Chapter 1: Introduction to Accounting Theory

1. Chapter 1: Introduction to Accounting Theory • What is Accounting Theory • Accounting Theory & Policy Making • Measurement

2. the basic assumptions definitions principles and concepts that underlie the rule making by a legislative body the reporting of accounting and financial information applicable to financial accounting, not to governmental or managerial Accounting Theory is defined as

3. Accounting Theory includes • Conceptual Frameworks • Accounting Legislation • Concepts • Valuation Models • Hypotheses and Theories

4. Accounting Theory & Policy Making • 3 inputs to policy making function • Accounting Theory • Political Factors • Economic Conditions • Once policy is made • Accounting Practice implements the policy • Users observe effects of implementation

5. Financial Accounting Environment Accounting Theory Economic Conditions Political Factors Accounting Policy Making Accounting Practice Users of AccountingData and Reports

6. Accounting Theory Economic Conditions Political Factors Accounting Policy Making Accounting Practice Audit Function Users of AccountingData and Reports

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

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

9. Is not simple There is not just one absolutely correct measure The process will depend on several factors: The object itself The attribute being measured The measurer Counting operations Instrument used Constraints affecting the measurer Measurement Process

10. 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

11. 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

12. SUMMARY: Introduction to Accounting Theory • What is Accounting Theory? • Accounting Theory & Policy Making • Measurement