Essay on Financial Accounting Theory - 1727 Words

QUESTION 1 a. Outline the objective and the principles of a theory that prescribes fair value accounting. Fair value accounting is to measure selected assets at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The objective of fair value accounting is linked with the objective of ‘decision usefulness’ of general purpose financial reporting. That is, to provide relevant information that is representationally faithful for users. IASB’s (and FASB’s) accounting standard on fair value measurement establishes a ‘fair value hierarchy’ in which the highest attainable level of inputs must be used to establish the fair value of an†¦show more content†¦Gearing and interest coverage ratios are frequently used in debt covenant to reduce the risk exposure of the lenders. Gearing is the leverage that measures as the ratio of total liabilities total tangible assets. If the company takes excessive debt or loses tangible assets, its gearing might fall below the requiring ratio; the company is likely to breach the debt covenant. In terms of interest coverage number, the covenant requires that ratio of net profit, with interest and tax added back, to interest expense is at least a minimum number of times. In the case of Sigma Pharmaceutical, the reported loss of $389 million of profit might be the main reason for its breaching of the interest coverage ratio. b. Explain the purpose of the debt covenant from a contracting theory perspective. Is the debt contract an efficient contract? Explain your answer. From a contracting theory perspective, the purpose of the debt covenant is to reduce agency cost of debt. Under Positive accounting theory, borrowers would have divergent behaviours towards lenders, such as excessive dividend payments, claim dilution, asset substitution and underinvestment. Without safeguards, it is assume that lenders would ‘price protect’, that is requiring higher cost of interest toShow MoreRelatedHistorical Development Of Financial Accounting Theory1422 Words   |  6 Pagesthe financial reporting statements of the business. The requirement of disclosures exists to communicate important and valid information to the investors concerning the values arrived at on the financial statements. Throughout this research, each inventory valuation method will be examined and discussed in regards to financial accounting theory, Conceptual Framework, Generally Accepted Accounting Principles, and International Financial Reporting Standards. Historical Development of Financial AccountingRead MoreHistorical Development Of Financial Accounting Theory1526 Words   |  7 Pagesfair value accounting concept, an understanding of the foundation of accounting is where it is today is needed. This information provides a guideline of how the first conceptual ideas of accounting first began and changed overtime to accommodate the ever increasing changes with investment options along with lobbying efforts of individuals. The FASB’s Statement of Financial Accounting Concepts (SFAC) No. 8 indicates that the primary purpose of financial reporting is to provide financial informationRead MoreFinancial Accounting Theory2740 Words   |  11 Pagesï » ¿Financial Accounting Theory Introduction The aim of this paper is to consider three theories of regulation, the public interest theory, the capture theory and the economic interest theory. These three theories attempt to explain why a particular phenomena in the regulation process occurs and as such they are positive theories. Initially, in part (a) the theories are explained and then related to a case where the European Union Commission defers accounting standards. Read MoreFinancial Accounting Theory11230 Words   |  45 PagesAbout the â€Å"Best† Accounting Policy Copyright  © 2009 Pearson Education Canada 126 Instructor’s Manual—Chapter 5 5.7 5.8 The Information Content of Other Financial Statement Information Conclusions on the Information Approach LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES 1. To Appreciate the Information Perspective on Decision Usefulness of Financial Reporting I begin coverage of this chapter by pointing out that we are now starting to apply decision theory and efficient securitiesRead MoreFinancial Accounting Theory Essay1794 Words   |  8 PagesChapter 1 – Financial Accounting Theory 1.1 What is Financial Accounting Theory? Henderiksen (1970) – Theory is defined as: A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry. FASB – a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. Introduction – theories of financial accounting Accounting is a human activity and will consider such thing as people’sRead MoreFinancial Accounting Theory the Reporting Environment1578 Words   |  7 PagesWeek 2: Topic 1: Financial Accounting Theory the Reporting Environment GHTHH Chapter 2 5. Researchers who develop positive theories and researchers who develop normative theories often do not share the same views about the roles of their respective approaches to theory construction. (a) How do positive and normative theories differ? (b) Can positive theories assist normative theories, or vice versa? If yes, give an example. If not, why not? Normative accounting research makes policy recommendationsRead More7101AFE Financial Accounting Theory And Practice Essay970 Words   |  4 Pagesï » ¿7101AFE Financial Accounting Theory and Practice Tutorial Questions for Tutorials 1- 6: Semester 1 2015 TUTORIAL 1 - Semester 1 2015 Deegan Topic 1: Introduction to financial accounting theory QUESTION 1 – Question 1.2: If you developed a theory to explain how a person’s cultural background influences how they prepare financial statements, would you have developed a positive theory or a normative theory? The first of all, it is important to understand the mean by a ‘theory’. According to ContemporaryRead MoreFinancial Accounting Theories And Disclosures Of Financial Information Will Affect Decision Making984 Words   |  4 PagesFinancial Accounting Theory (FAT) provides me an overview of the role of financial accounting in decision making which gives me a deeper insight of how accounting theories and disclosures of financial information will affect decision making. Throughout 12-week seminars, it develops my critical thinking skills which change my view of FAT to a new perspective. From which, it establishes an insightful explanation of the reason behind of every action and logic underlying of particular practice. AndRead MoreFinancial Accounting Theory, Chapter 4 Answers Essay1146 Words   |  5 PagesAssignment 4-2: Week 4 Analysis Write-Up Kylie Keener ACCT715-Q1WW Financial Accounting Theory Michael Miller 13 June 2012 1. Chapter 4:  Problem 8 (GM) The article â€Å"GM to Take Charge of $20.8-Billion† here reproduced from The Globe and Mail (February 2, 1993) describes the potential impact of SFAS 106, â€Å"Accounting for Postretirement Benefits Other Than Pensions,† on General Motors and Ford. For example, it appears that General Motors will be required to record a liability of $20.8 billionRead MoreFinancial Accounting Theory - Ball and Brown Study1674 Words   |  7 Pagesof Research Paper Through the paper and the information provided by the textbook, it is clear that two brief conclusions we can get and explanations will be attached. 1. The financial statement do impact the share price 2. The influence caused by the financial statement is limited. The main reason, that financial statement impact the share price, is the efficient capital market. Namely, the efficient security market will go hand in hand with full disclosure. Once the relevant information provided