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Chapter 1:

Chapter 1: . Introduction to Accounting Theory. Lecture. What is Accounting Theory? Accounting Theory & Policy Making Measurement. the basic assumptions definitions principles and concepts that underlie the rule making by a legislative body. the reporting of accounting and

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Chapter 1:

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  1. Chapter 1: Introduction to Accounting Theory

  2. Lecture • What is Accounting Theory? • Accounting Theory & Policy Making • Measurement

  3. the basic assumptions definitions principles and concepts that underlie the rule making by a legislative body the reporting of accounting and financial information applicable to financial accounting, not to governmental or managerial bodies Accounting Theory is defined as

  4. Accounting Theory includes • Conceptual Frameworks • Accounting Legislation • Concepts • Valuation Models • Hypotheses and Theories

  5. Critical Thinking and Analysis • Is accounting theory really necessary for the making of accounting rules? • Discuss • Is regulation necessary? • What, if any, unifying themes arose before the existence of any standard-setting body?

  6. Accounting Theory & Policy Making • Three (3) inputs to policy making function • Accounting Theory • Political Factors • Economic Conditions • Once policy is made • Accounting Practice implements the policy • Users observe effects of implementation

  7. Accounting Theory Economic Conditions Political Factors Accounting Policy Making Accounting Practice Users of AccountingData and Reports Financial Accounting Environment

  8. Accounting Theory Economic Conditions Political Factors Accounting Policy Making Accounting Practice Audit Function Users of AccountingData and Reports

  9. Measurement is defined as the assignment of numbers to the attributes or properties being measured

  10. Measurement Categories • Direct or Indirect • Direct is preferable; managers like • Indirect is a roundabout way of making the measurement • Assessment and Prediction • Assessment measures are concerned with particular attributes of objects • Prediction measures are concerned with factors that may be indicative of conditions in the future

  11. Measurement Process Is not simple. There is not just one absolutely correct measure

  12. The Measurement Process will depend on several factors including • The object itself • The attribute being measured • The measurer • Counting operations • Instrument used • Constraints affecting the measurer

  13. Measurement Types (NOIR) • Nominal • Most simple • Groups like objects (e.g., chart of accounts) • Ordinal • Indicates an order of preference • Degree of preference among the ranks is not necessarily the same • Interval: change in the attribute being measured is equal • Ratio: same as interval, but zero point has a unique quality

  14. Quality of Measurements • Objectivity (Verifiability) • The degree of agreement among measurers • Statistically, this means the less variance there is, the higher the objectivity • Bias (Usefulness) • Timeliness: financial statement data should be up-to-date • Cost Constraint

  15. Lecture Recap • What is Accounting Theory? • Accounting Theory & Policy Making • Measurement

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