Accounting Theory and Research Quiz

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Questions and Answers

What describes a theory in the context of accounting?

A set of laws and regulations governing financial reporting.

A personal opinion or belief regarding accounting practices.

An organized way of thinking that provides explanations for certain phenomena. (correct)

A collection of unrelated thoughts about a subject.

What aspect of accounting does the relationship between theory and research highlight?

The irrelevance of theories in the field of accounting research.

The prohibition of theory in favor of empirical data.

The dependency of research on established accounting theories. (correct)

The independence of theory and research in accounting.

What is a primary purpose of accounting theories?

To obscure the principles of accounting for advanced theorists.

To provide a structured approach to understanding accounting practices. (correct)

To create complex equations for financial calculations.

To formulate strict rules for financial reporting.

What is the primary reason for researchers to select one theory over another?

They are based on value judgments. Signup and view all the answers

How can the rejection of critical assumptions affect predictions in research?

It can invalidate the prediction. Signup and view all the answers

What aspect of evidence is crucial to validate a theory?

Supportive and non-conflicting evidence is needed. Signup and view all the answers

What does the statement 'all research emanates from the researcher’s implicit or explicit theory' imply about the relationship between theory and research?

Theory provides a foundation for formulating research questions. Signup and view all the answers

In evaluating theories, why should one be cautious about expecting perfect explanations of human behavior?

Theories are simply abstractions of reality. Signup and view all the answers

What is the primary purpose of theories in understanding human behavior?

To describe, prescribe, and explain human actions Signup and view all the answers

Which group of users is most likely to rely on working theories?

Managers and investors Signup and view all the answers

What distinguishes scholarly theory from common-sense theory?

Scholarly theory relies on systematic research Signup and view all the answers

Which type of theory is focused on predicting human behavior?

Predictive or positive theory Signup and view all the answers

What is a characteristic of a common-sense theory?

Rooted in personal experiences Signup and view all the answers

What is the role of accounting information in decision-making?

It aids in making sense of financial performance Signup and view all the answers

What type of theory provides more accurate explanations for financial accounting than common-sense theories?

Scholarly theory Signup and view all the answers

Which of the following is NOT a purpose of theories?

To eliminate the need for empirical evidence Signup and view all the answers

What is the primary focus of descriptive theories in accounting?

To describe common accounting practices. Signup and view all the answers

Which of the following is a disadvantage of prescriptive (normative) theories?

They assume there is one 'best way' to do something. Signup and view all the answers

Predictive theories are characterized by which of the following?

Concern for explaining and predicting outcomes. Signup and view all the answers

Which statement correctly differentiates descriptive theories from predictive theories?

Descriptive theories focus on existing behaviors, while predictive theories forecast future developments. Signup and view all the answers

What role does culture play according to accounting theories?

It affects how accounting information is provided based on individual backgrounds. Signup and view all the answers

Which aspect is NOT a characteristic of prescriptive theories?

They are non-value laden. Signup and view all the answers

Which is an example of what predictive theories in accounting might do?

Predict the impact of changing regulations on asset financing. Signup and view all the answers

Why are descriptive theories generally accepted by the majority?

They align closely with common practices. Signup and view all the answers

Which statement accurately reflects the non-value laden nature of predictable theories?

They focus on quantifiable outcomes and predictions. Signup and view all the answers

What is an advantage of descriptive theories in relation to COVID-19 infection rates?

They are typically accepted by the majority of people. Signup and view all the answers

Which type of theory developed during the 1960s and 1970s focused on prescribing specific accounting practices?

Normative theories Signup and view all the answers

What criticism was leveled against the inductive method of theory development?

It assumes current practices are always the best. Signup and view all the answers

Which of the following best defines positive theories in accounting?

Theories that predict and explain accounting phenomena. Signup and view all the answers

What was a significant focus of the research conducted in the mid to late 1970s regarding accounting theory?

Understanding and predicting accounting practices. Signup and view all the answers

What was a key characteristic of descriptive theories of accounting?

They rely on observation to develop theories. Signup and view all the answers

What does the term 'materiality' refer to in accounting?

The relevance of an item's inclusion in financial statements. Signup and view all the answers

Which of the following is NOT a focus of regulatory theories in accounting?

Best practices for financial reporting standards. Signup and view all the answers

Why is there no universally accepted theory of accounting?

There are many varying perspectives on its role and objectives. Signup and view all the answers

What is a primary objective of accounting regulation?

To enhance the efficiency of capital markets. Signup and view all the answers

Study Notes

Lecture 1: Introduction to Accounting Theory

The lecture is an introduction to accounting theory
Recommended textbooks include:
- Deegan, C., and Unerman, J. (2011). Financial Accounting Theory. (2nd ed.). European Edition. McGraw-Hill. (D&U) [Main text I]
- Rankin, M., Stanton, P., McGowan, S., Ferauto, K., and Tilling, M. (2022). Contemporary Issues in Accounting. (3rd ed.). Wiley. (R) [Main text II]
- Godfrey, J., Hodgson, A., Holmes, S., and Tarca, A. (2010). Accounting Theory. (7th ed.). Wiley. (GHHT) [additional reading]
Additional journal articles are available for download on blackboard
Background reading for Lecture 1 includes:
- D&U Chapter 1
- Rankin et al. Chapter 1; Chapter 5, pp. 131-134
- GHHT Chapters 1 & 3

Overview of Lecture 1

Defining accounting theory
Types of accounting theories
Development of accounting theory over time
Relationship between theory and research
Evaluation of theories

What is a theory?

An organized way of thinking about a subject
A set of ideas that explains something
A scheme or system of ideas (Oxford English Dictionary)
A statement of concepts and their interrelationships that explains how/why a phenomenon occurs (Corley & Gioia, 2011: 12)

What is the purpose of theories?

