IM_CH_01 - Chapter 1: An Introduction to Accounting Theory...

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Chapter 1: An Introduction to Accounting Theory Instructor’s Manual 7 th edition Page 1 of 14 C HAPTER H IGHLIGHTS The chapter is concerned with what accounting theory is and where it fits into the “structure” of financial accounting. The definition of accounting theory used here is broad and coincides with the purposes of the text. Theory itself helps to explain and predict phenomena that exist in a given field, and this likewise holds true in accounting. In accounting, theory can be developed in response to needs arising from practice, including concepts such as realization and matching. However, as an “infrastructure” has developed in financial accounting, theory is being formulated in a more institutionalized way by means of the research process. Along with political factors and economic conditions, accounting theory contributes to the standard-setting process. The process of formulating standards or making rules is itself largely a deductive process and is certainly concerned with accounting theory. The relationship of theory to measurement is quite important. While some see measurement as closely related to but separate from theory (as we did in earlier editions), its importance relative to theory is so great that we now consider it to be part of theory. Measurement is the assignment of numbers to the attributes or properties of objects being measured. The different types of measurements and the quality or “goodness” of measurements are examined. The latter embodies (1) the usefulness of the measurement, illustrated here in a predictive context but showing up later in an assessment mode and (2) verifiability or objectivity, which is the degree of consensus among measurers in the statistical sense. The various valuation models are presented in Appendix 1-A. The models come under the scope of accounting theory. In addition, the different models are mentioned in several theory chapters before being discussed in depth in Chapter 14. Even if there is no desire to go further into inflation accounting in Chapter 14, it is important for students to gain a rudimentary grasp of the concepts involved, as illustrated in Appendix 1-A. Q UESTIONS Q-1 What does the term “social reality” mean and why are accounting and accounting theory important examples of it? The term social reality pertains to the measurement of social phenomena and the use of these measurements. The measurements may be representationally faithful (low in bias) and have a high degree of objectivity (verifiability). Or the opposite for either or both of these qualities may be the case. The important thing to grasp, however, is that important consequences stem from the measurement, whether they are “good” or “bad.” For example, an excellent year in terms of income could cause management to be highly rated by shareholders and other interested parties, resulting in high management bonuses, or provide increased dividends to shareholders. All of this could occur even though income is a “construct”: not a “real” factor but a conceptual artifact.
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This note was uploaded on 02/12/2012 for the course ACCOUNTING 632 taught by Professor Johnlynch during the Fall '11 term at St. John's.

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IM_CH_01 - Chapter 1: An Introduction to Accounting Theory...

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