Accounting Theory, Conceptual Issues in a Political and Economic Environment 8e Harry
w w w w w w w w w w w
Wolk James Dodd John Rozycki (Instructor Manual All Chapters, 100% Original Verified, A
w w w w w w w w w w w w w
+ Grade) w
Chapter 1: An Introduction to Accounting Theory Instructor’s Manual
w w w w w w
w
CHAPTER HIGHLIGHTS W
The chapter is concerned with what accounting theory is and where it fits within the ―structure‖
w w w w w w w w w w w w w w w
of financial accounting. The definition of accounting theory used in this chapter is broad and
w w w w w w w w w w w w w w w
complements the objectives of the text. Theory itself helps to explain and predict phenomena
w w w w w w w w w w w w w w
that exist in a given field, and this likewise holds true in accounting. In accounting, theory can
w w w w w w w w w w w w w w w w w
be developed in response to needs arising from practice, including concepts such as realization
w w w w w w w w w w w w w w
and matching. However, as an ―infrastructure‖ has developed in financial accounting, theory is
w w w w w w w w w w w w w
formulated in a more institutionalized way by means of the research process.
w w w w w w w w w w w w
Along with political factors and economic conditions, accounting theory contributes to the
w w w w w w w w w w w
standard-setting process. The process of developing standards or making rules is itself largely a
w w w w w w w w w w w w w w
deductive process and is certainly concerned with accounting theory.
w w w w w w w w w
The relationship of theory to measurement is very important. While some see measurement as
w w w w w w w w w w w w w
closely related to but separate from theory (as we did in earlier editions), its importance relative
w w w w w w w w w w w w w w w w
to theory is so great that we now consider it to be part of theory. Measurement is the assignment
w w w w w w w w w w w w w w w w w w w
of numbers to the attributes or properties of objects being measured. The different types of
w w w w w w w w w w w w w w w
measurements and the quality or ―goodness‖ of measurements are examined. The latter
w w w w w w w w w w w w
embodies (1) the usefulness of the measurement, illustrated here in a predictive context but
w w w w w w w w w w w w w w
showing up later in an assessment mode and (2) verifiability or objectivity, which is the degree
w w w w w w w w w w w w w w w w
of consensus among measurers in the statistical sense.
w w w w w w w w
The various valuation models are presented in Appendix 1-A. The models come under the scope
w w w w w w w w w w w w w w
of accounting theory. In addition, the different models are mentioned in several theory chapters
w w w w w w w w w w w w w w
before being discussed in depth in Chapter 14. Even if there is no desire to go further into
w w w w w w w w w w w w w w w w w w
inflation accounting in Chapter 14, it is important for students to gain a rudimentary grasp of the
w w w w w w w w w w w w w w w w w
concepts involved, as illustrated in Appendix 1-A.
w w w w w w w
QUESTIONS
Q-1 What does the term ―social reality‖ mean and why are accounting and accounting theory
w w w w w w w w w w w w w
important examples of it? w w w
The term social reality pertains to the measurement of social phenomena and the use of these
w w w w w w w w w w w w w w w
measurements. The measurements may be representationally faithful (low in bias) and have a
w w w w w w w w w w w w w
high degree of objectivity (verifiability). Or the opposite for either or both of these qualities may
w w w w w w w w w w w w w w w w
be the case. The important thing to grasp, however, is that important consequences stem from
w w w w w w w w w w w w w w w
the measurement, whether they are ―good‖ or ―bad.‖ For example, an excellent year in terms of
w w w w w w w w w w w w w w w w
income could cause management to be highly rated by shareholders and other interested parties,
w w w w w w w w w w w w w w
resulting in high management bonuses, or provide increased dividends to shareholders. All of
w w w w w w w w w w w w w
this could occur even though income is a ―construct‖: not a ―real‖ factor but a conceptual
w w w w w w w w w w w w w w w w
artifact.
w
This example shows why accounting is an important area relative to social reality measurements
w w w w w w w w w w w w w
and constructs. Hopefully, accounting theory can improve the fairness and usefulness of these
w w w w w w w w w w w w w
measurements.
