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Financial Accounting Theory - Essay Example

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Financial Accounting Theory 1. What is the purpose of financial accounting theory? Are you a positivist? Explain why you agree or disagree with positive accounting theory. The purpose of financial accounting theory is broad and complex, spanning an array of issues…
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Download file to see previous pages One of the prominent implementations of accounting theory is in terms of developing normative standards. In these regards, accounting theory functions as a means of legitimizing the discipline of accounting in that articulates standards and regulations that establish public faith in the process (Deegan & Unerman 2011). Specific instances such prescriptive theories are implemented can be witnessed in terms of assets, wherein normative theories explore how these elements should be recorded (Deegan & Unerman 2011). Another such instance is prescriptive standards regarding the amount of accounting information that should be supplied to various stakeholders. In addition to normative accounting theories, there is also predictive or positivist accounting theories. Positivist theory seeks to develop predictive insights based on objective occurrences. There is an array of positivist perspectives. For instance, it’s noted that positivist theory seeks to make predications regarding the nature of managerial compensation and accounting practices (Deegan & Unerman 2011). In these ways positivist accounting theories function both to allow investors or stakeholders increased insight into accounting motivations, as well as a means of gaining a broader understanding of financial markets as a means of contributing to more accurate normative structures. There are a number of concerns related to positivist accounting theory. To an extent I would say that I am a positivist. The notion of positivist accounting is linked to philosophical notions of theory. While one of the central tenants of positivist accounting theory is that markets are efficient, clearly this constitutes a weak version of the EMH as contained within it is the notion that corporations and accountants will act in self-interest contingent upon at times a partial understanding that accounting procedures will affect market conditions (Tinker, Merino, and Neimark 1982). I accept the notion this weak notion of EMH, with markets responding to all available information, but also recognize that in many situations human behavior plays a highly important role in security valuations. Not simply in investor behavior, but also in the self-interested behavior of accounting professionals. Considering that markets are oftentimes driven by external and internal behavioral elements the propensity of a positivist approach to accounting theory, while to a great degree fallible, nonetheless holds the propensity towards tangible and functional insight (Chua 1986). In these regards I believe that positivist theoretical explanations of accounting practices and market conditions are essential to a progressive understanding of both human behavior and market impact. Ultimately, a furthered understanding, while understandable imperfect, can still contribute to more equitable and transparent accounting practices. In these regards, I while I would not entirely refer to myself as positivist; I recognize the importance and effectiveness of positivist theory to the accounting profession. 2. Explain why you think regulation of financial accounting is needed or not needed. Recent occurrences in financial markets have brought to light the tremendous need for regulation of financial accounting. From an overarching qualitative perspective, one considers erroneous accounting procedures in organizations such as Enron, or the recent MF Global scandal wherein customer funds were inappropriately ...Download file to see next pagesRead More
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