MACC615 Accounting Theory : Essay Fountain

Question:

Financial Accounting theory and analysis by Richard Schroeder, Myrtle Clark and Jack Cathey Responses should apply the concepts from the chapters chap 4 and 5 and your individual thoughts and understanding.

Research Methodology

Various research methodologies are available with which to study the development of accounting theory.

Required:

Discuss the deductive, inductive, and pragmatic research methods. Include in your discussion examples of accounting research that used each method.

Agency Theory

Agency theory provides an explanation for the development of accounting theory.

Required:

Discuss agency theory, including its basic assumptions, agency relationships, why the political process affects agency relationships, and why it does or does not explain accounting theory.

Revenue Recognition

In 2013 Airbus announced a contract to deliver 50 A380 airplanes to Emirates for $20 Million to be delivered between 2016 and 2018.

Required:

Outline the five- step revenue recognition process for this transaction.

The Concept of Conservatism

The concept of conservatism has been influential in the development of accounting theory and practice. A major effect of conservatism is that accountants tend to recognize losses, but not gains. For example, when the value of an asset is impaired, it is written down to fair value and an unrealized loss is recognized in the income statement. However, when the asset’s value appreciates, its value is not written up to fair value. (An exception is current accounting for investments in securities having readily determinable fair values.) Stated differently, accountants tend to recognize holding losses, but not holding gains.

  1. Define conservatism.
  2. Why do you believe conservatism has affected financial reporting? Explain.
  3. Do you believe that financial statements that recognize losses but not gains provide information that is relevant and representationally faithful? Explain.
  4. Do you believe that the concept of conservatism is consistent with the physical capital maintenance concept? Explain.
  5. Do you believe that the concept of conservatism is consistent with the financial capital maintenance concept? Explain.
 

Answer:

Case 4-4 Research Methodology

Several research methodologies help in developing accounting theory. Accounting theory includes the deductive approach, inductive and pragmatic research as the deductive approach includes the development of theory for identifying objectives. The deductive approach is essential for a mental type of research for accounting theory which includes the capability to correctly identifying and relating the various components for the process of accounting. In research, inductive approach includes the observation and conclusion that are observed as it includes the specific observation for specific situations. In case of pragmatic approach, the concept of utility which includes the researcher attempts to identify a utilitarian solution. In the solution, U.S. GAAP includes the deductive, inductive and pragmatic theory in the accounting research (Ihuah and Eaton, 2013).  

Case 4-5 Agency theory

In the accounting approach, accounting theory is used as a principle for clarifying and determining the issues for building the relationship in the business principles and the agents. Agency theory is considered as the positive accounting theory which helps in explaining the accounting practice and standard. The assumptions of agency theory include that the individuals maximizes the estimated benefits and their resources. Agency theory includes shareholders and managers relationships for becoming the owners. The process of political affects the agency relationship as it involves the costs to the principals (Lambert, 2006). The cost includes the sum of monitoring expenditures by the principal and bonding expenditures by the agent and the residual losses. Agency theory includes the act of individual act for maximizing their own utility in which managers and shareholders expect to incur bonding and monitor the costs.

Case 5-5 Revenue Recognition

In this case of transaction the five-step revenue recognition process this is included in steps

In step 1. It needs to determine the contract with the customer. The next step is to determine the requirements for performance obligations in the contract. In the next step, the transaction price is determined and then the transaction price is assigned to the performance obligation in the contract. In the final step, the company’s satisfactory income needs to be recognized as a performance obligation (Schipper, et al., 2009).

 

Case 5-8. Concept of Conservatism

  1. Accounting conservatism includes the set of bookkeeping guidelines for the verification of the company which helps in making a legal claim. The theory of conservatism is influential for the expansion of theory of accounting and practices. The conservatism result to the accountant as inclines to recognize loss but not gains.
  2. Conservatism helps raise awareness, partially offsetting management’s external optimism and overestimating the trend of financial statements. Financial reporting is affected by robustness because the principles of robustness include concepts in GAAP accounting that help to identify and record expenses and liabilities as quickly as possible, but recognize revenue and assets when it is guaranteed to be available. It includes clear guidelines for recording uncertainty and estimates. The conservative principles of accounting include that mistakes should always be made in the most conservative aspects of financial transactions. It helps to maximize the revenues by stating uncertain losses or expenses without declaring uncertain or estimated returns (Lara, et al., 2016).
  3. Financial statements help in providing the information which is relevant and represent it with faithfully as the standards of international Accounting in which Standard board and the Financial Accounting Standards Board as financial statement are necessary for the organization. It is necessary for the organization to recognize the gains as well as gains for the future growth and benefits.
  4. The conservatism concept is consistent along with the concept of tangible capital maintenanceas it is analyzed that the conservatism helps in maintaining the capital of the organization. FASB includes the impact of conservatism in financial reporting. Conservatism helps in overriding the holding-gaining arguments as the accountants believe to place in maintaining the capital in the organization (Kim and Zhang, 2016). In FASB, the decisions are included in faithfully representing the aspects that are considered as inconsistent with the character of neutrality. Financial information is required to encourage the users for taking and avoiding predetermining actions and the information is considered as neutral.
  5. Yes, I believe that the concept of conservatism is consistent with financial capital maintenance concept as the conservatism principle includes the concept of recognizing the expenses and liabilities. The conservatism principle in accounting is the general adhere the principle in lowering the profits which are recorded in the statements (Cohen and Holder-Webb, 2006).
 

References

Cohen, J.R. and Holder-Webb, L.L., 2006. Rethinking the influence of agency theory in the accounting academy. Issues in Accounting Education, 21(1), pp.17-30.

Ihuah, P.W. and Eaton, D., 2013. The pragmatic research approach: A framework for sustainable management of public housing estates in Nigeria. Journal of US-China Public Administration, 10(10), pp.933-944.

Kim, J.B. and Zhang, L., 2016. Accounting conservatism and stock price crash risk: Firm?level evidence. Contemporary Accounting Research, 33(1), pp.412-441.

Lambert, R.A., 2006. Agency theory and management accounting. Handbooks of management accounting research, 1, pp.247-268.

Lara, J.M.G., Osma, B.G. and Penalva, F., 2016. Accounting conservatism and firm investment efficiency. Journal of Accounting and Economics, 61(1), pp.221-238.

Schipper, K.A., Schrand, C.M., Shevlin, T. and Wilks, T.J., 2009. Reconsidering revenue recognition. Accounting Horizons, 23(1), pp.55-68.

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