Term
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Definition
| Systematically organized knowledge, applicable in a relatively wide variety of circumstances; a system of assumptions, accepted principles, and rules of procedures to analyze, predict, or otherwise explain the nature of behavior of a specialized set of phenomena |
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Term
| What is the objective of theory? |
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Definition
| to explain or predict what is going on to understand the rule world |
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Term
| What are the two types of theories? |
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Definition
1. Normative is prescriptive
• Tells us what should be
• Given A, choose B
2. Positive describes how the world works
• What is (a little more of why it is)
• A then predict will happen B
• Both still relevant to accounting |
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Term
| Evolution of Accounting Theory PART 1: |
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Definition
Classical (early 1900s)
- Economics Driven
- Inductive reasoning ( explaining the existing accounting practices)
- Was not able to create a standardized system because everyone had a different method of practice |
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Term
| Evolution of Accounting Theory PART 2: |
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Definition
Normative (1930s)
- Market crashed--> great depression
- Deductive reasoning used- Economic income approach... What is income, when does it end and what is it made up of
- Rules made (sec 1933, sec 1934)
- Management was not yet held accountable |
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Term
| Evolution of Accounting Theory PART 3: |
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Definition
Finance-based (1960s)
- Borrowing from capital markets became the norm
- Empirical research began
- Decision Usefulness: Considers reactions to alternatives
- Information Economics: What is the information necessary to make a decision |
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Term
| Evolution of Accounting Theory PART 4: |
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Definition
| 70s FASB came into play and created the CONCEPTUAL FRAMEWORK --> informational perspective |
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Term
| Two Roles of Financial Accounting under the Information Perspective: |
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Definition
1. Facilitate decision making
2. Facilitate contracting |
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Term
| Conceptual framework does supply you a set of assumptions and principles to work with but it LACKS.... |
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Definition
-hypotheses
- Stewardship
- Measure (nom vs. constant)
-Reporting Entity (SPE?)
- Recognition/ Derecognition
-Disclosure guidance |
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Term
| Will theories predict perfectly? |
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Definition
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Term
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Definition
| Attempt to prove theories wrong! If you cant prove it wrong it makes the theory stronger … this is how it is improved over time |
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Term
| How are theories improved? |
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Definition
| Through attempts at falsification and ruling over a previous theory |
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Term
| What is the goal of the U.S. framework? |
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Definition
| help the user make decisions (creditors, lenders and investors) |
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Term
| Three levels of conceptual framework: |
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Definition
1. The “why” purpose
2.Bridge between two
Qualitative Characteristics:
- To be useful it must be relevant
- Faithful representation
- CVTU
3. The “how” implementation
- Assumption
- Principles
- Constraints |
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Term
| Issues with the U.S. Framework: |
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Definition
- Lack of Stewardship
- Disconnects between policies and definitions-- revenue recognition theory does not match with what defines revenue
- More than 1 party controlling an asset
- Series of liabilities
- Probability |
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Term
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Definition
| Fairly similar to GAAP, looking to converge the two systems, |
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Term
| What are the challenges Wayne Upton describes? |
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Definition
| Today’s economy is much different than when much of the accounting was developed (1950s)-- in the 1950's, business was based on manufacturing so there was a heavy emphasis on cost and inventory. Now we have business based on technology (intangibles). |
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Term
| Describe the new metric- Balanced Scorecard |
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Definition
| Balance scorecard – look at customers, financial, a more broad approach to understand what the business is like |
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Term
| Describe the new metric- Value chain scorecard (Lev) |
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Definition
Visual representation of what the business does and where value is added
- Ex. Customer service, support functions- legal, accounting, ect. |
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Term
| What does Upton recommend for the new economy in terms of reporting? |
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Definition
New paradigm
New metrics
Intangible assets |
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Term
| Upton's definition of an intangible asset: |
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Definition
Future economic benefits
Past transactions
Control |
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Term
| Upton recommend some alternatives for recognizing intangible assets..what are they? |
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Definition
Retroactive capitalization or restatement
Discovery (and identification) as the recognition event
In-process assets |
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Term
| What is the reasoning Upton gives for why microsoft has a large gap between BV and Market Capitalization? |
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Definition
One of the reasons for this huge gap is quite simply that MicroSoft has minimal intangible assets
on its balance sheet |
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Term
| Why does Upton believe there is a gap between MV and BV? |
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Definition
Gap between BV and MV – why?
1. Market assessments of differences between accounting measurement and underlying
value of recognized assets and liabilities
2. Market assessments of the underlying value of items that meet the definition of assets and
liabilities but are not recognized in financial statements
3. Market assessments of intangible value drivers or value impairers that do not meet the
definition of assets and liabilities
4. Market assessments of the entity’s future plans, opportunities, and business risks
5. Other factors, including puffery, pessimism, and market psychology |
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Term
| The three proposals for the "New Economy" as proposed by Upton include all of the following EXCEPT |
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Definition
| Maintain the current reporting system. |
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Term
| How certain must future economic benefits be to account for the item as an asset? |
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Definition
| There is no exact answer. |
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Term
| What is the basic idea behind normative accounting theory? |
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Definition
| Explain what accounting should be. |
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Term
| Which of the following approaches to accounting theory has not been considered? |
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Definition
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Term
| Which of the following is NOT a reason why US GAAP doesn't allow R&D capitalization? |
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Definition
| Capitalization can inflate assets. |
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Term
| In the manufacturing sector, research shows that corporate values are driven least by |
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Definition
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Term
| Which of the following is NOT a problem associated with the current US conceptual framework? |
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Definition
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Term
| According to FASB and IASB, the two primary qualitative characteristics of useful accounting informaiton are relevance and |
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Definition
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Term
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Definition
| the change in PV of future cash flows after proper adjustments for deposits or withdrawals-- recognizes all gains and losses regardless of realized or unrealized |
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Term
| Does Upton think FAS#2 is consistent with the conceptual framework? Why or why not? |
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Definition
| No, because he believes that there are recognized assets in the F/S's that have considerable uncertainty about whether the effort will result in success or failure---R&D efforts in progress and results of completed efforts meet the definition of an asset and thus should be capitalized |
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Term
| Does the author support capitalization of internally generated R&D? Why or why not? |
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Definition
| Upton believes that R&D should be capitalized because |
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Term
| What are two issues with intangible assets in the f/s's? |
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Definition
1. Time Gap
2. Correlation Gap |
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Term
| What are 4 reasons NOT to capitalize R&D? |
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Definition
1. Uncertainty of future benefits
2. Lack of causal relationship
3. Inability to measure future benefits
4. lack of usefulness |
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Term
| What was the major finding from the Amir and Lev research? |
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Definition
| Found that financial information (such as earnings, BV, CF's) are NOT relevant for pricing securities; however, when combined with non-financial information they can be relevant |
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Term
| What does investing in intangibles lead to? |
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Definition
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Term
| What provides an attractive compromise between disclosure and withholding of fundamental proprietary information? |
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Definition
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Term
| When disclosing information, accountants should make sure to separate ___ expenses and ___ expenses in heavily intangible industries |
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Definition
| Operating Expenses and R&D expenses |
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