w
Accounting Theory (8th edition) w w w Page 1 of 14 w w w
,Chapter 1: An Introduction to Accounting Theory
w w w w w w Instructor’s Manual w
Q-2 Why do the value choices (entry value, exit value, and historical cost) fall within the
w w w w w w w w w w w w w w
domain of accounting theory? w w w
These are examples of different concepts involved with measuring income which have different
w w w w w w w w w w w w
underlying purposes. These different purposes—which affect social reality—are discussed in the
w w w w w w w w w w w
appendix.
w
Q-3 Of the three inputs to the accounting policy-making function, which do you think is the
w w w w w w w w w w w w w w
most important? w
Of the three inputs (economic conditions, political factors, and accounting theory) to the policy-
w w w w w w w w w w w w
making function, economic conditions is clearly the most important input. Economic conditions
w w w w w w w w w w w
can easily influence the accounting theory track as well as the policy-making function. Inflation,
w w w w w w w w w w w w w w
for example, in the USA during the 1970s and 80s triggered a significant amount of theoretical
w w w w w w w w w w w w w w w w
work. Theory responded to the actual economic environment. Another prominent example of
w w w w w w w w w w w w
the influence economic conditions has is the merger and acquisition wave of the 1960s, which
w w w w w w w w w w w w w w w
lead to APB Opinion Nos. 16 and 17. Many other standards have also been triggered by
w w w w w w w w w w w w w w w w
economic conditions.
w w
Q-4 How can political factors be an input into accounting policy-making if the latter is
w w w w w w w w w w w w w
concerned with governing and making the rules for financial accounting?
w w w w w w w w w
Those who are affected by the rules will usually try to influence what those rules will be. The
w w w w w w w w w w w w w w w w w
investment tax credit provides an excellent example. When APB Opinion No. 2 did not allow
w w w w w w w w w w w w w w w
flow through, lobbying led to APB Opinion No. 4, which did allow immediate recognition in
w w w w w w w w w w w w w w w
income of investment tax credits. The stock option battles of the 1990‘s (and continuing today)
w w w w w w w w w w w w w w w
is another example of the political process and its effect on rule-making. From a predictive
w w w w w w w w w w w w w w w
standpoint, we are concerned with how and why political factors play a role in the standard-
w w w w w w w w w w w w w w w w
setting process. w
Q-5 Is accounting theory, as the term is defined in this text, exclusively developed and refined
w w w w w w w w w w w w w w
through the research process? w w w
Absolutely not. Many concepts such as conservatism and revenue recognition arose on a
w w w w w w w w w w w w
―common law‖ type of basis. They were responses to particular problems. Research has, of
w w w w w w w w w w w w w w
course, dealt with these issues. Any attempt to leave these concepts outside of the definition of
w w w w w w w w w w w w w w w w
accounting theory would make the subject matter of accounting theory artificial and incomplete.
w w w w w w w w w w w w w
Accounting Theory (8th edition) w w w Page 2 of 14 w w w
,Chapter 1: An Introduction to Accounting Theory
w w w w w w Instructor’s Manual w
Q-6 What type of measurement is the measurement of objectivity in Equation (1.1): nominal,
w w w w w w w w w w w w
ordinal, interval, or ratio scale?
w w w w w
It is ordinal, due to the squaring effect on each individual deviation from the mean. The zero
w w w w w w w w w w w w w w w w
wpoint, however, is unique. Hence, there would be perfect consensus among measurers. It would
w w w w w w w w w w w w w
wmean that each individual measurement would be the same for all measurers.
w w w w w w w w w w w
Q-7 The measurement process itself is quite ordinary and routine in virtually all situations.
w w w w w w w w w w w w
Comment on this statement. w w w
This is not necessarily the case. Measurements can be extremely complex. For example,
w w w w w w w w w w w w
measuring the temperature of the earth‘s atmosphere is extremely difficult. The increasing
w w w w w w w w w w w w
temperature has led both to the hypothesis of the greenhouse effect and to the theory that the
w w w w w w w w w w w w w w w w w
warming global temperatures are simply a fluctuation, a naturally occurring variation.
