Chapter 1: Introduction to Accounting Theory

What is Accounting Theory Accounting Theory & Policy Making Measurement

Wolk & Thearney

Accounting Theory is defined as

the basic

the reporting of

assumptions definitions principles and concepts that underlie the rule making by a legislative body

accounting and financial information

applicable to financial accounting, not to

governmental or managerial

Accounting Theory includes

Conceptual Frameworks Accounting Legislation Concepts Valuation Models Hypotheses and Theories

Accounting Theory & Policy Making

3 inputs to policy making function

Accounting Theory Political Factors Economic Conditions

Accounting Practice implements the policy Users observe effects of implementation

Once policy is made

Financial Accounting Environment

Accounting Theory Political Factors Accounting Policy Making Accounting Practice Economic Conditions

Users
of Accounting Data and Reports

Accounting Theory

Political Factors Accounting Policy Making Accounting Practice

Economic Conditions

Audit Function

Users
of Accounting Data and Reports

Measurement is defined as
the assignment of numbers to the attributes or properties being measured

Measurement Categories

Direct or Indirect

Direct is preferable; managers like Indirect is a roundabout way of making the measurement Assessment measures are concerned with particular attributes of objects Prediction measures are concerned with factors that may be indicative of conditions in the future

Assessment and Prediction

Measurement Process

Is not simple There is not just one absolutely correct measure The process will depend on several factors:

1.

2.

3. 4.

5. 6.

The object itself The attribute being measured The measurer Counting operations Instrument used Constraints affecting the measurer

Measurement Types (NOIR)

Nominal

Most simple Groups like objects (e.g., chart of accounts)

Ordinal

Indicates an order of preference Degree of preference among the ranks is not necessarily the same

Interval: change in the attribute being measured is

equal

Ratio: same as interval, but zero point has a unique

quality

Quality of Measurements

Objectivity or Verifiability

The degree of agreement among measurers Statistically, this means the less variance there is, the higher the objectivity

Bias Timeliness Cost Constraint

SUMMARY: Introduction to Accounting Theory

What is Accounting Theory? Accounting Theory & Policy Making Measurement