Accounting theory may also be used to explain existing practices to obtain a If it is possible to develop an accounting theory (Hendriksen and McDonald) then. Get this from a library! Accounting theory. [Eldon S Hendriksen; Michael F Van Breda]. Fourth Edition. ACCOUNTING. THEORY. Eldon S. Hendriksen. Professor of Business Administration. University ofSanta Clara. L~echecs16.infoD D. IRWIN .
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Accounting Theory 5th. e. Hendriksen - Ebook download as PDF File .pdf) or read book online. ACCOUNTING. THEORY. Eldon S. Hendriksen, Ph.D., C.P.A.. Professor of Business The approach to accounting theory presented is based primarily on. View Accounting Theory - Eldon S. echecs16.info from MARH at Universidade Federal do Espírito Santo. Fourth Edition. ACCOUNTI G THEORY.
Abstract Purpose: The purpose of this paper is to review literature devoted to intangibles and their valuation and give examples of the methods that can be used for valuation of individual intangibles in financial terms. Findings: This article presents the definitions of intangibles, intangible assets, knowledge assets and other related terms. These terms are used interchangeably in spite of their different meanings. Differences and relations between these terms are clearly explained. The paper also proposes the list of basic intangibles with suggested methods for their valuation in financial terms. Income and cost approaches should be used mainly in this purpose. Market approach has only limited use.
The average number of shares listed on the New York Stock Exchange in was about 60 million shares, compared with million in and 1, million in unadjusted for stock splits. Ripley and J. Hoxsey, were particularly influential in stating the case for an improvement in accounting standards for reporting to stockholders and investors.
Ripley, professor of economics at Harvard, made an attack on the accounting practices of the 2 New York Stock Exchange Faci Book p. He argued that this information should avoid misleading the stockholders in any respeet and should aid them in determining the true value of their investments.
These changes are evident in the literature and in the pronouncements of several interested organizations before and after It is interesting to note that these changes in accounting thought were not the direct result of the stock market crash of nor the depression ofthe s, but rather they were the result of institutional ehanges that had begun rnuch earlier and to which accountants had not as yet adapted themselves.
They were, of course, made more urgent by the events of the period. One of the most significant of these changes was the shift in emphasis from the balance sheet to the income statement oecurring in the United States and in Europe during the period from about World War I to the late s. As early as , Schmalenbach in Germany had pointed out that annual accounts should provide information about the operations of a business as weU as about the state of its capital.
The effect of this was, as we sha11see from the writings and pronouncements of the s and s, to foeus attention on the nature of allocations and accruals and their consequent effect on income. There is also evidence of an increasing arbitrary use during this period af deferrals of losses and income items to 3 William Z.
Ripley, "Stop, Look, Listen! Hoxsey, "Accounting for lnvestors," Journal af Accouniancy, October , pp. Ch"ptcl' 2 permit a smoothing of income from one yeal' to the next. This led to the attempts in the s to establish better standal'ds for the pl'esentation of the income statement.
A second step was taken in when a committee of the Association was appointed to formulate definitions of technical accounting terms in order to give uniformity to their meaning.
Subsequent pronouncements were intended to standardize audit procedures and to facilitate the presentation of financiaI statements useful to bankers. After this memorandum was approved by the council ofthe Institute and the Federal Trade Commission, it was presented to the Federal Reserve Board for consideration. The Federal Reserve Board gave it tentative endorsement and submitted it to bankers and banking associations throughout the country for their consideration and criticism.
The edition, like the edition, set forth suggestions for the verification and preparation of statements specifically for credit purposes. It stated, however: "A more condensed form of balance sheet is usually prepared for general distribution, but in no case should any essential feature be omitted.
Government Printing Office, , p. See also Journal of Accountancy, May , pp. Departures from the cost basis were permitted if disclosure was made regarding the basis of the appraisal. The following observations relating to the profit and loss statement were suggested in the bUlletin: 1 Depreciation is included under the caption "deduetions from income" along with interest and taxes. The revision of the bulletin was prepared and published by the American Institute of Accountants and entitledExamination ofFinancial Statements by Independent Public Accountants.
This bulletin serves as an interesting contrast to the edition. The preface to this edition states: Developments of acconnting practice during recent years have been in the direction of increased emphasis on accounting principIes and consis- tency in their application,and of fuller disclosureof the basis on which the accountsare stated..
The suggestionscontainedin this bulletin are intendedto applyto examinationsby independentpublicaccountants offinanciaistatements prepared for credit purposesor forannual reports to stockholders. The general objective of accounting statements is changed: FinanciaI statements are prepared for the purpose of presenting a periodicalr,eviewor report on progressby the management and deal with the status af the investment in the business and the results achieved during the period under review.