w w w w w w w w w w w
Measuring the success of a man‘s life can be perplexing. How does accumulation of Bill Gates‘
w w w w w w w w w w w w w w w
monetary wealth compare with the accomplishments of Ghandi, Nelson Mandela, or Wolfgang
w w w w w w w w w w w w
Amadeus Mozart? What does one actually measure to determine success?
w w w w w w w w w w
Measurements in accounting are significantly less complex, but should not be taken lightly. For
w w w w w w w w w w w w w
example, determining the replacement cost or exit value of a firm‘s machinery and equipment is
w w w w w w w w w w w w w w w
not an easy task. Determining net income or earnings during a specified period of time may be
w w w w w w w w w w w w w w w w w
more complicated that it appears to be on the surface.
w w w w w w w w w w
Q-8 Can assessment measures be used for predictive purposes?
w w w w w w w
Though an assessment measure concerns an attribute or characteristic of an object at the present
w w w w w w w w w w w w w w
time, it could be used as a surrogate for a prediction measure if none exists. For example, the
w w w w w w w w w w w w w w w w w w
best indicator of the current ratio of a firm in a year may be the current ratio today, if budgets
w w w w w w w w w w w w w w w w w w w w
have not been prepared.
w w w w
Q-9 A great deal of interest is generated each week during the college football and college
w w w w w w w w w w w w w w
basketball seasons by the ratings of the teams by the Associated Press and United Press
w w w w w w w w w w w w w w w
International. Sports writers or coaches are polled on what they believe are the top 25
w w w w w w w w w w w w w w w
teams in the country. Weightings are assigned (25 points for each first place vote, 24 for
w w w w w w w w w w w w w w w w
each second place vote, . . . one for each 25th place vote) and the results are tabulated.
w w w w w w w w w w w w w w w w w w
The results appear as a weekly listing of the top 25 teams in the nation. Do you think that
w w w w w w w w w w w w w w w w w w
these polls illustrate the process of measurement? Discuss.
w w w w w w w w
An argument can be made that a number is assigned to a team on the basis of a property that
w w w w w w w w w w w w w w w w w w w
might be called the ―goodness‖ or ―strength‖ of a team. However, these measurements do not
w w w w w w w w w w w w w w w
Accounting Theory (8th edition) w w w Page 3 of 14 w w w
, Chapter 1: An Introduction to Accounting Theory
w w w w w w Instructor’s Manual w
have a great deal of precision. How good a team is relative to other teams is a property or
w w w w w w w w w w w w w w w w w w
quality that is extremely intangible compared to other measurements such as median weight of
w w w w w w w w w w w w w w
interior linemen, average speed of running backs per 100 meters, etc. Unquestionably, the
w w w w w w w w w w w w w
measurements are indirect.
w w w
The qualifications of the measurers are also open to question. Do sportswriters really ―know‖
w w w w w w w w w w w w w
football? Constraints are also present because the voters may have seen very few teams and they
w w w w w w w w w w w w w w w w
may also have regional biases. The numbering scale used is basically ordinal because 1 is
w w w w w w w w w w w w w w w
considered to be better than 2, which is better than 3. However, the ―goodness‖ of the interval
w w w w w w w w w w w w w w w w w
between rankings is not uniform. For example, a voter may feel it is a virtual ―toss-up‖ between
w w w w w w w w w w w w w w w w w
1 and 2, both of which he considers to be vastly superior to 3. As a result, the aggregating
w w w w w w w w w w w w w w w w w w w
process is open to serious question.
w w w w w w
It is also not clear whether the pollsters are making assessment or prediction measures. The
w w w w w w w w w w w w w w
wmeasures would be prediction measures if the voter presumes that 1 would beat 2 if they played
w w w w w w w w w w w w w w w w
wthe following week. We suspect, however, that an assessment measure is being made. The
w w w w w w w w w w w w w
wproperty being assessed is the team‘s record to date. Hence, a team with a 6-0-0 record is usually
w w w w w w w w w w w w w w w w w
wranked higher than a team with a 5-0-1 record.
