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54 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What are the different measurement models? |
1. Historical cost 2. CPPA - current purchasing power accounting 3. CCA - current cost accounting 4. COCOA - continuously contemporary accounting 5. Fair Value |
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What is political economy theory? |
- LT, ST & IT derive from PET - Political economy is the social, political, and economic framework within which human life takes place. - Corporate reports not considered neutral and unbiased but are a product of the interchange between the corporation and its environment. - Two streams of political economy theory; classical; bourgeois |
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What are social contracts |
An implied contract representing the norms and expectations of the community in which an organization operates. |
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What is institutional theory |
- Explains how various practices, processes and organizational forms become similar or instutionalized within society. - Explains that organizations whitin particular institutional environment will become similar because of various, coercive, informative, and mimetic pressures - This process of becoming similar is referred to as isomorphism - The theory also predicts that there will be a decoupling of formal structures or forms and actual structures or forms. |
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What is stakeholder theory |
- Recognizes that the firm is a part of a greater social system and decisions cannot be made in isolation - Relationship between firm and shareholders must be carefully managed - Government and tax offices are shareholders - Popular for examining the disclosure decisions made for environmental and sustainable reporting |
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What is Legitimacy theory |
A theory that proposes that organizations need to operate within the bounds and norms of their respective societies. Compliance with societal norms and expectations is assigned the status of legitimacy. If legitimacy is not apperant then managers will embrace the process of legitimsatiom. |
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What does it mean when a firm is nexus of contracts |
- contracts (mechanisms) being put in place with the intention of ensuring that all parties, acting in their own self- interests, are at the same time motivated towards maximizing the value of the organization. - firm will have many contracts - contracts aim to reduce many conflicts of interest and related uncertainties that might otherwise arise |
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What is management compensation hypothesis |
Predicts that managers who are rewarded in terms of accounting numbers are more likely to select accounting methods that increase income to the extent that this will lead to an increase in the size of the bonus. |
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What does conceptual framework do? |
- Assist the IASB in the development of future IFRS and its review of existing IFRS - Assist preparers of financial statements in developing accounting policies for transactions or events not covered by existing standards |
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What is debt hypothesis? |
- Developed from PAT - proposes that organisations close to breaching accounting-based debt covenants will select accounting methods that lead to an increase in profits and assets |
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What is residual cost |
PAT assumes that not all opportunistic arrangement can be controlled by contractual arrangement. These cost occur despite the potential use of various bonding and monitoring mechanisms. |
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What is monitoring cost |
Cost incurred in monitoring the performance of others |
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What are agency cost |
-Costs incurred by owners because of asymmetric information or conflict of interest between principles (owners) and agents (managers). -Three commonly cited costs; 1. monitoring cost 2. bonding cost 3. residual cost |
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What is bonding cost |
Costs that are borne by agents. Bonding occurs when the agent gives a guarantee to undertake or not to undertake certain activities. |
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Positive Theory vs normative Theory |
Both have a different role, not appropriate to say one is better than the other. Rather than seeing them as competing, they can actually be used in a complimentary manner. |
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What is an agency |
Relationship between two parties, were one is a principal and the other is an agent who represents the principal in transactions with a third party |
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What is agency Theory |
A theory explaining the relationship between principals and agents. In this relationship the principal Delegates or employes an agent to perform work in the best interest of the principal. The delegation of decision-making authority can lead to a loss of efficiency and consequently increased cost, often referred to as agency cost. |
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What is positive Theory |
- Provide the basis for explaining or predicting particular phenomena - seeks to explain or predict particular financial reporting practices |
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What is normative accounting Theory |
Seek to prescribe particular approaches to or methods of financial accounting with these prescriptions being based on particular perspectives about the role of financial accounting and the needs and expertise of financial statement readers |
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What is PAT? |
- A theory that seeks to predict and explain why managers and accountants elect to adopt particular accounting methods in preference to others. - Developed by Watts and Zimmerman and others it is concerned with explaining accounting practices. - Designed to explain and predict which firms will and will not use particular accounting methods but says nothing about which method a firm should use. - Based on the central economics-based assumption that all individuals actions are driven by self interest. |
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What does understandability mean |
Classifying, characterizing and presenting information clearly and concisely |
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What does timelessness mean |
Having information available to decision makers in time to be capable of influencing their decisions |
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What does verifiability mean |
Ability to ensure that information represents what it purports to represent or that the chosen method of measurement has been used without error or bias |
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What does comparibility mean |
Permits the identification and understanding of similarities and differences between items of information |
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What does relevance mean |
Financial information is relevant if it would potentially affect or make a difference in a user's decision |
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What does faithful representation mean |
Information which faithfully represents an information complete, neutral and free from error |
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What are the qualitative characteristics of accounting |
Two main ones 1. relevance 2. faithful representation Four enhancing ones 3. comparability 4. verifiability 5. timelessness 6. understandability |
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Who benefits from conceptual framework |