New York: January , p. Ch lptel" 32 2 2. An increased emphasis on the cost basis and the going-concern concept is specifical1y statec1: Oneofthe important accountingconventionsis that the balancesheet of a goiugcoucemshall be prepared onthe assumptionthat the concemwill continue in business.
Plant assets 1 permanent investments and intangi. With the increased emphasis on the cost basis, the writers of the bulletin recognized the need for greater consistency in the application of procedures. Reflecting the need for better information for investors, the need for an improvement in the reporting of income and the recognition of the earning power concept of income are stated in the bul1etin: From an investor's point af view.
The emphasis on the income statement is then reftected in the general approach to the balance sheet-recognizing changes in the balance sheet from year to year, rather than placing significance in a single statement. The suggested profit and loss statemei1t is more concise than that recommended in Nonoperating or extraordinary charges and credits are included in the "other income" and "other charges" captions. The item "net income for the period" is then eliminated, and the final figure is ca11ed"net profit loss for period carried to surplus.
Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent on the continuation of the enterprise as a major customer.
Customers have an interest in information about the continuance of an enterprise. The providers of risk capital and their advisers are concerned with the risk inherent in and return provided by. They do not include special purpose reports such as prospectuses and tax computations para. The suggestion that because investors are providers of risk capital. This ability ultimately determines.
Activity feedback As a matter of logic. As investors are providers of risk capital to the enterprise. Either way it is widely accepted in practice. Enterprises affect members of the public in a variety of ways.
Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities. Financial statements prepared on the accrual basis inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future.
Under this basis. Information about performance is primarily provided in an income statement. Underlying assumptions Accrual basis 22 In order to meet their objectives. The four principal qualitative characteristics are understandability.
These correspond closely to the conventions and characteristics of Chapter 1. Hence it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations. Although each statement provides information that is different from the others. In other cases. For this purpose. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Relevance 26 To be useful. Materiality 29 The relevance of information is affected by its nature and materiality.
To have predictive value. In some cases. The substances of transactions or other events is not always consistent with that which is apparent from their legal or contrived form. Information has the quality of reliability when it is free from material error and bias and can be depended on by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. Faithful representation 33 To be reliable.
This is not due to bias. In such circumstances. Reliability 31 To be useful. In certain cases.
Substance over form 35 If information is to represent faithfully transactions and other events that it purports to represent. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty.
Compliance with International Accounting Standards. Completeness 38 To be reliable. Financial statements are not neutral if. Users need to be able to identify differences between the accounting policies for like transactions and other events used by the same enterprise from period to period and by different enterprises.
To provide information in a timely basis it may often be necessary to report before all aspects of a transaction or other event are known. In achieving a balance between relevance and reliability. Constraints on relevant and reliable information Timeliness 43 If there is undue delay in the reporting of information it may lose its relevance. The relative importance of the characteristics in different cases is a matter of professional judgement.
Balance between qualitative characteristics 45 In practice a balancing. For these reasons. It is also inappropriate for an enterprise to leave its accounting policies unchanged when more relevant and reliable alternatives exist. Management may need to balance the relative merits of timely reporting and the provision of reliable information.
It is not appropriate for an enterprise to continue accounting in the same manner for a transaction or other event if the policy adopted is not in keeping with the qualitative characteristics of relevance and reliability. There are four principal qualitative characteristics.
Although this framework does not deal directly with such concepts. Table 8. In particular: This last paragraph concerning fair presentation has been rather overtaken by events. Not every national tradition would accept them. There are a number of peculiarities about these suggested relationships. There are two. It is worth emphasizing the suggested interrelationships between these various notions.
As noted earlier. A current asset. Assets may result from various types of past transactions and other past events. The essential criterion is the intention of the owner. Expected future transactions or events do not give rise to assets. Neither having physical form nor being the object of a right of ownership is an essential attribute of an asset.
While expenditure is a common way to acquire or generate an asset. Activity feedback None of these is an asset because: It possesses some motor vehicles that it is attempting to sell. An enterprise may have a commitment to download an asset in the future at an agreed price.
Examples are the difference among the following: Paragraph 64 does not emphasize the equally important point that a provision that fails to satisfy the criterion of being an obligation arising from a past transaction or past event is not a liability. This point. Business Combinations and IAS Equity Paras 65—68 are concerned with equity.
The commitment does not give rise to a liability. In the accounts of A. A and B. Firm A is a motor trader. Contingent Liabilities and Contingent Assets see Chapters 18 and A present obligation in the relevant sense is not the same as a future commitment. There are a number of ways in which a liability may be settled or discharged. A current asset is an asset likely to change its form. In the accounts of B. The duty or responsibility may arise from the law.