w w w w w w w w
Q-10 Accounting practitioners have criticized some proposed accounting standards on the
w w w w w w w w w
wgrounds that they would be difficult to implement because of measurement problems.
w w w w w w w w w w w
wThey therefore conclude that the underlying theory is inappropriate. Assuming that the
w w w w w w w w w w w
wcritics are correct about the implementational difficulties, would you agree with their
w w w w w w w w w w w
thinking? Discuss. w
This question brings together the relationship among theory, policy, and practice. It also brings
w w w w w w w w w w w w w
up Larson‘s warning of the necessity to differentiate between theory and measurement even
w w w w w w w w w w w w w
though we believe that Larson‘s statement is too strong. Hence, even though the practitioners
w w w w w w w w w w w w w w
may be correct about the measurement process recommended by the proposed standard, it does
w w w w w w w w w w w w w w
not necessarily mean that the underlying theory is inappropriate. Some theories may indeed lead
w w w w w w w w w w w w w w
to dead ends in terms of implementation. More time may also need to be taken to make the
w w w w w w w w w w w w w w w w w w
measurements operational.
w w
Q-11 Some individuals believe that valuation methods proposed by a standard-setting body
w w w w w w w w w w
such as FASB should be based on those measurement procedures having the highest
w w w w w w w w w w w w w
degree of objectivity as defined by Equation (1.1). Thus, some assets might be valued on
w w w w w w w w w w w w w w w
the basis of replacement cost and others on net realizable value. Do you see any problems
w w w w w w w w w w w w w w w w
with this proposal? Discuss.
w w w
The problem here is basically the opposite of that presented in question 10. In this case, part of
w w w w w w w w w w w w w w w w w
the measurement problem might be solved, but at the cost of sacrificing the theoretical base.
w w w w w w w w w w w w w w w
Hence, the cart is put before the horse, conceptually speaking. However, there are other
w w w w w w w w w w w w w
measurement problems presented by this proposal. It is questionable whether replacement cost
w w w w w w w w w w w w
dollars and net realizable value dollars can be meaningfully added together, even if computed for
w w w w w w w w w w w w w w w
Accounting Theory (8th edition) w w w Page 4 of 14 w w w
w w w w w w w w w w w
Wolk James Dodd John Rozycki (Instructor Manual All Chapters, 100% Original Verified, A
w w w w w w w w w w w w w
+ Grade) w
Chapter 1: An Introduction to Accounting Theory Instructor’s Manual
w w w w w w
w
CHAPTER HIGHLIGHTS W
The chapter is concerned with what accounting theory is and where it fits within the ―structure‖
w w w w w w w w w w w w w w w
of financial accounting. The definition of accounting theory used in this chapter is broad and
w w w w w w w w w w w w w w w
complements the objectives of the text. Theory itself helps to explain and predict phenomena
w w w w w w w w w w w w w w
that exist in a given field, and this likewise holds true in accounting. In accounting, theory can
w w w w w w w w w w w w w w w w w
be developed in response to needs arising from practice, including concepts such as realization
w w w w w w w w w w w w w w
and matching. However, as an ―infrastructure‖ has developed in financial accounting, theory is
w w w w w w w w w w w w w
formulated in a more institutionalized way by means of the research process.
w w w w w w w w w w w w
Along with political factors and economic conditions, accounting theory contributes to the
w w w w w w w w w w w
standard-setting process. The process of developing standards or making rules is itself largely a
w w w w w w w w w w w w w w
deductive process and is certainly concerned with accounting theory.
w w w w w w w w w
The relationship of theory to measurement is very important. While some see measurement as
w w w w w w w w w w w w w
closely related to but separate from theory (as we did in earlier editions), its importance relative
w w w w w w w w w w w w w w w w
to theory is so great that we now consider it to be part of theory. Measurement is the assignment
w w w w w w w w w w w w w w w w w w w
of numbers to the attributes or properties of objects being measured. The different types of
w w w w w w w w w w w w w w w
measurements and the quality or ―goodness‖ of measurements are examined. The latter
w w w w w w w w w w w w
embodies (1) the usefulness of the measurement, illustrated here in a predictive context but
w w w w w w w w w w w w w w
showing up later in an assessment mode and (2) verifiability or objectivity, which is the degree
w w w w w w w w w w w w w w w w
of consensus among measurers in the statistical sense.
