Solution Manual for Accounting Theory: Conceptual Issues in a Political and Economic Environment , 8th Edition

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Chapter 1:An Introduction to Accounting TheoryAccounting Theory (9thedition)Page 1 of 14CHAPTERHIGHLIGHTSThe chapter is concerned with what accounting theory is and where it fits within the “structure”of financial accounting. The definition of accounting theory used in this chapter is broad andcomplements the objectives of the text. Theory itself helps to explain and predict phenomenathat exist in a given field, and this likewise holds true in accounting. In accounting, theory canbe developed in response to needs arising from practice, including concepts such as realizationand matching. However, as an “infrastructure” has developed in financial accounting, theory isformulated in a more institutionalized way by means of the research process.Along with political factors and economic conditions, accounting theory contributes to thestandard-setting process. The process of developing standards or making rules is itself largely adeductive process and is certainly concerned with accounting theory.The relationship of theory to measurement is very important. While some see measurement asclosely related to but separate from theory (as we did in earlier editions), its importance relativeto theory is so great that we now consider it to be part of theory. Measurement is the assignmentof numbers to the attributes or properties of objects being measured. The different types ofmeasurements and the quality or “goodness” of measurements are examined. The latterembodies (1) the usefulness of the measurement, illustrated here in a predictive context butshowing up later in an assessment mode and (2) verifiability or objectivity, which is the degreeof consensus among measurers in the statistical sense.The various valuation models are presented in Appendix 1-A. The models come under the scopeof accounting theory. In addition, the different models are mentioned in several theory chapters.QUESTIONSQ-1What does the term “social reality” mean and why are accounting and accountingtheory important examples of it?The termsocial realitypertains to the measurement of social phenomena and the use of thesemeasurements. The measurements may be representationally faithful (low in bias) and have ahigh degree of objectivity (verifiability). Or the opposite for either or both of these qualities maybe the case. The important thing to grasp, however, is that important consequences stem fromthe measurement, whether they are “good” or “bad.”For example, an excellent year in terms ofincome could cause management to be highly rated by shareholders and other interested parties,resulting in high management bonuses, or provide increased dividends to shareholders. All ofthis could occur even though income is a “construct”: not a “real” factor but a conceptualartifact.This example shows why accounting is an important area relative to social reality measurementsand constructs. Hopefully, accounting theory can improve the fairness and usefulness of thesemeasurements.

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