Acc theory
Ch: One
1: describe the evaluation and history of double entry bookkeeping
2: what is the relationship between capitalism and accounting?
3: what is the relevance of accounting history?
4: describe why financial accounting standards inspire or encourage political action and social
involvement during the standards-setting process.
Answer:
1: Also known as ‘Italian bookkeeping’ because it was promulgated by Italian traders Firstknown double-entry accounting books are those of Massari of Genoa in 1340 Luca Pacioli, a
Franciscan friar, is credited with introducing double-entry bookkeeping because his is the first
published discussion on the topic (1494).
Sixteen century: Introduction of specific journals for recording of different types of transactions
Sixteen and seventeen century: Practice of periodical financial statements, Separate inventory
accounts for different types of goods
Nineteen century:
Depreciating property was accounted for as unsold merchandise
Twentieth century: the development funds’ statements and Development of accounting
methods for complex issues (e.g., earnings per share)
2: Capitalism is an economic system in which capital assets are privately owned and goods and
services are produced for profit in a market economy. Two factors helped the development and
evolution of capitalism is: Separation of business from the household, and rational bookkeeping
 Accounting is the study of the evolution in accounting thought, practices and institutions
in response to changes in the environment and societal needs.It is important to:
▫
Accounting policy and practice
▫
Better understanding present and to forecast or control future
3: Accounting history: is the study of the evolution in accounting thought, practices and
institutions in response to changes in the environment and societal needs.
The origins and development of accounting should receive more attention today. Sometimes
accountants fail to appreciate accounting history due to their focus on current or emerging issues.
As a result, they ignore some practices that still have relevance today.
4: for improvement in standards of financial reporting from 1900, New York stock exchange
required corporations to publish annual financial statements calls for protection of investors
board of examiners established in 1917 to create a uniform certified practising accountant (cpa)
examination. Because all of them will use the final report and they want to make decisions also
when involvement the setting process political action and social the financial report will be
highly strong.
Chapter Two: The Nature and Uses of Accounting
Q1. Definitions of Accounting: is the art of recording, classifying, and summarizing, in a
significant manner and in terms of money, transactions and events which are, in part at least, of a
financial character, and interpreting the results therefore “the process of identifying, measuring,
and communicating economic information to permit informed judgments and decisions by users
of the information”
Nature of accounting:
Role of Accounting: Is to produce information about the economic behavior resulting from a
firm’s activities within its environment
Q2. Measurement issue in accounting
Direct measures are actual measures of an object or its attributes. Indirect measures are derived
indirectly by an algebraic transformation of a set of numbers that themselves represent direct
measure of some objects or attributes.
 Accounting measures can be classified as: a past measure, a present measure, or a future
measure or Accounting measures can be classified as retrospective, contemporary or
prospective. Measurements can be either fundamental measurements or derived
measurements
 Types of scales
 Nominal: is the determination of equality. Most simple and use Groups like objects (e.g.,
chart of accounts)
 Ordinal: is the determination of greater or lesser. Indicates an order of preference and
Degree of preference among the ranks is not necessarily the same
 Interval: is the determination of equality of interval or difference like temperature.
change in the attribute being measured is equal
 Ratio scale: same as interval, but zero point has a unique quality
Q3: The Rational behind Double-entry Accounting
It consists of two kinds:

A classification double-entry: maintains the fundamental accounting equation (A= L + C)

A causal double-entry: describes the cause-effect relationship between an increment and
a decrement. In this type of accounting, the value of an increment (debit) is offset by an
equal value of a decrement (credit)
Q4:
Generally Accepted Accounting Principles (GAAP) is experience, reason, custom,
usage, and practical necessity’ and they ‘… encompass the conventions, rules, and procedures
necessary to define accepted accounting practices at a particular time. It is a guide to the
accounting profession in the choice of accounting techniques and the preparation of financial
statements. The conventions, rules and procedures included in GAAP have substantial
authoritative support
Q5: Income Smoothing Hypothesis:
Income smoothing represents an attempt on the part of the firm’s management to reduce the
fluctuations in earnings. It is deliberate normalization of income in order to reach a desired trend
or level, Using accounting techniques and methods to affect the net income to successive
accounting periods
Motivation for smoothing:
The reasons for smoothing: a stable level of future earnings and dividends, and has a favorable
effect on the firm’s shares. Counters the cyclical nature of reported earnings and reduces the
correlation of a firm’s expected returns with market returns
Constraints that lead to income smoothing:
•
Competitive market mechanisms that reduce options available to managers
•
A management compensation scheme that is linked to the firm’s performance
•
The threat of management displacement
Smoothing is classified into two dimensions:
Real Smoothing: Refers to the actual transaction that is undertaken or not undertaken on the
basis of its smoothing effect on income.
Artificial Smoothing: Refers to accounting procedures which an implemented to shift costs or
revenues from one period to another.
Chapter Three: Traditional Approaches to the Formulation of an Accounting Theory
Q1. Accounting: “is the art of recording, classifying, and summarizing, in a significant manner
and in terms of money, transactions and events which are, in part at least, of a financial
character, and interpreting the results thereof”

