Assignment Answers : Capital Market Management ATH306

Assignment Answers : Capital Market Management ATH306

Accounting Theory Assignment
Accounting Theory Assignment
Name of the Student:
Name of the University:
Author Note: …

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Accounting Theory Assignment
Accounting Theory Assignment
Name of the Student:
Name of the University:
Author Note:
1 Accounting Theory Assignment
Part A
Answer 1
The link between security prices and accounting data is examined in capital market
research. Given that investors are frequently seen as conventional readers of financial reports,
it makes sense to investigate how accounting data affects and influences stock value. The
information contained in company earnings statements, and many other accounting and
financial reporting topics, was studied. Both practising accountants and finance specialists
such as security analysts will benefit from the findings of this study. These findings are
thought to be relevant when it comes to ma king financial accounting judgments. When
undertaking financial reporting decisions, it is frequently stated that better choices between
accounting and disclosure alternatives may be made if the predicted implications on share
prices are considered (Schroe der, Clark and Cathey 2019).
Answer 2
The three reasons why different countries tend to use different accounting systems
have been outlined as follows:
1. Taxation: While in some countries the publishes set of financial statements are often
used for the purpose of taxation while in some countries, a separate set of statements
are modified and presented separately to the government from those sent to the
shareholders .
2. Inflation: Different nations exposed to continuous inflation at high rates deemed it
vital to develop accounting practices that required historic values to be inflation
adjusted. When such information are adjusted for inflation , assets and accompanying
cos ts require writing down. In countries where financial statements serve the basis for
tax ation , such adjustments are paramount which would prevent companies from
paying higher taxes especially on inflated earnings.
3. Providers of Finance: The demand for trans parency in countries where finances are
mostly raised by banks and government is mostly less as they are represent ed in the
boa rd, providing regular access to information. The desire for additional information
increases when organisations rely upon public through a public issue (Wolk, Dodd
and Rozycki 2016).
2 Accounting Theory Assignment
Answer 3
Behavioural accounting is a subcategory of accounting that is involved with conduct
in conjunction to accounting knowledge. It is focused with people’s opinions when presented
with an account ing occurrence, which characterises their decision -making behaviours .
Behavioural psychology studies how people make decisions, interact with others, and
influence economies and civilizations. Behavioural accounting encompasses the influence of
accounting skills on behaviour, administration, audits, ethics, and rationalisations for
unethical action (Jones 2015).
Answer 4
Brunswik’s Lens Model from 1956 is one method of looking at how individuals make
decisions and how they can go about making them (Scott 2015). The model proposes that the
decision -making process consists of three key components:
1. Basic information: When making a choice, individuals have a variety of signals or
indications at their discretion , which they may or may not employ for assistance in the
2. Observed Decision: E very decision should result in some form of reaction, even if the
reaction is merely the decision not to react, it is usually acceptable to claim that some
sort of response has occurred. An option of action is always the re while making a
3. Correct Decision: There is an ideal reaction connected with any decision, much as
there is an observable action to take on the side of the decision maker. This optimum
decision indicates the finest potential course of action tha t the decision maker might
have taken in that specific situation. It is, in many ways, the ultimate standard which
can be used for assessing the actual decision.
Part B
Answer 1
The stakeholder theory examines relationships with specific stakeholders instead of
the entire society. Stakeholders are described as any group or people who can influence or is
influenced by an organization’s attainment of its goals. The ethical or moral handling of
the stakeholders in an organisation is the subject matter of this theory. The stakeholder theory
is often confused with the legitimacy theory in general. It is worth mentioning that while the
3 Accounting Theory Assignment
legitimacy theory discusses the expectations of the overall society (social contract), the
stakeholder theory provides for a much more refined r esolution by taking into consideration
the expectations of different groups within the society, also known as stakeholder groups.
As different stakeholders may have different opinions about how an organisation should
handle its operation s, the theory admits that there will be several social contracts to be
negotiated with distinct stakeholder groups, instead of a single contract with society as a
whole which the legitimacy theory undertakes (Conway and Byrne 2018).
There are two distingui shable branches to the stakeholder theory, the ethical and the
managerial branch. The ethical branch to the theory is also referred to as the moral or the
normative perspective. It prescribes that an organisation should treat all of its stakeholders
equall y, and those businesses should be operated to benefit all of its stakeholders. The
relevance of stakeholders is not dictated by the number of resources available to
an organisation. This means that no single stakeholder is considered more essential than th e
others, and organisations owe a fiduciary obligation to all of them. Stakeholders also are
significant for determining the company’s philosophical or moral norms for managing their
operations. On the contrary, the managerial branch to this theory propose s a mechanism that
tends to explain how stakeholders may have an influence upon the actions of the
organisation. According to this interpretation of the concept, the amount to which an
organisation considers its stakeholders is related to the strength or i mpact of such
stakeholders. The level of control stakeholders have upon resources required for an
organization was hypothesised to be connected to their power. The more critical the resources
under the stakeholder’s control are to the organization’s perfor mance, the much more probable
management are to consider the concerns of such stakeholders.
Answer 2
There are several theorists that have critically opposed the work within the scope of
the Positive Accounting Theory. Some of these criticisms have been elucidated as follows:
1. One of the most common criticisms of PAT is that it lacks prescription and hence
does not give a way to improve accounting practise. It is suggested that PAT’s goal of
understanding and forecasting accounting practise is insufficient . These theorists risk
alienating practising accountants by failing to give prescription.
2. A second critique of PAT is that, contrary to what it claims, it is not value free. A n
examination of the numerous studies that have used PAT will demonstrate that th ere
4 Accounting Theory Assignment
is a general lack of prescription, since there is no instruction as to what individuals
should do; instead, it explains or anticipates what they will do. These theorists
typically rationalise this by claiming that they do not wish to push their idea upon
others, but instead would rather present objective knowledge about the predicted
consequences of specific acts and allow others to make their own decisions.
3. PAT researchers frequently conduct studies that incorporates corporate data from a
variety of c ompanies, assuming that all companies in a sample may be regarded
equally for the sake of analysis. Many theorists would argue that no two firms are
same, and that seeing them as such is foolish. PAT assumes that rules and principles
can be created that ar e supposed to hold in many contexts, so there is an underlying
reality that can be discovered by an independent, unbiased observer who is unaffected
by personal views, peculiarities, or prejudices.
4. PAT is also accused of being scientifically faulty. PAT mu st be dismissed
scientifically since the theories created by it are generally unsupported. Theorists
contend that a positive theory can only be expected to hold on an average.
Furthermore, empirical theories are mostly concerned with trends which are
gene ralised. It is difficult to believe that any theory could ever adequately describe
human behaviour as a human study. The capacity to do so would, in reality, be a
dehumanising act (Deegan 2019).
5 Accounting Theory Assignment
Conway, E. and Byrne, D., 2018. Contemporary Issu es in Accounting . Springer International
Publishing.. https://doi. org/10.1007/978 -3-319 -91113 -7.
Deegan, C., 2019. An Introduction to Accounting: Accountability in Organisations and
Society . Cengage AU.
Jones, S. ed., 2015. The Routledge companion to fina ncial accounting theory . New York:
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases . John Wiley & Sons.
Scott, W.R., 2015. Financial Accounting Theory Sevent Edition. United States: Ca nada
Cataloguing .
Wolk, H.I., Dodd, J.L. and Rozycki, J.J., 2016. Accounting theory: conceptual issues in a
political and economic environment . Sage Publications.

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