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Financial Accounting: Theory and Analysis: Text and Cases 12 Edition
Financial Accounting: Theory and Analysis: Text and Cases 12 Edition
Financial Accounting: Theory and Analysis: Text and Cases 12 Edition
Accounting
Theory and Analysis:
Text and Cases
12th Edition
Richard G. Schroeder
Myrtle W. Clark
Jack M. Cathey
Chapter 1
The Development of
Accounting Theory
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.”
Two major types:
1. Normative theory
2. Positive theory
Why is the development of a general theory of accounting
important?
Allocating scare resources
▪ Romans
▪ Renaissance
▪ Italians pursuing trade and commerce needed records
▪ Fra Luca Pacioli
THE EARLY HISTORY OF ACCOUNTING
▪ The evolution of joint ventures into ongoing businesses
▪ Caused need for external financial reporting
▪ By the end of the 19th century commerce was expanding and the
industrial revolution had arrived in the U. S.
▪ Widespread speculation in the securities markets, watered stocks, and large
monopolies that controlled segments of the U.S. economy resulted in the
establishment of the progressive movement
▪ A report reviewing these practices issued in 1900 suggested that an
independent public accounting profession should be established to curtail
observed corporate abuses.
THE EARLY HISTORY OF ACCOUNTING
▪ The “Capital Maintenance” concept evolved
viewed as a way to curb corporate abuses
▪ Changed from maintaining invested capital intact
▪ To maintaining physical productive capacity
▪ To maintaining real capital
▪ The accounting profession was also evolving at this time
▪ American Institute of Accountants (AIA)
▪ American Association of the University Instructors
in Accounting (AAUIA)
THE EARLY HISTORY OF ACCOUNTING
▪ After WWI, public perception was that business had reformed and
that external regulation was no longer necessary.
▪ The accountant’s role changed
from protector of third parties to protector of business interests
Admin Research
Staff Staff
FASB
The result was less tests that help detect the likelihood of fraud.
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)
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.
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