Financial Accounting Theory Case Study

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Register to read the introduction… • Predict that organization seeks to be perceived by the community as legitimate and that accounting information can be used as a means of gaining, maintaining or regaining the legitimacy to the organization (i.e. Legitimacy Theory)

Chapter 1 – Financial Accounting Theory

1.2 A brief overview of theories of accounting
Different researchers have different perspectives of the role of accounting theory.
a. Some researchers believe that the principal role of accounting theory should be to “explain and predict” particular accounting-related phenomena.

b. Other researchers believe that the role of accounting theory is to “prescribe” particular approaches to accounting based on a perspective of the role of accounting. E.g. a theory that prescribes the assets should be valued on the basis of market values rather than historical costs.

Early development of accounting theory relied on the process of induction, that is, the development of ideas or theories through observation.
Period 1 (1920s to early
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That is, they were developed by the process referred to as “induction”. 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.
Period 2 (1960s and 1970s)
While some accounting researchers continued to adopt an inductive approach, a different approach becomes popular in the 1960s and 1970s. This approach sought to prescribe particular accounting procedures, and as such was not driven by existing practices. I.e. theories being developed based on development of arguments about what the researchers considered accountant should do.
Rather than being developed on the basis of inductive reasoning, these theories were being developed on the basis of deductive reasoning.
Period 3 (Late 1970s)
In the mid to late 1970s, there were further changes in the focus of accounting research and development and a great deal of accounting research had the major aim of explaining and predicting accounting practice, rather than prescribing particular approach.

Chapter 1 – Financial Accounting Theory

1.3 Positive research and normative
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To develop hypotheses from a theory of a researcher, the falsification(ist)s believe that these hypotheses must be of a form that allows them to be rejected if the evidence is not supportive of the hypotheses.

According to Popper and other falsificationists, knowledge develops as a result of continual refinement of a theory. When particular hypotheses are deemed to be false through lack of empirical support, the pre-existing theories will be refined (or abandoned).

Chambers provides a useful overview of falsificationisem. He states:
The falsification freely admits that “observation” is guided by and presupposes theory. He is also happy to abandon any claims implying that theories can be established as true or probably true in the light of observational evidence.

It is always safer to say that our evidence ‘supports’ a theory but that it is also possible that we might embrace an alternative theoretical perspective at a future time should better explanation for a particular phenomenon become

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