that have been best captured and described as globalization process with different economies. In the modern accounting, the pace of such economic dynamics has accelerated for the last ten years in the world economy as compared to previous decades (Barnett 2012). The rationale for such changes has been attributed as a reflection of the world’s growing ascendancy of the philosophical concept of the free global market. Through recognition of the critical role efficient capital markets play as a core element in fair resource allocation in a real economy, different economic key players have enhanced capital markets through consistency accounting approaches in the world economy (Godfrey 2010). Constituency support in accounting standards is critical and necessary in certain accounting approaches embodied in accounting framework in the global markets to enhance better accounting, and it practices globally. Such constituency has critical implications for accounting ‘neutrality’ and ‘faithfulness representational’ of accounts in the world today.

The paper’s focus and the argument are based on three objective folds of accounting standards regarding Miller’s statement on accounting issues. The study arguably established that accounting standards ought to provide credible information to the users in the global. Based on the objective it provided that FASB should set standards approaches of preparing accounts in the world. The second objective of accounting standards was to harmonize different accounting procedures. Thus, through such an objective it is easy to resolve the accounting issues that would be acceptable to its constituency. Finally, accounting standards were aimed at enhancing accounting contents to foster comparability and credibility of the world’s financial statements. With such objectives, it is logic that Miller (1986)’s statement had critical relevance in the accounting world today.

It is of essence that a suitable likelihood exists in such accounting approach that FASB would resolve the articulated issue in a manner that will be acceptable to the constituency (Miller, 1986). Citing with the accepted accounting principles (GAPP), the core thrust of accounting standards preparation is to establish global comparability and uniformity thus, bridging the already existing diverse accounting practices (Barnett, 2012). The argument of Miller is based on the rationality that not all accounting issues that are raised should be of primary concern for the global accounting standards, but proper procedure is of the essence in handling such issues. Authoritatively FASB could resolve the issues in a manner that does not require a prior sense of board members to be able to achieve a consensus thus, in such scenario is unadvisable to start any formal project (Reviews 2013). The implication that would yield from such a project it is accounting standards inconsistency with the constituency not agreeable to such undertakings.

Neutrality and Representational Faithfulness

In discussing the economic implication of a representational faithfulness, the paper articulates complementary attributes in accounting policy and their importance. On the other hand, ‘neutrality’ is paramount in any given accounting approach as it ensures there is fairness in the accounting practices thus, representational faithfulness and neutrality are mutually exclusive practices in accounting policy. According to Godfrey 2010 p. 26), articulates that the basic idea of representational faithfulness and neutrality in accounting policy is based on the notion that truth should always respond to facts or reality. Thus, the paper focuses on affirming Miller’s 1986 statement in expounding on the account that neutrality and representational faithfulness should be like a two-sided coin in accounting policy.

Representational faithfulness in the concept of accounting framework is described as the essentiality of the ‘truth’ in the social context of the world. Miller in his statement vied representational faithfulness in the notion of subjective and objective in excluding vague nature an accounting issue would raise to the board in resolving a solution (Reviews 2013). Thus, for a substantiated approach that should be standardized in accounting could enhance better accounting policy that is acceptable to the constituency. Gowthorpe (2008) further argues that based on the anachronistic view on accounting policy, the flew should be based on searching ‘true income’ and ‘true wealth’ thus the nation of Miller in accounting theory and its principles.

Rationale and Importance of Constituency Support

With the increasing malpractices in financial accounting, and the increased business entities failures, the world market is on high demand of standardized accounting approaches. Accounting operates on a wide social-economic and political environment thus, accounting knowledge cannot be compartmentalized without the knowledge of its users (Whittington 2014). For instance, with a current dynamic change of trade and globalization process, financial markets have shifted from general banking industry to capital industry operated on bonds, portfolio investments, foreign direct investment and international borrowing by private entities (Chopping 2013). The world populace is more concerned with the nature of the accounting approaches as compared to 1970s where the banking industry played a major role in financial accounting processes. The much insights gained by the constituency the better chances of a universally accounting standard in the world. The basis of the argument was based on easy resolutions of accounting issues raised in the market place in the long run of the world’s financial market.

QUESTION 2. INTRODUCTION

The concept of particular accounting method exclusively has the organization’s explicit and implicitly pacts including compensation plans, capital, and ownership structure. As articulated with Watts and Zimmerman (1986, p.7), Positive Accounting Theory (PAT) on its basis of explaining and predicting accounting approaches, PAT fails to articulate specific accounting method to be used in this perspective. Despite such flip sides of the theory, I do not think that such basis represents an ‘abrogation’ of academics. The rationale for my argument is based on the fact that the theory does not limit the application of other ideologies in explaining and predicting accounting practices of firms in the global market (Whittington, 2014). Accounting theory seeks to articulate ‘true income’ and true wealth’ but not particular method to attain such objective result in accounting practices. The hypotheses of predicting and explaining how firms make its accounting choices arguably could be based on the fact that in such modern markets, firms are distinctively different from one another (Scott 2009).

