Accounting Theory and Issues - Doc
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Accounting theory and issues
Table of ContentsAccounting theories: Normative & Positivism............................................................................1Limitations of accounting theories...............................................................................................1No single unified theory of accounting........................................................................................1Pressures and motivation of accounting method..........................................................................2Creative accounting......................................................................................................................2Financial statement preparation and influencing factors.............................................................2Accounting framework................................................................................................................3ASSESS ACCOUNTING POLICIES AND ESTIMATES OF WESTFIELD CORPORATION..3Accounting policies and estimates...............................................................................................3Flexibility assessment..................................................................................................................4Competitors accounting policies and estimates...........................................................................5Comparative evaluation...............................................................................................................5Agree or disagree.........................................................................................................................5Presenting accounting strategy.....................................................................................................5Red flags......................................................................................................................................5Accounting position.....................................................................................................................6CRITICAL EVALUATION OF ACCOUNTING QUALITY........................................................6Political pressure of accounting standard setting environment....................................................6Disclosure requirements...............................................................................................................7Investigation report......................................................................................................................7REFERENCES................................................................................................................................9
Accounting theories: Normative & Positivism Accounting is a standardized system that presents the detailed informative picture ofcompany’s financial transactions undertaken in a given year. In current era, company’saccounting system can be seems to a carefully constructed theories by which firms tend torepresent the best performance. There are two theories which are highly popular, normative andpositive. First is based on application of theoretical principles that accountant must use likecurrent cost accounting, deprival –value accounting and exit-price accounting. It begins withtheoretical underpinning and then move towards designing specific accounting policies hence,regarded as deductive approach (What Are the Differences Between Positivism and NormativeAccounting?, 2015). For instance, before crisis, there were no need of assets revaluation, whilst,following the period of crisis, with the coming of marked to market approach, revaluationbecome necessary. However, later view entire company as a total of all the contracts that it had made in areporting period. By this way, efficiency is the core key driver behind company’s success whichbelieves that firms can gain high value only by reducing contractual cost (Deegan, 2013). Thus,it evaluates real life happening events and examine that how companies accounted suchoccurrence. Limitations of accounting theoriesThe key criticism of normative theory is that it does not clarify that which accountingprinciple must be used in different situations and contract type has a significant impact over theselection of accounting method (Coetsee and BUYS, 2016). For instance, it does not clarify thatwhether cost and benefits from a contract should be recognized immediately or over the time. However, PAT is based on prediction which might prove wrong in dynamic era. Besidesthis, Bazrafshan and Talebnia (2016), criticized it because it avoid and undermine theoreticalaspects. For instance, financial institutions accounted their financial securities in such a mannerthat hid change in material which was persistent to their day to day operations. No single unified theory of accountingExamining PAT & NAT, it becomes clear that first is highly practical whereas later ismore theoretical. PAT is an individual self-interest driven approach and in this, individual acts1
opportunistically for wealth maximization. Its efficient perspective works on minimizing theiragency cost. Hence, loyalty and morality notions are not covered (Cao, Chychyla and Stewart,2015). However, NAT seeks to facilitate in selecting most appropriate policy by providingconceptual framework. Both the method has their own drawbacks henceforth, none of the theorycan be considered as a unified approach. Pressures and motivation of accounting method Managing threatening real life events encourage and motivate accountant to usepositivism theory for the self-benefit because it have an opportunistic perspective that aims atdriving efficiency through cost minimization. However, in order to promote morality, NAT isconsidered appropriate because it focus on theories. Creative accounting Providing misleading financial information by exploitation of accounting loopholes so asto present favorable performance is called creative accounting. Although, in this, firms followaccounting laws, principle and rules, still, they do not support the key aim which the standardintend to achieve by giving false information. Earning management is the most popular way ofCA in which, firms deliberately present higher return from their operations to mislead theirstakeholders. For instance, if a firm excessive loss then in order to satisfy shareholder, it will useEM so as to build confidence among investors that their investment is safe. This in turn, they willretain their fund in the corporation so as to gain good return. Thus, companies use CA in order tocreate good market impression, stay competitive and build confidence among stakeholders, moreimportantly, shareholders. Financial statement preparation and influencing factors Initially, business records all the business transaction into journal on the basis on doubleentry book keeping system.Afterwards, all the journal entries are posted into ledger which provides details on eachindividual account. After ledger, trial balance is constructed to know arithmetical accuracy either followingtotal method or balancing method (Cao, Chychyla and Stewart, 2015).2
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