Chapter 7 - Positve Acct Theory

Chapter 7 - Positve Acct Theory - Chapter7PositiveTheory

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Chapter 7 - Positive Theory Positive Accounting Theory Philosophy of PAT Million Friedman  championed positive theories in economics. He stated that: (part 3 Empirical Research in Accounts of Accounting theory from  Jayne Godfrey)   The ultimate goal of positive science (i.e. INDUCTIVE) is  The development of a ‘theory ‘ or ‘hypothesis’; that yields valid and meaningful “Predictions’ about phenomena not yet “observed”. Consistent with Friedman’s view,   Watts and Zimmerman  asserts that:     The objective of “positive accounting theory” is to  “explain ” and “ predict ”  accounting practice. Explanation ” means providing reasons for observed practice. For example, positive accounting theory seeks to explain why firms continue to  use historical cost accounting and why certain firms switch between a numbers  of accounting techniques. Prediction ” of accounting practice means that the theory predicts “ unobserved  phenomena ”. Unobserved phenomena ” are not necessarily future phenomena; they include  phenomena that have occurred, but on which systematic evidence has not been  collected.   For example – Predicting the reaction of firms to a proposed accounting standard and  an explanation of why firms would lobby for and against such a standard, even though  the standard has already been released. Testing these theories provides evidence that can be used to  predict       the impact of  accounting regulations before they are implemented. PAT  has an  economic focus and seeks to answer such questions – what is the effect of  reported financial statements on share price, for example?  For the above issue, PAT is based on  assumption  about the  behavior of individuals that is Manager, investors, lender and other individuals are rational, evaluative utility 
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maximize® (REM). Chapter 7 - Positive Theory Positive Accounting Theory This theory attempts: 1. to explain  manager’s choices of accounting methods in terms of self- interest, 2. the  relationships between stakeholders and,  3. how financial accounting can be used to  minimize cost by aligning  competing interests. Returning our fouces, PAT foucses on the  “relationship” between the various individuals involved in providing resources to an organization and how accounting is used to assist in the functioning of these relationship PAT,  as developed by  Watts and Zimmerman and others ,  is based on the central  economic-based assumption that all individuals’ action is derived by  self-interest and  that individuals will act in an  opportunistic manner to the extent that the actions will 
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This note was uploaded on 02/02/2012 for the course ACCOUNTING Acc632 taught by Professor Marry during the Spring '10 term at College of the Bahamas.

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Chapter 7 - Positve Acct Theory - Chapter7PositiveTheory

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