ChoiSM_ch02 - Chapter 2 Development and Classification...

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Chapter 2 Development and Classification Discussion Questions 1. a) Sources of finance . Where capital markets/shareholders are the principal source of finance, accounting focuses on profitability, stewardship, and a fair presentation of results and financial position. There are high levels of disclosure in published financial statements. When banks are the principal source of finance, accounting tends to be conservative and disclosures are usually relatively low (banks have direct access to information). When governments are the principal source of finance, accounting is aimed at the information needs of government agencies such as tax collection, assembling macroeconomic statistics, or compliance with macroeconomic goals. b) Legal system . Accounting in code law countries tends to be highly prescriptive, detailed, and procedural, designed to cover every possible circumstance. Accounting standards are a part of national laws. Accounting in common law countries is more adaptive and innovative and tends to allow more judgment to suit the circumstance. Accounting standards are set in the private sector. c) Taxation . This tends to parallel the legal system. In common law countries (where accounting standards are set by the accounting profession), accounting and taxation are separate. In code law countries (where accounting standards are national laws), accounting and taxation are essentially the same. d) Political and economic ties . Accounting technology and expertise is imported and exported based on the contacts that nations have with each other through commerce, conquest, etc. e) Inflation . Historical cost accounting is the basis for initially recording transactions around the world. Inflation puts stress on the historical cost principle. Where inflation is high, accounting adjusts recorded amounts to reflect price level changes. f) Level of economic development . This factor defines the difficulty and types of the accounting issues that are faced in a nation. Accounting is complex where business transactions are complex (in highly developed economies); it is simpler where transactions are simpler (in less developed countries). g) Education levels . This factor defines the limits of accounting sophistication in a nation. Accounting cannot get very sophisticated where education levels are relatively low (unless the country imports accounting training or its citizens are sent elsewhere for it). 2.The text lists seven environmental circumstances asserted to have direct effects on accounting development. We judgmentally rank the list as follows: a. Sources of finance b. Legal system c. Taxation d. Political and economic ties e. Education levels 1
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f. Inflation g. Level of economic development Students may wish to alter this ranking and justify their own. It should also be pointed out that the rankings for certain countries may be quite different.
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ChoiSM_ch02 - Chapter 2 Development and Classification...

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