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Questions and Answers
What is the approach involved in the above review?
Which step is involved in the construction of the theory used in the above review?
What type of accounting propositions result from deductive inference according to the text?
In normative accounting theory, what is the prescription for measuring PPE, IA, and IP?
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What does PAT seek to predict according to the text?
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Which aspect determines the truth or falsity of propositions in the deductive approach?
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What is the primary goal of management in market-based theories?
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What is the main function of financial statements, according to market-based theories?
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In the context of private interest theory, what assumption is made about people's behavior?
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Why is private interest theory suggested for evaluating the adequacy of auditor independence requirements?
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What does the normative approach in accounting theories focus on?
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What is size considered a proxy for under PAT?
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What is the primary assumption of market-based theories?
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What does the private interest theory of regulation assume about different interest groups?
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Study Notes
Approaches to Accounting Theory
- The approach involved in the review is the deductive approach, which involves constructing a theory through a series of logical steps.
- The step involved in constructing the theory is deducing propositions from a set of assumed truths or axioms.
Deductive Inference
- Deductive inference results in accounting propositions that are considered true or false based on the underlying assumptions.
Normative Accounting Theory
- In normative accounting theory, the prescription for measuring Property, Plant, and Equipment (PPE), Intangible Assets (IA), and Intellectual Property (IP) is based on a set of norms or standards.
Positive Accounting Theory (PAT)
- PAT seeks to predict the behavior of firms and individuals in response to different accounting rules and regulations.
Deductive Approach
- The truth or falsity of propositions in the deductive approach is determined by the logical consistency of the underlying assumptions.
Market-Based Theories
- The primary goal of management in market-based theories is to maximize shareholder value.
- The main function of financial statements is to provide information for investors and creditors to make efficient decisions.
Private Interest Theory
- In private interest theory, it is assumed that people behave in their own self-interest.
- Private interest theory is suggested for evaluating the adequacy of auditor independence requirements because it can help identify potential conflicts of interest.
Normative Approach
- The normative approach in accounting theories focuses on prescriptive statements about what should be done in a particular situation.
Positive Accounting Theory (PAT)
- Size is considered a proxy for complexity under PAT.
Market-Based Theories
- The primary assumption of market-based theories is that markets are efficient and that prices reflect all available information.
Private Interest Theory of Regulation
- The private interest theory of regulation assumes that different interest groups will act to promote their own interests, and that regulations will be shaped by the relative power of these groups.
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Description
Explore the deductive approach in accounting theory and the steps involved in constructing the theory. Test your understanding of specifying objectives of financial statements, selecting accounting postulates, deriving principles, and developing techniques.
