Financial Accounting Theories: Questions and Answers

Financial Accounting Theories: Questions and Answers In the nature of theory, a positive theory of accounting or Positive Accounting Theory is a descriptive theory, which describes particular aspects of financial accounting practice. It seeks to predict, observe, and explain which accounting methods accountants will or will not use in particular circumstances and why managers and/or accountants elect to adopt particular accounting methods in preference to others. While a normative theory of accounting is a prescriptive theory, which prescribes how accounting should be undertaken. It generates guidance about what accountants should do. It seeks to tell accountants which accounting method in practice is the most efficient or equitable process and hence, which accounting method accountants should use. In the concept of theory, a positive theory of accounting is developed through inductive reasoning that is, through observations. The theory developed is based on observing what accountants do. While a normative theory of accounting is developed through deductive reasoning that is, logical reasoning. The theory developed is based more on the use of logic that is, what accountants should do rather than observation. If a normative theory of financial accounting has been developed to prescribe how we should do financial accounting, is it possible that we can decide to reject the theory because we do not with agree with a central assumption of the theory (such as an assumption about the objective of financial reporting), but at the same time decide that the theory is nevertheless logical? Explain your answer. Yes, we can reject a theory even that the theory is logical. For instance, the capital markets that we use as an assumption are efficient. Besides that, individuals are motivated by self-interest bind together with the wealth maximization. It might lead us to make particular prescriptions about what information organizations should produce. Self-interest means a core belief about what motivates individual action. However, we might consider that the prescriptions provided by the theory are unsound and potentially even negative impact to particular groups within society if we reject these assumptions. In short, we might even to believe that the theory is logically developed. Is the study of financial accounting theory a waste of time for accounting students? Explain your answer. In my opinion, the study of financial accounting theory is not a waste of time for accounting students. In fact, it is important for accounting students to study and understand financial accounting theories. This is because; accounting theories aim to provide a coherent and systematic framework for investigating, understanding and/or developing various accounting practices. The evaluation of individual accounting practices is likely to be much more effective if the person evaluating these practices has a thorough grasp of accounting theory. Without a thorough theoretically informed understanding of accounting, it is difficult to evaluate the suitability of current accounting practices, to develop improved accounting practices where current practices are unsuitable for rapidly changing business situations, and to defend the reputation of accounting where accounting practices are wrongly blamed for causing companies to fail. Hence, the insights from a varied range of accounting theorie s are essential to the process of continual improvement in financial accounting practices. In addition, students of financial accounting will also be required to learn how to construct and read financial statements prepared in conformity with various accounting standards and other professional and statutory requirements. In their working life, whether or not they choose to specialize in accounting, they could be involved in such activities as analyzing financial statements for the purpose of making particular decisions, compiling financial statements for others to read, or generating accounting guidance or rules for others to follow. As such, the better they understand the accounting practices underlying these various activities, the more effective they are likely to be in performing these activities and therefore, the better equipped they are likely to be to succeed in their chosen career. Explain the meaning of the following paragraph and evaluate the logic of the perspective described: In generating theories of accounting that are based upon what accountants actually do, it is assumed (often implicitly) that what is done by the majority of accountants is the most appropriate practice. In adopting such a perspective there is, in a sense, a perspective of accounting Darwinism a view that accounting practice has evolved, and the fittest, or perhaps best, practices have survived. Prescriptions or advice are provided to others on the basis of what most accountants do, the logic being that the majority of accountants must be doing the most appropriate thing. From approximately the 1920s to the 1960s, theories of accounting were normally developed on the basis of observation of what accountants actually did in practice. They were developed by the process referred to as sense. This can be contrasted with a process wherein theories are developed by deductive reasoning which is based more upon the use of logic rather than observation. Besides, returning to the use of observation to develop generalisable theories is based on the common practices which were codified in the form of conventions of accounting after observing what accountants did in practice. These approaches of the theories were adopted by Notable theories, which careful observation of accounting practice revealed patterns of consistent behaviour. For example, it could be observed that accountants tended to be very prudent in measuring both revenues and expenses. Where judgement was necessary it was observed that accountants usually underestimated revenues and overstated expenses. The result was a conservative measure of profit. Similarly, it could be observed that accountants behaved as if the value of money, which was the unit of account, remained constant. These observations of accounting practice led to the formulation of a number of hypotheses such as that where