IM_CH_05 - Chapter 5: Postulates, Principles, and Concepts...

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Chapter 5: Postulates, Principles, and Concepts Instructor Manual 7 th edition Page 1 of 13 C HAPTER H IGHLIGHTS Chapter 5 starts with an analysis of ARS 1 (by Moonitz) and ARS 3 (by Sprouse and Moonitz), which were sponsored by the APB at its inception. While the shortcomings of these documents are discussed in depth, viewing them within the historical context presented in Chapters 5 and 6 is far more important. For example, ARS 1 and ARS 3 say little, if anything, about user objectives. However user objectives did not begin to make an impact upon accounting theory until much later in the 1960s. The numerous concepts that have arisen on an informal basis as a result of the needs of accounting are examined next. We have used a somewhat arbitrary, but hopefully useful, classification scheme. We presume that students are generally familiar with these concepts. Our main purpose is to assess how important we believe these concepts will be in the future, particularly in light of the development of a conceptual framework. The chapter closes with a review of the equity theories of accounting. These are essentially deductive and normative types of theories that attempt to explain the relationship between the enterprise and its owners. These theories today take a back seat to empirical research findings in accounting. Nevertheless, they are still useful in terms of assessing certain accounting models. Q UESTIONS Q-1 Do you think the “broad principles” of ARS 3 are really principles as that term is used in science? A principle might be termed as an “enduring truth” in science. Unlike diamonds, however, they may not last forever. In ARS 3, “principles” are more like rules that are presumed to be useful, though other potential alternatives might be present depending upon factors such as costs and user needs. Such factors, however, were not considered in the early 1960s.
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Chapter 5: Postulates, Principles, and Concepts Instructor Manual 7 th edition Page 2 of 13 Q-2 “Assuming all other things equal, it is possible that the lower-of-cost-or-market method can result in any given year in higher income than would be the case under the same inventory costing method without the use of lower-of-cost-or-market. If so, then lower-of-cost-or-market cannot be classified as a conservative method.” Do you agree with this statement? Discuss. The first statement is true because beginning inventory may be lower as a result of a lower-of- cost-or-market write-down. If the ending inventory write-down is less than the beginning inventory write-down, a higher income will occur under lower-of-cost-or-market than would be the case without it. However, we would still classify it as conservative. Cumulative income must be equal or lower using lower-of-cost-or-market and the balance sheet valuation of assets is equal or lower in any given year. Therefore, we believe it is conservative in terms of the definition given in the chapter. Q-3
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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_05 - Chapter 5: Postulates, Principles, and Concepts...

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