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The document debates the view that there is no need for an overall theory of accounting. It argues that while the physical sciences do not have overarching theories, accounting would benefit from a conceptual framework that provides consistency and allows practices to be assessed. A conceptual framework could serve as a standard for judging accounting practices and help formulate standards that are consistent with each other. While accounting has survived without a general theory, some theory has always guided practices like GAAP.

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PRAVINA A P SIVAKUMAR
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43 views

Tutorial Answers

The document debates the view that there is no need for an overall theory of accounting. It argues that while the physical sciences do not have overarching theories, accounting would benefit from a conceptual framework that provides consistency and allows practices to be assessed. A conceptual framework could serve as a standard for judging accounting practices and help formulate standards that are consistent with each other. While accounting has survived without a general theory, some theory has always guided practices like GAAP.

Uploaded by

PRAVINA A P SIVAKUMAR
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Tutorial 3

Question 1

Some people argue that there is no need for a general theory of accounting, as established
in a conceptual framework. They argue that there is no overall theory of physics, biology,
botany or psychology, so there is no need for an overall theory of accounting. Furthermore,
attempts to develop an overall theory of accounting are futile and unnecessary, since
accounting has not needed a conceptual framework so far. Debate this view.

 It is true that in the physical sciences, there is no overall theory of a given field of study.
There is no theory of chemistry or biology, etc.
o Some scientists have attempted to formulate such theories, but have failed.
o It is generally agreed that such theories would be beneficial because they would
provide an integrated explanation of all aspects of the given field of study.
o At present, different theories in a given discipline — for example, in biology —
remain as separate categories, and often the connection of one theory to another is
not known.

 Theories in the sciences are descriptive, but in accounting an overall theory would be
normative, telling accountants what ought to be done.
 This would be very useful if it could be formulated.
o It would serve as a standard by which to judge practices.
o Although the probability is slim that in the near future a logically consistent
overall theory can be constructed, a theoretical framework such as the conceptual
framework can be helpful.

 It is true that the profession has survived without a general theory, but a theory of some
sort has always been in mind.
o Constant reference to generally accepted accounting principles reveals this.
o It would be easier to assess accounting practices and to formulate standards
consistent with each other if a general theory existed.
o If a theory is empirically verified, accounting methods for particular purposes
would also have empirical evidence to support them. In other words, we would be
able to present evidence as to why a certain procedure (for example, FIFO
inventory valuation) should be used rather than another method.
Question 2

What do the conceptual framework describe as the basic objective of accounting?


What are its implications?

 Stewardship looks primarily to the past, asking the question: What happened?
 Decision making looks to consequences in the future, asking the question: What will
happen?
o A decision-making approach sees accounting information as inputs for the
decision-making prediction models of users.
o If so, then we are concerned about what kind of accounting information is
relevant to decision makers.
 Some believe that current value is implied.
 Also that statement of financial position accounts and their amounts are as
important as those in the income statement.
 Traditional accounting emphasises income.

Question 3

What type of information do you think is useful for shareholders, lenders and
creditors? Is this the type of information that is currently provided?

Useful information is both relevant and reliable. Presumably, it is also ‘fair’.

Adopting a narrow perspective,


 useful information provides a basis for investors and creditors to assess the amount,
timing and uncertainty of future cash flows for themselves based on the expected cash
flows of the firm.
o Such a basis is provided by information concerning the profitability and financial
condition of the firm. In turn, this information is presently reported in the
statement of financial performance or the statement of financial position, and the
statement of changes in financial position. For the latter, many believe a cash flow
statement is especially pertinent.

Taking a broader view,


 useful information helps to efficiently allocate capital in the economy.

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