judgement is needed, a conservative procedure is adopted and that it is assumed that the value of money remains constant. These hypotheses were confirmed by many observations of the behaviour of accountants. While there was a general shift towards prescriptive research in the 1960s, some research of an inductive nature still occurs. Research based on the inductive approach has been subject to many criticisms. For example, Gray, Owen and Maunders (1987, p. 66) state that studying extant practice is a study of what is and, by definition does not study what is not or what should be. It therefore concentrates on the status quo, is reactionary in attitude, and cannot provide a basis upon which current practice may be evaluated or from which future improvements may be deduced. What role do values judgments have in determining what particular accounting theory a researcher might elect to adopt to explain or predict particular accounting phenomena? Value judgements have a major power to make with what theory a researcher might elect to use to explain or predict particular phenomena. These indicate that, we must consider the particular accounting theory researchers might use to explain the companies elect to produce information about their social and environmental performance. In case, I believed that company managers are motivated by self-interest. At that time, I would embrace a Positive Accounting Theory. A Positive Accounting Theory has self-interest as one of the fundamental assumptions about what drives human behaviour. These people would have a trend towards believing that all human activity. The activities include the disclosure of social and environmental information. This means that, it is undertaken to the limits that the activity can be related back to positively impacting the managers wealth. Besides, it typically requires people of current generations to offer current consumption to extent it is in the interests of future generations if I was a researcher who holds a vision of sustainable development. In this way, I would reject Positive Accounting Theory as self-interest and sustainable development are to mutually exclusive. For example, researcher would embrace another theoretical perspective such as legitimacy theory. However, there are no researchers in the area of social and environmental accounting enfolds Positive Accounting Theory although it is interesting to note that. Marks and Spencer: Human Resource Management Marks and Spencer: Human Resource Management Company Profile MS made a humble beginning as a single market stall; and have grown to become one of the UKs leading retailers of clothing, food, home products and financial services. MS employs 68,000 employees over 30 countries, has more than 500 stores and cater tens of millions of customers each and every week. MS is committed to provide superior quality products and that too at attractive prices. MSs turnover is  £8 billion. Values Success story of MS has been built on a number of core company values that have remained almost unchanged. These values are: Quality   Delivering excellent standards consistently. Value   Delivering exceptional value to customers. Innovation   Need to continue to be at the forefront of innovation in both general merchandising and food. Trust   The most trusted retailer. MS have a proud heritage of staff welfare, customer care and involvement in the community. Service   They are committed to deliver the best services to customers. Valued   Employees contribution to the business is rewarded. Fairly treated   Employees are respected and valued, whoever they are. Proud   Employees take pride in everything they do. Committed   To delivering great customer service. Involved   Employees are informed of new developments and kept up-to-date with the progress of the company. Challenged   Employees challenge each other constructively every day and work at full potential. From the above mentioned points it is clear that quality of Human Capital at MS forms the basis of their values. Its all about creating a working environment that encourages people to add to their skills, and where theyre provided with everything they need to achieve their potential. (Belinda, HR Head, MS) HR Policies and Rules: Service Rules: Promotion Policy Rules: Any opportunities for promotion are open to all and depend on ability, skills and experience. Wage Structure: Each job is positioned within a reward level according to level of responsibility and market value. This enables MS to: Provide competitive salaries for each job taking into account market rates. Reward everyone according to their contribution. Payment is by BACS (Bankers Automated Clearing System) so it goes straight into employees account. How pay is calculated If a person is on an hourly rate of pay, monthly pay is calculated as follows: Store administered employees (Hourly rate x minimum agreed weekly committed hours x 52.25)/12 Head Office administered employees (Hourly rate x minimum agreed weekly committed hours x 52)/12 For those on an annual salary, the calculation is: Annual salary/12 * The Company reserves the right to suspend pay where an employee fails to notify about absence from work. Employee motivation welfare schemes: Reward Policies Marks Spencer believes in sharing its progress and profitability and reward accordingly. They offer a range of benefits which are service-related, so they build up as service of an employee increases. Each element of the benefits package is reviewed regularly to ensure it remains competitive and maintains Marks Spencer as a leading employer. Some of them are: Employee Discount Car Allowance Healthcare Offers MS offers following healthcare options to all monthly paid employees and their partners: Private health insurance Dental plan insurance Hospital Saving Association (HSA). Travel Expenses Travel is an integral part of work for many people. Marks Spencer offers travel options and expenses so employees can travel in a secure and comfortable manner. Social Activities The Company provides a grant each year for sports and social activities which are organised at business unit/store level. Freeshares Sharesave Schemes Sharesave allows to save tax-free for three to five years and at the end of that period employee can buy Marks Spencer shares at a