In the case of a cash transaction. The rather obvious point is made that the amount at which equity is shown in the balance sheet is not intended to be a measure of the market value of the enterprise.
Revenue is described as arising in the course of the ordinary activities of an enterprise and includes.
This term is potentially misleading. There are various legal. It is emphasized that transfers to legal. The recognition criteria set out in para. Gains may arise on the disposal of non-current assets and also include unrealized gains such as those arising on the revaluation of marketable securities and from increases in the carrying amount of long-term assets. Losses represent items that may or may not arise in the course of ordinary activities. Gains may or may not arise in the course of ordinary activities.
This refers. Recognition is subject to materiality. The counterpart entry corresponding to a credit for income may be to various asset accounts not only cash or receivables or to a liability account such as when a loan is discharged by the provision of goods or services para. Examples given of expenses that arise in the course of ordinary activities are cost of sales.
They usually take the form that is. The intention of management in undertaking the expenditure is irrelevant paras 89— Professional judgement is required in the context of the particular situation in which the enterprise concerned operates.
In regard to receivables. If an item does not possess a cost or value that can be measured with reliability so that the information has that qualitative characteristic. The Framework does not pretend otherwise.
Reliability of measurement Reliability. This applies when the item meets the probability criterion of recognition but not the reliability criterion. An item that does not satisfy the recognition criteria for an asset or a liability at one time may do so later. Obligations under executory contracts.
Current cost may be used as a means of taking account of the effects of changing prices of non-monetary assets. In either case. It involves the selection of a particular basis of measurement. An example is the matching of the cost of goods sold with the associated sales revenue. Marketable securities may be carried at market value and pension liabilities are carried at their present value.
An example of the latter is the carrying of inventories at the lower of historical cost and net realizable value. The treatment here is descriptive and avoids being prescriptive. Recognition of expenses Recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets or a combination of the two.
These procedures are concerned with restricting the recognition of income to items that. The physical. An example is the requirement that revenue should be earned that is. Operating capability embodied in assets may. Under real physical capital maintenance. Presentation of Financial Statements represents an attempt to cover several important aspects.
As a full Standard. Presentation of Financial Statements. IAS 1 Presentation of Financial Statements It is most important to remember that the Framework has not been revised since and is now. Readers should be very familiar with the concepts underlying these alternatives.
Different combinations of measurement bases and capital maintenance concepts provide different accounting models. Both of these are concerned. At the beginning of the year. To achieve this objective. The item of inventory is sold at the end of the year for i Part 2 is covered in Chapter 9. Inventories see Chapter It is worth noting that most national accounting standards operate. IAS 1 consists of two parts. There is. To some extent. Property Plant and Equipment see Chapter IAS 1 applies to all aspects of all businesses.
They include statements presented separately or those within another public document such as an annual report or prospectus. Broadly speaking.
Consistent with our chapter structure in this book. Much of Part 1 is a restatement of aspects of the Framework.
This is discussed and illustrated in more detail in Chapter 9. The appropriate application of International Accounting Standards. Brief suggestions as to coverage are made in paragraph 8. In the extremely rare circumstances when management concludes that compliance with a requirement in a Standard would be misleading and therefore that departure from a requirement is necessary to achieve a fair presentation. Item 3 may be a new concept in some jurisdictions.
Enterprises which comply with IASs should say so. This requires that they comply with all applicable aspects of all applicable Standards and with all applicable interpretations of the Standing Interpretations Committee. Further additional statements and reports.
The issue at stake is whether or not the detailed regulations. IAS 1 encourages. The UK requirement to give a true and fair view equally clearly means to follow Standards where suitable. This is not to imply that the override is likely to be used in similar ways or in similar volumes in the various jurisdictions where it exists. The question of terminology and national positions here is both important and potentially confusing.
A fair presentation requires para. We predict that its usage under the IASB will indeed be rare. But an important issue of principle is at stake. In general. All these terms are taken from the Framework and their implications have already been discussed.
In such circumstances departure from the Standard is required. IASB will monitor instances of noncompliance that are brought to its attention by enterprises.
More recently the new Board of IASB has taken steps to emphasize the rare nature of the use of the override. The override can only be applied when following the Standard plus providing additional information would not give a fair presentation i.
IASB is at pains to minimize the likelihood of this happening. IAS 1 requires in addition. When management is aware. The Framework principle continues to relate. Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading or has no realistic alternative but to do so.
Some other Standards do so require. The going concern assumption means that it is assumed that the enterprise will continue in operation for the foreseeable future. IAS 1. IAS 1 also incorporates the principle of consistency from para. The Framework states.