Chapter 9 Case Study

Chapter 9 Case Study - Chapter 9 Case Study Cases 48. The...

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Chapter 9 Case Study Cases 48. The positive accounting theory is a well-established principle of accounting theory. Do an Internet search of it and then answer the following questions: What are the three main hypotheses of the positive accounting theory? How does each of these hypotheses fit into the concept of financial statement fraud? Positive Accounting Theory tries to make good predictions of real world events and translate them to accounting transactions. While normative theories tend to recommend what should be done, Positive Theories try to explain and predict o Actions such as which accounting policies firms will choose o How firms will react to newly proposed accounting standards • Its overall intention is to understand and predict the choice of accounting policies across differing firms. It recognizes that economic consequences exist. • Under PAT, firms want to maximize their prospects for survival, so they organize themselves efficiently. • Firms are viewed as the accumulation of the contracts they have entered into. • In relation to PAT, because there is a need to be efficient, the firm will want to minimize costs associated with contracts. Examples of contract costs are negotiation, renegotiation, and monitoring costs. Contract costs involve accounting variables as
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contracts can be stipulated in terms of accounting information such as net income, and financial ratios. • The firm will choose the accounting policies that best acknowledge the need for minimization of contract costs. • PAT recognizes that changing circumstances require managers to have flexibility in choosing accounting policies. • This brings forward the problem of “opportunistic behavior”. This occurs when the actions of management are to better their own personal interests. • With this in mind, the optimal set of accounting policies are described as a compromise between fixing accounting policies to minimize contract costs and providing flexibility in times of changing circumstances (considering the effects of opportunistic behavior). What are the three main hypotheses of the positive accounting theory?
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Chapter 9 Case Study - Chapter 9 Case Study Cases 48. The...

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