Chapter 4 - Solution Manual

Accounting research theories are put forth as

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accounting research theories are put forth as attempts to discover an objective reality, and there is an expressed or implied belief that the observed phenomena are not impacted by the research methodology. In summary, mainstream accounting research is based upon a belief in empirical testability. c. In contrast, critical perspective research is concerned with the ways societies, and the institutions that make them up, have emerged and can be understood. Research from this viewpoint has been claimed to be based on three assumptions:
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69 1. Society has the potential to be what it is not. 2. Conscious human action is capable of molding the social world to be something different or better. 3. No. 2 can be promoted by using critical theory. Case 4-7 a. No. Financial reporting should be neutral. According to SFAC No. 5, neutrality means that in either formulating or implementing accounting standards, the primary concern should be the relevance and reliability of the information being provided, not the effect that the accounting standards will have on a particular interested party. That is, accounting information should be free from bias toward a predetermined result. Neutrality implies that accounting information reports economic activity and financial position as faithfully as possible without attempting to influence behavior in some particular direction. Accounting information that is not neutral loses credibility. Employers who provide postretirement and postemployment benefits presumably do so because the employees earned these benefits while they worked. If so, these costs accrue during the employment period. When they are accounted for, accrual or pay-as-you-go, does not affect the amount and timing of the future payments. Management decisions should be based on how they affect cash flows, i.e., their economic impact, not on how accountants report economic events. b. Arguably, there are social costs associated with the accounting for postemployment and postretirement benefits. If management reacts to the accounting change be curtailing benefits, the cost is real and obvious. Employees will not receive benefits as they did before. Other possible costs might include agency costs such as management compensation or debt covenant agreements. If management’s compensation is based on net income, expensing the cost of providing these benefits early will reduce net income and management’s bonus. Reporting previously unreported liabilities for future benefit payments would negatively affect debt-to- equity ratios that may be perceived by the stock market as increased risk and may violate existing debt covenant agreements. c. Critical perspective proponents would argue that the social costs (see b.) outweigh the benefits, if any, of reporting postemployment benefits and postretirement benefits in accordance with the new pronouncements.
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