specially discounted price. Season Ticket Loans Catering They provide a subsidised catering service for all employees. Lifestyle Options MS provides following options and benefits: Flexible working Including a range of options: part-time working, job sharing, term-time working Unpaid special leave up to nine months. If an employee have two years continuous service and the timing fits with the operation of the business , he can take up to nine months unpaid leave. Paid special leave In case of serious personal difficulties, e.g. where a child is hospitalized. Unpaid leave up to 48 hours. Political appointments If an employee has a minimum of five years service, a break of five years is available for all who are wishing to become candidates for any UK or European parliament or assembly. Public duties/involvement in local community In case of any other public duties to attend, an employee can speak to his line manager for adjustments. Justice of the Peace or school governor If an employee intends to become, a Justice of the Peace or school governor, adjustments are made in the working hours. Armed Forces Volunteer Services Offer a period of paid leave to volunteers and ex-service men and women who are required to go on annual training exercises. Confidential helpline A 24-hour confidential support service which help employees to manage stress, personal, traumatic or financial issues which are affecting their attendance or performance at work. Maternity, Adoption, Paternity and Parental Leave entitlements. IVF Provide support if an employee or his/her partner is having IVF treatment. Fostering Support is provided if an employee is considering to become a foster parent. Health safety rules: MS is committed to ensure the health, safety and well being of all its employees, customers and others who visit or work in their premises. MS Policy on Health and Safety includes: The Health Safety Committee It advises on health safety policy, monitors its effectiveness and reviews key performance measures on a quarterly basis. The information is provided by the Fire, Health Safety Officer Network Groups which also meet quarterly. Information from each location is exchanged with Fire, Health Safety Officers at Business Involvement Group Meetings (BIG). The Store/Site Manager The Store/Site Manager is responsible for ensuring with Fire, Health Safety Officer that Company Health Safety Policy is implemented. This includes: Suitable Induction and Legislative Update training for Fire, Health Safety. The prevention, investigation and the reporting of accidents. The completion of ongoing Risk Assessments and maintenance of known hazard information. The Fire, Health Safety Officer (FHSO) He assists the Managers and works closely with the Central Retail Operational Support Fire, Health Safety team. Business Involvement Groups (BIGs) It represents all employees in a two way communication. They discuss health safety policy, performance and implementation as an agenda item at each meeting and update the business through the FHSO Networks. Retail Operational Support Group This group is responsible for determining and monitoring the Fire, Health Safety Risk Assessments, work practices and enforcement measures. Property, Development and Facilities Management They are responsible for the provision of working areas, equipment and materials that are safe and dont pose any risk to health. Occupational Health Services Under this, they provide advice and support to line managers on managing the impact of work on health, and health on work. It creates to safe, secure and pleasant working environment for employees. Training and development:  Personal Development Learning career development MS is committed to develop its employees into skilled, customer-focused, enthusiastic and motivated employees. They do this through training, developing the necessary skills and knowledge to perform effectively and fulfill potential. An employee is equally responsible for learning and development. One should actively identify training and development needs by recognising strengths and weaknesses. Proper formal training consisting of coaching and practical on-the-job experience, supported by a wide range of learning resources is provided. Training is given as and when required e.g. the implementation of new systems. Employees with disabilities MS help disabled employees to realise their full potential and provide them with the same career prospects and promotional opportunities that are available to all employees. In addition, they are provided with the retraining, rehabilitation and reasonable adjustments for those who become disabled during the course of working life. Review of performance Line managers review performance continually in order to assess how a particular employee is doing. It helps employee in assessing themselves and look for further development. Managing Diversity: Marks Spencer have a diverse range of employees and are committed to an active Equal Opportunities Policy. This doesnt just cover recruitment and selection procedures, but runs right through training and development, appraisal, promotion opportunities and eventually to retirement. MS is highly dedicated and committed to promote an environment free from discrimination, harassment and victimisation and work hard to ensure everyone is offered equality of opportunity to achieve their full potential. All the decisions are objective, free from bias and based solely upon work criteria and individual merit.   Highlights of Equal Opportunities Policy are: Promote a working environment free from discrimination, harassment and victimisation on the basis of: gender, sexual orientation, marital or civil partnership status, gender reassignment race, colour, nationality, ethnic or national origin, hours of work religious or political beliefs disability age Adequate concern is shown towards individuals personal circumstances and the needs of the business in order to find solutions to such issues. Reasonable adjustments are made to ensure that disabled workers or applicants are not placed at a substantial disadvantage by a practice or policy that exists at MS. Proper help is provided to people with disability or who have learning difficulty to complete the application process online and also in telephone assessment.