w w w w w w w w
The various valuation models are presented in Appendix 1-A. The models come under the scope
w w w w w w w w w w w w w w
of accounting theory. In addition, the different models are mentioned in several theory chapters
w w w w w w w w w w w w w w
before being discussed in depth in Chapter 14. Even if there is no desire to go further into
w w w w w w w w w w w w w w w w w w
inflation accounting in Chapter 14, it is important for students to gain a rudimentary grasp of the
w w w w w w w w w w w w w w w w w
concepts involved, as illustrated in Appendix 1-A.
w w w w w w w
QUESTIONS
Q-1 What does the term ―social reality‖ mean and why are accounting and accounting theory
w w w w w w w w w w w w w
important examples of it? w w w
The term social reality pertains to the measurement of social phenomena and the use of these
w w w w w w w w w w w w w w w
measurements. The measurements may be representationally faithful (low in bias) and have a
w w w w w w w w w w w w w
high degree of objectivity (verifiability). Or the opposite for either or both of these qualities may
w w w w w w w w w w w w w w w w
be the case. The important thing to grasp, however, is that important consequences stem from
w w w w w w w w w w w w w w w
the measurement, whether they are ―good‖ or ―bad.‖ For example, an excellent year in terms of
w w w w w w w w w w w w w w w w
income could cause management to be highly rated by shareholders and other interested parties,
w w w w w w w w w w w w w w
resulting in high management bonuses, or provide increased dividends to shareholders. All of
w w w w w w w w w w w w w
this could occur even though income is a ―construct‖: not a ―real‖ factor but a conceptual
w w w w w w w w w w w w w w w w
artifact.
w
This example shows why accounting is an important area relative to social reality measurements
w w w w w w w w w w w w w
and constructs. Hopefully, accounting theory can improve the fairness and usefulness of these
w w w w w w w w w w w w w
measurements.
w
Accounting Theory (8th edition) w w w Page 1 of 14 w w w
,Chapter 1: An Introduction to Accounting Theory
w w w w w w Instructor’s Manual w
Q-2 Why do the value choices (entry value, exit value, and historical cost) fall within the
w w w w w w w w w w w w w w
domain of accounting theory? w w w
These are examples of different concepts involved with measuring income which have different
w w w w w w w w w w w w
underlying purposes. These different purposes—which affect social reality—are discussed in the
w w w w w w w w w w w
appendix.
w
Q-3 Of the three inputs to the accounting policy-making function, which do you think is the
w w w w w w w w w w w w w w
most important? w
Of the three inputs (economic conditions, political factors, and accounting theory) to the policy-
w w w w w w w w w w w w
making function, economic conditions is clearly the most important input. Economic conditions
w w w w w w w w w w w
can easily influence the accounting theory track as well as the policy-making function. Inflation,
w w w w w w w w w w w w w w
for example, in the USA during the 1970s and 80s triggered a significant amount of theoretical
w w w w w w w w w w w w w w w w
work. Theory responded to the actual economic environment. Another prominent example of
w w w w w w w w w w w w
the influence economic conditions has is the merger and acquisition wave of the 1960s, which
w w w w w w w w w w w w w w w
lead to APB Opinion Nos. 16 and 17. Many other standards have also been triggered by
w w w w w w w w w w w w w w w w
economic conditions.
w w
Q-4 How can political factors be an input into accounting policy-making if the latter is
w w w w w w w w w w w w w
concerned with governing and making the rules for financial accounting?