Fields of Accounting are: Financial reporting, Tax determination and planning,
Independent audits, Cost and management accounting National income accounting, and
Management consulting, International accounting, Governmental accounting
Q2. Refer to Chapter Two Questions 4
Q3: Theory construction: Develops from the need to provide a rational for what accountants do
or expect to be doing also explains and predicts accounting phenomena
Theory verification: means to validate the robustness of the theory, the verification should
explain and predict accounting phenomena; when such phenomena occur, if theory is unable to
produce the expected results, it should replace better theory.
Q5. Accounting Theory: A theory is defined as ‘a set of interrelated constructs (concepts),
definitions and propositions that present a systematic view of phenomena by specifying relations
among variables with the purpose of explaining and predicting the phenomena.
Q7. Approaches and values between accounting practice and research has led to the use of two
methodologies:
▫
Descriptive: In the professional world of accounting, the belief is widely held
that accounting is art, the traditional methodology of formulation Acc theory Is an
attempt to justify what is by codifying accounting practices
▫
Normative: is accounting theory attempts to justify what ought to be, rather than
what is, such theory is labeled to normative.
Q9. Deductive Approach: the construction of any theory begins begins with basic propositions
and proceeds to drive logical conclusions about the subject under consideration. This approach
moves from general (acc environment) to particular (acc principle first and acc techniques
second)
Inductive Approach: the construction of any theory begins with observations and
measurements and moves toward generalized conclusions. Inductive arguments are said from the
particular (Acc info depicting recurring relationship) to general ( postulates and principle
accounting)
CHAPTER 4
QUESTIONS and ANSWERS
1. Define accounting standards?
 Accounting standards provide practical and handy rules for the conduct of the
accountant’s work.
2. List the types of accounting standards and explain?
 It consists three parts:
 A description of the problem to be tackled
 A reasoned discussion of solving the issue
 The prescribed solution
3. List five of the institutions involved with setting accounting standards?
 The five Institutions Involved with Setting Accounting Standards are:
 Institute of Chartered Accountants, Australian Society of Certified Practicing
Accountants, Federal Attorney General (public prosecutor), Australian Accounting
Research Foundation and Australian Accounting Standards Board.
4. List other parts affected by accounting standards setting?
 Other Parties Affected by Accounting Standards Setting:
 Individual and Public Accounting Firms, Other professional Organizations and Users of
Financial Statements.
CHAPTER 4 QUESTIONS
4.1 Discuss the role and function of accounting standards?
 Some good reasons to establish accounting standards are:
 Provide users information about the conduct of the firm.
 Provide guidance for public accountants to enable them to exercise due care and
independence.
 Provide guidance for the government.
 Generate interest in principles and theories.
4.2 Outline the standard setting functions of the AASB and the FSAB, why did the profession
create the FSAB?
 Austrian Accounting Standard Board (AASB) is an Australian Government agency and
its functions are:

To develop a conceptual framework for the purpose of evaluating proposed standards.

To make accounting standards.

To formulate accounting standards for other purposes.

To participate in and contribute to the development of a single set of accounting
standards for worldwide use.

The Financial Accounting Standards Board (FASB) is a private, non-profit
organization market regulator whose primary purpose is to establish and improve
generally accepted accounting principles (GAAP) within the United States in the public's
interest.
4.5 Discuss alternative arguments about the legitimacy of the accounting standard setting
process?
 The pessimistic prognosis is the legitimacy of the standard setting process was
sometimes linked to its ability to produce optimal accounting systems.
 The optimistic prognosis in fact, Cushing gave an optimistic prognosis about the sheer
responsibility of optimal accounting principal, provided that assumptions of
heterogeneous users are dropped.
4.7 What are the differences between public regulation and self-regulation? Present some of the
advantages of self-regulation in the accounting profession. Finally, what is the main mechanism
for self-regulation?
 The private sector approach to the regulation of accounting standards rest on the
fundamental assumption that the public interest in accounting is best served if standard
setting is left to the private sector. Supported AASB and FASB.
 Public sector regulation has gained a high degree of legitimacy and become part of
Australian and international tradition and legal frame work. Supporters: Elliot and
schuetze.