Chapter 1: Introduction to Accounting Theory Accounting Theory ( 5th edition) Wolk, Tearney & Dodd Copyright March, 2000 Chapter 1: Introduction to Accounting Theory What is Accounting Theory Accounting Theory & Policy Making Measurement Chapter 1: An Introduction to Accounting Theory

Accounting Theory is defined as 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 includes Conceptual Frameworks Accounting Legislation Concepts Valuation Models Hypotheses and Theories

Accounting Theory & Policy Making Accounting Theory ( 5th edition) Wolk, Tearney & Dodd Copyright March, 2000 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 Accounting Theory: developed and refined by the process of accounting research. Political Factors: refers to the effect upon policy making of those who are subject to it Economic Conditions: classic example is the high inflation rates of 1970s forced FASB to disclose price-level information Chapter 1: An Introduction to Accounting Theory

Accounting Theory ( 5th edition) Wolk, Tearney & Dodd Financial Accounting Environment Accounting Theory ( 5th edition) Wolk, Tearney & Dodd Copyright March, 2000 Accounting Theory Political Factors Economic Conditions Users of Accounting Data and Reports Practice Policy Making The Financial Accounting Environment Black line denotes the MAIN FLOW Dotted blue line denotes SECONDARY FLOW Chapter 1: An Introduction to Accounting Theory

Accounting Theory ( 5th edition) Wolk, Tearney & Dodd Copyright March, 2000 Accounting Theory Political Factors Economic Conditions Accounting Policy Making Accounting Practice Audit Function The Financial Accounting Environment Black line denotes the MAIN FLOW Dotted blue line denotes SECONDARY FLOW Users of Accounting Data and Reports Chapter 1: An Introduction to Accounting Theory

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 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

Measurement Process 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 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 Accounting Theory ( 5th edition) Wolk, Tearney & Dodd Copyright March, 2000 SUMMARY: Introduction to Accounting Theory What is Accounting Theory? Accounting Theory & Policy Making Measurement Chapter 1: An Introduction to Accounting Theory