Summary of Accounting Theories - Essay Example

Summary of Accounting Theories Name: Course: Course Code: Date Tutor: ARTICLE 1 Summary of the article This article talks about the rules that will affect how various organization will book their revenue and how the changes will affect different firms ranging from software companies to Auto manufacturers. According to this article, the new rules will bring the uniformity into the primary yardstick on the performance of an organization. The article also explains on how and when organizations should book their revenue since every company can be a hub of fraudulent activities. Also, the article discusses on how the manufacturers could record less revenue upfront and more revenue later. The articles summarize by giving an overview of how wireless companies will book their revenue monthly (Riahi-Belkaoui, 2004). Accounting Theory Positive Accounting Theory The theory is concerned with how various firms predict such actions like the choice of accounting policies to be adopted and how they will respond to recommended new accounting standards. In most cases, positive accounting theory (Porwal, 2007) assists us in reconciling efficient securities market theory with economic outcomes. The theory tries to translate the real world events and translate them into various accounting transactions. Positive accounting theory attempts to explain and predict which accounting policies should a firm adopt and also how they will react to new proposed accounting standards. The entire intention of the theory is to understand the accounting practices and how they will have the effect on the performance of a firm. Analysis of the theory Positive accounting theory is more concerned about how the introduction of new accounting policies will have an impact on the financial performance of a firm. There are two perspectives of Positive accounting theory i.e. efficiency perspective and opportunistic perspective. As far as efficiency perspective is concerned, it holds this view that managers always choose accounting methods and rules that depict the actual representation of the financial performance of an organization. According to this perspective, accounting practices adopted by an organization are often explained on the basis that depicts the actual financial image of an organization. Opportunistic perspective, on the other hand, holds the view that managers act in their self-interest. Managers only adopt those accounting policies and practices that meet their needs (Laplume, Sonpar, & Litz, 2008). The relationship between the accounting theory and the article is that the article discusses on how new rules as proposed by the theory will alter how firms will be affected by the introduction of new rules on how and when to record revenue on their books. From the article, the new regulations were intended to replace the inconsistent and fragmented standards whereby firms in different sectors of the economy record their revenue in a different manner and sometimes record part of the revenue well before or after the sales (Richard & Posner, 2004 ). According to the article, there have been various allegations of differing or improper speed up of income so that a firm can achieve its objectives. Another relationship between the theory and the article is that the opportunistic perspective of the theory of Positive accounting predicts that managers of most of the firms will adopt accounting policies that could further their goals. Unethical or fraudulent behavior cannot be inferred here; rather the accounting policies which management utilizes should be naturally within GAAP. Accounting rule makers have majorly focused on the issue of when firms should record revenue since it touches every company and can be a hub of fraud (Freeman, 2010). One way in which firms can reduce the reported net earnings is through manipulation of accounting policies that relate to accruals. By doing this, they will be adopting the efficiency perspective in the positive accounting theory where the managers choose policies that represent the performance of the firm. For instance, a company may raise depreciation and amortization charges. Such items such as these are regarded as discretionary accruals. Nonetheless, one of the greatest challenges is how to separate total accruals from discretionary components. The reason is that non-discretionary accruals like current liabilities, receivables, inventories and current liabilities are related with the business activities of a firm (Kotler, 2012). Conclusion of the article According to the article, the introduction of new rules will have some benefits to most of the companies and it will provide a level field where firms can report true financial statements that reflect the true financial position of a firm. Nonetheless, changing the accounting rules and policies will draw strong opposition from some of the managers. New standards and policies that reduce the flexibility of a firm, in terms of new accounting policies will receive strong opposition from some managers. ARTICLE 2 Summary of the article This article provides an overview on the changes of proposed accounting rules mostly when it comes to leases where firms will have to bring their leases onto their balance sheets. This article asserts that leases will be treated as part of the assets and will also be amortized much faster as compared with capitalized obligations. Furthermore, the article articulates that those retailers that have various stores are most likely to be affected. It outlines how an average entity that has material operating leases will have to gross up both sides of the balance sheet, where there will be more assets and liabilities (Donaldson & Preston, 2005). The article ends by giving the benefits of the new rules on the firm i.e. there will be more assets than liabilities; the prompt changes will make the retailers disclose their details concerning their lease agreements and liabilities. The accounting theory The public interest regulation theory This theory holds that regulators have to look for ways of finding market solutions that are very efficient. The theory proposes that market power of those firms in the competitive market must be regulated. These regulations are assumed to benefit the entire society instead of some groups that have vested interests. In the case of a market with natural monopolies, the regulation acts as a necessary tool for lowering the prices and increasing the output. In the case of the oligopolistic market, regulation is seen as a way of preventing throat competition (Richard & Posner, 2004 ). Analysis of the theory According to the currently proposed accounting regulations, all the leases will be amortized much faster as compared to capitalized obligations, therefore, reducing the equity of the shareholders. Retailers who have long-term lease liabilities are most likely to be affected that those with short-term. This theory of regulations holds that some firms at one point or another have to be regulated so