Globalization is changing the market structure rapidly to technological advancement, population integration and industrialization in emerging markets has effectively changed accounting policy. The milestone in dynamic financial markets have further changed based on the different modes of accounting enhanced to meet the demand of the constituency (Scott 2009). Thus, PAT argues that accounting choice of firms does not in any way change the value of such firms provided that it is aimed at enhancing explanations and predicting a role in the firms. Hence, Watts and Zimmerman point of view are broadly based on economic-based assumption with its explanation that human beings are driven by ‘self-interest’, and they often act in ‘resourceful manner.’ Such actions are based on the rationale that whichever the means provided it fulfills two major objective ‘self-interest, and ‘increase wealth’ individual would be driven on such basis. Thus, PAT predicts that through ‘self-interest’ organization or individual seek to ‘increase wealth’ (explanation), an organization will often put together the effective mechanisms aligning the interest of the firm (Schroeder 2010).

According to Efficient Market Hypothesis (EMH) which is described as the genesis of PAT, is based on the economic hypothesis of capital markets reacts to unbiased and efficient manner to collectively accepted accounting information. The accounting perspective cited from the EMH is articulated as security prices in an economy will always reflect the accounting content or information that is available to the populace. The information presented by such capital markets should not be restricted in any accounting disclosures of firms and individuals in the economy. For instance, the 2007 capital market crisis was entirely based on the available information to the public on the financial markets in the long run and the possible causes of such capital meltdown of the economies (Schroeder 2010). Hence, the capital markets in the current dynamic capital markets are highly competitive that is enhanced by available information released to the public that the public expects it to impound quickly to share prices. Based on such rationales, the PAT has effectively provided a framework for financial accounting that is not necessary ‘abrogation’ of academics to serve as the community supporting them.

Logically, accounting works in a social-economic environment that are based on human being making choices on the accounting method that could assure them fulfillment and wealth creation (Schroeder 2010). A different individual has a different perspective of personal interest and different capabilities of creating wealth in different economic situations. The Role of Academics in accounting especially on PAT is to create the basis of the theory in accounting and its applications in accounting issues. Through such foundation created in accounting practice, the populace would enhance a better foundation of accounting. Such information acquired is used in different ways and with different economic purpose thus it is not logic for developing specific methods that could be used in such ‘self-interest driven’ accounting practices (Scott 2009). On that perspective, for instance, as there are many sources of information and data used in capital markets and accounting practices. If truthful disclosures do not corroborate or even contradict the available information due to a specific method of accounting the capital market integrity would be at risk. Thus, using different approaches in accounting based on PAT would enhance desired results in the process of accounting. In this, I a firm that academic does not represent abrogation to serve the community supporting them in the essence of accounting practices.

According to Scott (2009), accounting studies attempts to use one accounting method such as depreciation instead of using a combination of different methods selectively. The recent accounting studies have articulated three incentive variables such as debt contracts, bonus plan, and political process variables. The ideology of using a combination of accounting methods to foster acceptance of such accounting results by the constituency is widely articulated (Wolk 2009). In their study, they state that focusing on one accounting method would reduce the credibility of the accounting process as required by accounting standards. According to Schroeder (2010), accounting accruals of some approaches could result in a single accounting outcome that is known as net accounting effect of the selected accounting choices. Citing with other studies such as the equity hypothesis of Wolk (2009), for a firm to determine appropriate accounting method, it should consider its equity ratio. Thus, such ratios are highly variable in the capital market and has inconsistency as terms of reference hence, a combination of accounting methods should be used at a given time.

In conclusion, positive accounting theory despite its weakness of not providing a particular accounting method, it does not represent an academic ‘abrogation’ in serving the community that supports the theory. There is much that can be learned from PAT especially in explaining the accounting practices in the current global markets that have rapidly changed due to globalization. The capital markets are more dynamic in the current economies as compared to the 19th century with accounting approaches becoming vital in international trade. The theory has effectively enhanced firms and managers to explain and predict accounting implication in a highly dynamic capital markets in the world.

References

Barnett, K. (2012). Accounting for Profit for Breach of Contract: Theory and Practice. Oxford: Hart.

Godfrey, J. M. (2010). Accounting theory. Milton, Qld: John Wiley.

Gowthorpe, C. (2008). Management accounting. London: South-Western Cengage Learning.

In Chopping, D. (2013). Accounting standards.

Reviews, C. T. (2013). Studyguide for accounting theory: Conceptual issues in a political and economic environment. Place of publication not identified: Academic Internet Publish.

Schroeder, D. A. (2010). Accounting and causal effects: Econometric challenges. (Springer — LINK.) New York: Springer.

Scott, W. R. (2009). Financial accounting theory. Toronto: Pearson Prentice Hall.

Whittington, O. R. (2014). Wiley CPAexcel Exam Review Spring 2014 Study Guide: Financial Accounting and Reporting. Hoboken: Wiley.

Wolk, H. I. (2009). Accounting Theory. Los Angeles: Sage.