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Unformatted text preview: 25/02/2011 1 ACCT 2011 Week 2 Theories of Accounting Week 2: Theories of Accounting Text Readings: Chapter 3 (except 3.8 pp 105-115) Other Readings: (in E-Reserve) 2 Indjejikian (1999) LeMay (2010) Self-Study Questions: see Blackboard Objectives of Week 2 Identify and explain different normative and positive theories of financial accounting Discuss the limitations of accounting theory Discuss the economic consequences of accounting policy choices and the factors 3 accounting policy choices and the factors influencing those choices Discuss earnings management and the implications for financial reporting Describe theories that explain government regulation (includes theories from Week 1) Outline A. Theory B. Positive Accounting Theory (PAT) 1. Agency Theory 2. Assumptions & Predictions of PAT 3. Owner-Manager Contracting 4. Debt Contracting 5. Political Costs 4 6. Accounting Policy Choice 7. Earnings Management C. Normative Accounting Theories D. Other Accounting Theories 1. Stakeholder theory 2. Legitimacy theory 3. Institutional theory E. More Theories of Regulation Warning! Midterm test covers Weeks 1- 6 inclusive. Therefore, Weeks 1 & 2 represent 1/3 of the material examined. Do you think you can pass the midterm test if you don't learn 1/3 of the material? 5 1/3 of the material? Every semester there are many students who don't study the Week 1 & 2 material. They don't perform well on the midterm! Most students need to develop their writing skills so take your self-study and tutorial workshop discussion activities seriously. They are opportunities to learn. A. Theory Theory should provide the foundation for good practice A coherent group of propositions or principles 6 forming a general framework of reference for a field of inquiry Two accounting theory approaches- Normative (deductive, prescriptive)- Positive (inductive, descriptive) 25/02/2011 2 B. Positive Accounting Theory (PAT) Often developed & supported on the basis of observations (how it actually is done) Seeks to explain & predict practice (particular accounting policy choice 7 accounting policy choice) PAT is a type of positive theory (not the only one of its type) Grounded in economic/agency theory & focuses on agency relationships B.1. Agency Theory Agency relationship:- delegation of decision-making from principal to agent Agency problem:- delegation of authority can lead to loss of efficiency & increased costs 8 efficiency & increased costs Agency costs (contracting costs):- costs that arise as a result of the agency relationship- bonding costs- monitoring costs- residual loss (unrecoverable) B.2. Assumptions & Predictions of PAT Assumptions: Organisations are a collection of self-interested individuals who agree to co-operate Individuals will act in an opportunistic manner to increase their wealth Notions of loyalty and morality not incorporated 9 Notions of loyalty and morality not incorporated Predictions: Organisations will seek mechanisms to reduce the...
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This note was uploaded on 04/29/2011 for the course ACCT 2011 taught by Professor D during the Three '11 term at University of Sydney.
- Three '11