as to guarantee the availability of some basic amenities such as electricity, water, medical services and telephone services. Such services could otherwise not have been profitable enough to make other unregulated firms offer them in a particular community. Organizations that provide such essential services are mostly given franchise and licenses that inhibit competition. When it comes to negotiation, the government is considered as a neutral arbiter representing the entire society in which it operates, rather than the regulator’s private interest (Miles, 2012). the link between the article and the theory is that the theory of public interest regulation was meant to protect investors who want to invest in a firm. Introduction of new regulations by IASB that brought operating leases into the balance sheet was supposed to provide a clear picture to potential investors and also creditors on the size of corporate debt after the collapse of other organizations such as Enron. The introduction of new rules also could boost the level of transparency around gearing. According to public interest theory, the aim of the regulator is to create a level field where competition is fair and rules of the game are favorable to all the players in the industry. Regulatory bodies such as IASB were formed so as to protect the investors. Although retailers with long term lease liabilities may be affected at the short run by the new regulations, the investors who wanted to invest in such firms will have enough information regarding to debts of such organizations. As a way of protecting the entire public, introduction of such regulations by IASB could increase the gearing ratios therefore forcing some other firms to renegotiate debt agreements the bankers. Although the public interest theory may be opposed by those who could wish to further their private interests, the theory was meant for protecting the interest of the entire public therefore increasing the level of transparency in the lease contracts (Hoque, 2006). Summary of the theory The theory proposes that market power of those firms in the competitive market must be regulated. These regulations are assumed to benefit the entire society instead of some groups that has vested interests. In the case of a market with natural monopolies, the regulation acts as a necessary tool for lowering the prices and increasing the output. In the case of the oligopolistic market, regulation is seen as a way of preventing throat competition. ARTICLE 3 Summary of the article The article is about how CBA has led other banks into share correction. It starts by introducing how other banks have adopted the strategy of Deeping into correction territory after the increase of costs, increasing loan losses and narrowing of profits. It explains how CBA has suffered a continuous reduction of its share price since the beginning of the global financial crisis. This article explains that though the credit quality of CBA was sound, its expenses of impaired loans were increasing at an alarming rate. The article summarizes by explaining how the reduction of share prices of CBA has affected other market rivals such as Westpac and ANZ bank where the interim profits became low. The theory of efficient market hypothesis This is a kind of model on market performance. A market is regarded as effective if the prices in the market indicate the available information. It states that it is not possible to beat the market since the efficiency of the stock market causes the current price share to incorporate and reflect all the relevant information (Waddock, 2012). According to this theory, the stock in the market always sale at their average value, therefore, making it difficult for the investors to buy the undervalued stocks and sell them at high prices Therefore it becomes very difficult to outperform the entire market through market timing or expert stock, and the only way an investor can get higher profit is by getting involved in risk investments Analysis of the theory According to this theory, for it to be market efficient, the following assumptions should be applicable. There should be a large number of investors who analyze and value securities for a profit. Stock prices should automatically adjust to new information Stock prices should depict all the available information New information is brought into the market independent from others in a random manner According to the article, CBA has been suffering from the continuous reduction of its share price since the start of the financial crisis where it has created some inefficient market practices as a result of competitive prices. Linking the article with the theory, competitive market practices states that it is not possible to beat the market since the efficiency of the stock market causes the current price share to incorporate and reflect all the relevant information. Ideally, the profit opportunities provided by presence of overvalued or undervalued stocks encourage most investors to trade, and as a result, their trading activities push the share prices towards the current value of the future cash flows. This has not been the case of CBA, whereby the investors have punished the firm’s shares by 5% margin during the time the company was undergoing one of the worst recessions. Since new information is arbitrarily unfavorable or favorable to expectations, any change in an efficient market has to be random, leading to a renowned random walk in stock prices (Friedman & Miles, 2006). Therefore, investors should not earn high returns in an efficient market where prices depict fundamental value. Laplume, et al (2008) proposes that presence of uncertainties on whether the economy will be weaker and the profits will decrease is a clear sign of a weaker form of efficiency, where the future prices cannot be predicted by looking at the previous prices. Even though there has been a drop in the earning per share and dividend per share of CBA, this does not necessarily mean that the firm’s dividend will not be attractive. Excess profits cannot be earned in the long run by adopting the investment strategies basing on the historical data or former share prices. Although other forms of essential analysis may still provide excess profits, technical analysis techniques may not produce excess profits. The prices of shares may not show any serial dependencies, which means that there is no pattern to asset prices (Riahi-Belkaoui, 2004). Conclusion of the theory A market is seen as efficient if its prices in the market indicate the available information. It states that it is not possible to beat the market since the efficiency of the stock market causes the current price share to incorporate and reflect all the relevant information. This theory holds that the stock in the market always sale at their average value, therefore, making it difficult for the investors to buy the undervalued stocks and sell them high prices References Donaldson, T., & Preston, L. E. (2005). 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