w w w w w w w w w
Those who are affected by the rules will usually try to influence what those rules will be. The
w w w w w w w w w w w w w w w w w
investment tax credit provides an excellent example. When APB Opinion No. 2 did not allow
w w w w w w w w w w w w w w w
flow through, lobbying led to APB Opinion No. 4, which did allow immediate recognition in
w w w w w w w w w w w w w w w
income of investment tax credits. The stock option battles of the 1990‘s (and continuing today)
w w w w w w w w w w w w w w w
is another example of the political process and its effect on rule-making. From a predictive
w w w w w w w w w w w w w w w
standpoint, we are concerned with how and why political factors play a role in the standard-
w w w w w w w w w w w w w w w w
setting process. w
Q-5 Is accounting theory, as the term is defined in this text, exclusively developed and refined
w w w w w w w w w w w w w w
through the research process? w w w
Absolutely not. Many concepts such as conservatism and revenue recognition arose on a
w w w w w w w w w w w w
―common law‖ type of basis. They were responses to particular problems. Research has, of
w w w w w w w w w w w w w w
course, dealt with these issues. Any attempt to leave these concepts outside of the definition of
w w w w w w w w w w w w w w w w
accounting theory would make the subject matter of accounting theory artificial and incomplete.
w w w w w w w w w w w w w
Accounting Theory (8th edition) w w w Page 2 of 14 w w w
,Chapter 1: An Introduction to Accounting Theory
w w w w w w Instructor’s Manual w
Q-6 What type of measurement is the measurement of objectivity in Equation (1.1): nominal,
w w w w w w w w w w w w
ordinal, interval, or ratio scale?
w w w w w
It is ordinal, due to the squaring effect on each individual deviation from the mean. The zero
w w w w w w w w w w w w w w w w
wpoint, however, is unique. Hence, there would be perfect consensus among measurers. It would
w w w w w w w w w w w w w
wmean that each individual measurement would be the same for all measurers.
w w w w w w w w w w w
Q-7 The measurement process itself is quite ordinary and routine in virtually all situations.
w w w w w w w w w w w w
Comment on this statement. w w w
This is not necessarily the case. Measurements can be extremely complex. For example,
w w w w w w w w w w w w
measuring the temperature of the earth‘s atmosphere is extremely difficult. The increasing
w w w w w w w w w w w w
temperature has led both to the hypothesis of the greenhouse effect and to the theory that the
w w w w w w w w w w w w w w w w w
warming global temperatures are simply a fluctuation, a naturally occurring variation.
w w w w w w w w w w w
Measuring the success of a man‘s life can be perplexing. How does accumulation of Bill Gates‘
w w w w w w w w w w w w w w w
monetary wealth compare with the accomplishments of Ghandi, Nelson Mandela, or Wolfgang
w w w w w w w w w w w w
Amadeus Mozart? What does one actually measure to determine success?
w w w w w w w w w w
Measurements in accounting are significantly less complex, but should not be taken lightly. For
w w w w w w w w w w w w w
example, determining the replacement cost or exit value of a firm‘s machinery and equipment is
w w w w w w w w w w w w w w w
not an easy task. Determining net income or earnings during a specified period of time may be
w w w w w w w w w w w w w w w w w
more complicated that it appears to be on the surface.
w w w w w w w w w w
Q-8 Can assessment measures be used for predictive purposes?
w w w w w w w
Though an assessment measure concerns an attribute or characteristic of an object at the present
w w w w w w w w w w w w w w
time, it could be used as a surrogate for a prediction measure if none exists. For example, the
w w w w w w w w w w w w w w w w w w
best indicator of the current ratio of a firm in a year may be the current ratio today, if budgets
w w w w w w w w w w w w w w w w w w w w
have not been prepared.
w w w w
Q-9 A great deal of interest is generated each week during the college football and college
w w w w w w w w w w w w w w
basketball seasons by the ratings of the teams by the Associated Press and United Press
w w w w w w w w w w w w w w w
International. Sports writers or coaches are polled on what they believe are the top 25
w w w w w w w w w w w w w w w
teams in the country. Weightings are assigned (25 points for each first place vote, 24 for
w w w w w w w w w w w w w w w w
each second place vote, . . . one for each 25th place vote) and the results are tabulated.
w w w w w w w w w w w w w w w w w w
The results appear as a weekly listing of the top 25 teams in the nation. Do you think that
w w w w w w w w w w w w w w w w w w
these polls illustrate the process of measurement? Discuss.