To make sense of the world (physical, social, psychological phenomena) and communicate understanding to others.
To make sense of financial accounting information (financial statements, reports)
Accounting information is compiled and interpreted by people.

Types of Theory

Common-sense theory: Used by lay people based on personal experience. Example: "It is not what you know, but who you know." [Example link referenced in slides]
Working theory: Used by experts like managers, investors, and auditors. [Example link referenced in slides] Example: Crisis communication should prioritize key stakeholders.
Scholarly theory: Used by academics. Example: Accounting choice is driven by managerial factors. Example of accounting theory discussed is positive accounting theory.

Scholarly Theory

Undergoes systematic research
Provides more thorough explanations for financial accounting than common-sense or working theories

Purpose of Theories

Descriptive theories: Describe what people do. Based on common practice. Example: Common ways to avoid high COVID-19 infection rates. Common practice of accounting for fixed assets.
- Advantage: Commonly accepted.
- Disadvantage: Doesn't allow for change or critical evaluation.
Prescriptive theories (normative theories): Suggest the best way to deal with human behavior. Example: Prescribing particular accounting practices. What people should do
- Advantage: Improves accounting practices
- Disadvantage: Assumes that there is only one "best way".
Predictive theories (positive theories): Explain and predict human behavior. Example: Explain why managers choose particular accounting methods [Example of theory]. -Concerned with explaining reasons for outcomes and predicting future outcomes. Example: Predicting effect of a change in social behaviour on infection rates. Explaining the characteristics of companies that revalue assets.

Comparison of Theories

Descriptive: "What is." Non-value laden. No empirical methodology.
Prescriptive: "What should be." Value laden. No empirical methodology.
Predictive: "Why it is," and "What will happen." Non-value laden (generally). Empirically based.

Examples of Uses of Theories

Prescribing how assets should be valued
Predicting why managers choose specific accounting methods
Explaining how cultural background impacts accounting information
Prescribing accounting information for stakeholders
Predicting the effect of stakeholder power on accounting information, and why accounting information is used to present legitimacy.

Accounting Theories

Accounting is a human activity.
Accounting theories explain human behaviour within and outside organisations regarding accounting information.
Accounting theories consider why people in organisations elect to provide specific information, people's behaviour towards accounting information, needs of people for accounting information.

Accounting Theories (cont'd)

Accounting is a social phenomenon
Accounting theories draw on disciplines studying human behavior, such as psychology and sociology.

Why do we need accounting theories?

Accounting is viewed practically, focusing on applying accounting rules.
Theories help understand the social world we live in.
Theories provide a basis for decisions, such as the decision of whether to include an item in financial statements [example: materiality and recognition criteria].

Why do we need accounting theories (cont'd)

Theories help make better predictions and decisions.
Theories help clarify accounting and reporting issues.
Accounting theories help to understand the many possible reasons behind accounting methods and reporting.

Why study accounting theories?

Understanding motivating factors for supporters/lobbyists of accounting methods in preference to others. Example of theories considered are regulatory theories.
How capital markets react to accounting information. Example of theories considered are positive accounting theories
Evaluating if there is a true measure of income [Example theories considered are asset valuation theories].

Overview of Theories of Accounting

Multiple financial accounting theories exist.
No single universally accepted accounting theory.
Different perspectives on the central objective, role, and scope of financial accounting exist.
Different researchers have different perspectives on the role of accounting theory.

Accounting Theory Timeline

Shows the development periods in accounting theory and practices.
- Example: 1750-1920s: Formalization of practice (e.g., general scientific explanations of practice development).
- Example: 1970s-2000s: Positive accounting theory.
- Examples: pre-theory, normative period, mixed period

Early Development of Accounting Theories

Descriptive theories used induction reasoning from observations.
- Relied on the observation of existing practice to drive theory.

Criticisms of Inductive Approach

Focuses solely on "status quo"
Doesn't provide a means to evaluate practice for future improvement.
Assumes what is done by the majority is the best approach

Example of Inductive Approach

Grady's research for the AICPA on basic accounting principles and concepts.

Theory Development - 1960s and 1970s

Normative theories sought to prescribe ideal practices.
Often critical of existing historical cost accounting.
Sought to improve asset valuation approaches during times of inflation.

Example of Prescriptive Theory

Moonitz and Sprouse studies advocating for current values as accounting measurement.

Theory Development - Mid-to-Late 1970s

Shift towards positive theories to explain and predict accounting practice rather than prescribing.

Positive Theories

Seek to explain and predict phenomena (accounting behaviours) through logical deduction or assumptions.
- Example of deductive logic: If assumption is true, then deduction(s) follow (predictions are made).
If predictions hold up in real-world observations, support is provided.

Testing a Theory in Research

Steps involved in testing accounting theories. [Flow diagram/steps shown in the lecture slides]

Relationship between Theory and Research

Research is driven by implicit or explicit theories of the phenomenon being investigated.

Evaluation of Theories

Accounting theories are abstractions of reality.
Choice of theory is based on value judgements.
Theories cannot provide perfect explanations of human behaviour or discern what types of information users need.

The Role of Assumptions

Logical arguments might be accepted if critical assumptions are acceptable.
Example: The assumption that people are rational and are driven by money. (Is this a good assumption?)

Evidence

Evaluating theories requires enough evidence.
Conflicting evidence should be considered.

### Any Questions?

Participate in discussions on the blackboard.
- Discuss why we need accounting theories.

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Description

Test your understanding of the relationship between accounting theories and research. This quiz explores key concepts, recommended readings, and the implications of theory in the field of accounting. Prepare to deepen your knowledge of how theory shapes research outcomes in accounting.