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ACCOUNTING THEORY: TEXT AND READINGS
RICHARD G. SCHROEDER MYRTLE CLARK JACK CATHEY
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CHAPTER 1
THE DEVELOPMENT OF ACCOUNTING THEORY
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Introduction What is theory?
Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.”
Normative theory (what should be)Positive theory (what is)
A good theory should cover the two of them
Why is the development of a general theory of accounting important?
What is the relationship of accounting research to accounting theory?
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Introduction What is theory?
Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide
variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.”
Theory may be described as:Normative theory (what should be)Positive theory (what is)
A good theory should cover the two of them
The goal of accounting theory is to provide a set of principles and relationship that explains observed practices and predicts unobserved practice
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Introduction What is theory?
Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide
variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.”
Theory may be described as:Normative theory (what should be)Positive theory (what is)
A good theory should cover the two of them
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THE EARLY HISTORY OF ACCOUNTING
The Zenon Papyri (30 B.C, founded in 1915)
The impact of the Renaissance Fra Luca Pacioli – Summa de Arithmetica Geometria Proportioni et
Proportionalita (1419)
The evolution of joint ventures into ongoing businesses The impact of the industrial revolution and the
progressive movement The concept of capital maintenance The accountant as a protector of business interests
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ACCOUNTING IN THE UNITED STATES SINCE 1930 Meetings between NYSE and AIA AAA SEC
Securities Act of 1933Securities Exchange Act of 1934
Committee on Accounting Procedure Accounting Principles Board Financial Accounting Standards Board
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THE ACCOUNTING PRINCIPLES BOARD Formation and structure Types of pronouncements
APB Opinions The flap over accounting for the investment
tax Credit Rule 203 Criticism of the APB
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THE FINANCIAL ACCOUNTING STANDARDS BOARD
The Wheat Committee The Trueblood Committee The FASB was established The structure of the FASB
is illustrated in the following diagram
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Structure of the FASBFinancial
AccountingFoundation
Board ofTrustees
AppointElectors
GovernAppoint and fund
FinancialAccountingStandardsAdvisory
Committee(approx.
20 members)
Financial Accounting Standards
Board(7 members)
Task Forces of the Standards Board
Appointt
Admin. Staff
Research Staff
||||||
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Appoint andfund
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FASB Mission Types of pronouncements
Statements of Financial Accounting ConceptsStatements of Financial Accounting StandardsInterpretationsTechnical Bulletins
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FASB Emerging Issues Standards Overload Standard setting as a political process Economic Consequences
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GAAP
Evolution of phrase: Changed wording of auditor’s certificate brought about by
meetings between NYSE and AIA The APB’s definition The Auditing Standards Executive Committee’s definition
The current sources of GAAP consist of four levels described as A, B, C, and D by Statement of Auditing Standards No 69
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GAAP Hierarchy
LEVEL A: FASB StatementsFASB Interpretations
SEC Rules and Interpretive ReleasesAccounting Principles Board Opinions (unless amended)
Account Research Bulletins (unless amended)
LEVEL B: FASB Technical Bulletins
AICPA Industry Audit Guides that have been reviewed by the FASB
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GAAP Hierarchy
LEVEL C: AcSEC Practice Bulletins that have been reviewed by the FASB
Consensuses reached by the EITF
LEVEL D: AICPA Accounting Interpretations (no longer issued)
FASB Implementation GuidesOther widely recognized or prevalent accounting practices
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The Business Reporting Research Project Steering Committee Working Groups
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THE ROLE OF ETHICS IN ACCOUNTING The public accountant as a
watchdog
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Accounting in Crisis – The Events of the Early 2000s Enron and the Accounting Scandals
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Accounting in Crisis – The Events of the Early 2000s
Two major changes in the accounting profession have taken place in the wake of the accounting scandals:
1. Arthur Andersen
formerly one the Big 5 audit firms has gone out of business
2. Sarbanes-Oxley Act President Bush signed into law July 2002 imposes a number of corporate governance rules on publicly traded
companies (Discussed in Chapter 17).
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International Accounting Standards
The concept of harmonization The IASB The IASB’s objectives:
1. To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance
2. To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements.
41 Statements of Accounting Standards and 5 Statements of Financial Reporting Standards to date
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