- Accountants (clear guidance) - consistency |
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What are the disadvantages of conceptual framework |
- Smaller organisation may feel over burdened by reporting requirements - represent a codification of existing practice - expensive project - economic in focus - no guidance for environmental or sustainable reporting |
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Arguments in support or reducing regulation of financial accounting |
- Free market - accounting information is like any other goods - individual will act in their own self interest - managers will have incentives to provide information - managers are the best to determine what method of Accounting are best - lemons |
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What is creative accounting |
An approach to accounting where in objectivity is not employed but rather those responsible for the preparation of accounts select accounting methods that provide the accounting result desired by the preparers |
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What are the five elements of financial reporting |
1. Assets 2. liabilities 3. equity 4. expenses 5. income |
Ann lived in England Europe |
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What is the cost of conceptual framework |
-Collection -storage -retrieval -presentation -analysis -interpretation |
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What are the benefits of conceptual framework |
- Development of standards more economical - reduce needs for additional standards - sound economic decision making by users - consistent accounting standards - standard Settlers should be more accountable for ther decisions - communication between standard Settlers and constituents more enhanced |
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What is the conceptual framework |
- A coherent collection of ideas concepts and objectives that systematically flow from an objective and guide the fulfillment of that objective - defines what financial reporting is and what it seeks to do and what it contains - prescribes what's objectives of Accounting are - what qualitative characteristics should possess - how elements should we defined - when elements are recognised - how they should be measured |
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What are normative Theories |
- Theories that seeks to inform you of what should be no more acceptable or best practise - they are not concerned about what is currently happening or in predicting what will happen in the future - concerned with what should be happening right now conceptual framework is an example of normative Theory - it prescribes what financial accountants should or must do |
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Disadvantages of fair value |
- Pays less attention to the effectiveness of management - challenged as being appropriate in times of wildly fluctuating asset prices (crisis) - some criticism might be unfair |
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Advantages of fair value |
- Offers more scope to value assets - supported by ifrs |
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Disadvantages of COCOA |
- Involve a fundamental shift in financial accounting - relevance of exit prices questioned - assets of specific nature considered to have no value - requires assets to be valued separately rather than a bundle - not recognise goodwill as asset |
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Advantages of c o c o a |
- Assist with additivity - no need for arbitrary cost allocation for depreciation as gains or losses on assets are based on movements in exit price |
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Disadvantages of CCA |
- Replacement cost of assets may not be the same for all firms - some firms may not choose to replace the asset - if the entity requires replacement assets it may be more efficient and Less costly to acquire different assets - replacement cost does not reflect what the asset would be worth if sold -difficult to determine replacement cost |
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Advantages of CCA |
- More details concept of profit due to the separation of holding gains and losses - better compatibility of various entities |
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Disadvantages of cppa |
- Adjusted historical values probably don't reflect the value of the assets today - information generated under cppa may be confusing to users |
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Advantages of cppa |
- Simple process - relies on data already available under historical cost - no need to incur costs or effort to collect data about current asset values - CPI data also readily available |
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Disadvantages of historical cost |
- Does not account for price fluctuation - during inflation assets recorded in balance sheet lose their value relative to the recorded purchase price - overstate assets - not giving investors the information they really need |
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Advantages of historical cost |
- Simple and objectives - difficult for dodgy accountants to rort |
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What is fair value |
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date |
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What is cocoa (continuously contemporary accounting) |
- Based on valuing assets at net selling price (exit price) at balance dates on the basis of orderly sales - referred to as current cash equivalents - balance sheet considered to be the prime financial statement - profit directly relates to changes in adaptive capital - adaptive capital reflected by the total exit values of assets |
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What is CCA ( current cost accounting ) |
-Based on actual valuations not adjusted historical cost - differentiates between profits from trading and holding gains - holding gains can be realises or unreleased - incomplete perspective adopted will determine whether holding gains or losses treated as income |
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What is CPPA (current purchasing power accounting) |
-Base on the view that in times of rising prices, if an entity where to distribute unadjusted profits based on historical cost, in real terms the entity could be distributing part of its capital - a price index is used when applying general price level accounting |
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What is historical cost |
- Assets are recorded at the amount of cash or cash equivalent paid or the fair value or the consideration given to acquire them at the time of their acquisition - liabilities are recorded at the amounts of proceeds received in exchange for the obligation or in some circumstances at the amount of cash or cash equivalent expected to be paid to satisfy The Liability in the normal course of business |
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Why different countries have different system of accounting |
- Underlying laws and political system - tax systems - level of Education - level of economic development - nature of business ownership - Colonial inheritance - taxation - culture - history - language - religion |
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Development of Accounting standards |
- Draft standards developed - released to public - final standards developed - adopted by IASB - written submission made during release to public -political process |
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Arguments against reducing regulation of financial accounting |
- Free good - managers ability - average outcomes - markets are not always efficient - only once with power will get information - lemons |
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