w w w w w w w w
An argument can be made that a number is assigned to a team on the basis of a property that
w w w w w w w w w w w w w w w w w w w
might be called the ―goodness‖ or ―strength‖ of a team. However, these measurements do not
w w w w w w w w w w w w w w w
Accounting Theory (8th edition) w w w Page 3 of 14 w w w
, Chapter 1: An Introduction to Accounting Theory
w w w w w w Instructor’s Manual w
have a great deal of precision. How good a team is relative to other teams is a property or
w w w w w w w w w w w w w w w w w w
quality that is extremely intangible compared to other measurements such as median weight of
w w w w w w w w w w w w w w
interior linemen, average speed of running backs per 100 meters, etc. Unquestionably, the
w w w w w w w w w w w w w
measurements are indirect.
w w w
The qualifications of the measurers are also open to question. Do sportswriters really ―know‖
w w w w w w w w w w w w w
football? Constraints are also present because the voters may have seen very few teams and they
w w w w w w w w w w w w w w w w
may also have regional biases. The numbering scale used is basically ordinal because 1 is
w w w w w w w w w w w w w w w
considered to be better than 2, which is better than 3. However, the ―goodness‖ of the interval
w w w w w w w w w w w w w w w w w
between rankings is not uniform. For example, a voter may feel it is a virtual ―toss-up‖ between
w w w w w w w w w w w w w w w w w
1 and 2, both of which he considers to be vastly superior to 3. As a result, the aggregating
w w w w w w w w w w w w w w w w w w w
process is open to serious question.
w w w w w w
It is also not clear whether the pollsters are making assessment or prediction measures. The
w w w w w w w w w w w w w w
wmeasures would be prediction measures if the voter presumes that 1 would beat 2 if they played
w w w w w w w w w w w w w w w w
wthe following week. We suspect, however, that an assessment measure is being made. The
w w w w w w w w w w w w w
wproperty being assessed is the team‘s record to date. Hence, a team with a 6-0-0 record is usually
w w w w w w w w w w w w w w w w w
wranked higher than a team with a 5-0-1 record.
w w w w w w w w
Q-10 Accounting practitioners have criticized some proposed accounting standards on the
w w w w w w w w w
wgrounds that they would be difficult to implement because of measurement problems.
w w w w w w w w w w w
wThey therefore conclude that the underlying theory is inappropriate. Assuming that the
w w w w w w w w w w w
wcritics are correct about the implementational difficulties, would you agree with their
w w w w w w w w w w w
thinking? Discuss. w
This question brings together the relationship among theory, policy, and practice. It also brings
w w w w w w w w w w w w w
up Larson‘s warning of the necessity to differentiate between theory and measurement even
w w w w w w w w w w w w w
though we believe that Larson‘s statement is too strong. Hence, even though the practitioners
w w w w w w w w w w w w w w
may be correct about the measurement process recommended by the proposed standard, it does
w w w w w w w w w w w w w w
not necessarily mean that the underlying theory is inappropriate. Some theories may indeed lead
w w w w w w w w w w w w w w
to dead ends in terms of implementation. More time may also need to be taken to make the
w w w w w w w w w w w w w w w w w w
measurements operational.
w w
Q-11 Some individuals believe that valuation methods proposed by a standard-setting body
w w w w w w w w w w
such as FASB should be based on those measurement procedures having the highest
w w w w w w w w w w w w w
degree of objectivity as defined by Equation (1.1). Thus, some assets might be valued on
w w w w w w w w w w w w w w w
the basis of replacement cost and others on net realizable value. Do you see any problems
w w w w w w w w w w w w w w w w
with this proposal? Discuss.
w w w
The problem here is basically the opposite of that presented in question 10. In this case, part of
w w w w w w w w w w w w w w w w w
the measurement problem might be solved, but at the cost of sacrificing the theoretical base.
w w w w w w w w w w w w w w w
Hence, the cart is put before the horse, conceptually speaking. However, there are other
w w w w w w w w w w w w w
measurement problems presented by this proposal. It is questionable whether replacement cost
w w w w w w w w w w w w
dollars and net realizable value dollars can be meaningfully added together, even if computed for
w w w w w w w w w w w w w w w
Accounting Theory (8th edition) w w w Page 4 of 14 w w w
