March 1, 2015
Module #2 Assignment
1. The deductive approach to the development of accounting theory starts with the establishment of certain objectives. After identifying the objectives, key definitions and assumptions are stated. Later on, researchers develop a structure for accomplishing the objectives from the information of the definitions and assumptions. An example of deductive theory is political economy theory. The theory emphasizes the objective of accounting to not allow it to benefit one group over another. It also recommends viewing market and socio-economic forces in the development of accounting theory. Agency theory is also a normative theory, which attempts to explain behavior.
2. The inductive approach to the development of accounting theory makes observations and draws conclusions from the observations made, which goes from ...view middle of the document...
The study made through the approach was used by some accountants as an authoritative source to define current practice.
The five categories of information provided by a full set of financial statements include the following:
1. The statement of financial position is expected to provide information about an entity's assets, liabilities, and equity and its relationship to one another at a moment in time. It should also list the entity's resource structure major classes and amounts of assets, its financing structure-major classes, and amounts of liabilities and equity. The statement doesn’t determine the value of the business. It should be able to inform users planning on estimating the enterprise's value.
2. Earnings measures the performance of entity during a certain period. The measuring consists on how assets inflow and outflow. The concept of earning provided in SFAC No. 5 is similar to net income for a period in current practice. Certain adjustments from earlier periods are excluded and are now recognized in the current period. The concept of earnings will continue to be subject to gradual change, which characterized the concept’s development.
3. Comprehensive income includes the effects of transactions and other events from a particular entity. All recognized changes in equity of the entity during a period from transactions besides the investments made by owners and distributions to owners are compromised.
4. The statement of cash flows is expected to directly or indirectly reflect the cash receipts of an entity classified by major source. It should classify the entity’s cash payments, which are used for major purposes during a period. The statement of cash flows should include cash flow information such as operating, investing and financing activities.
5. A statement of investments by and distributions to owners reflects an entity's capital transactions during a period. This is to the extent to which and the ways the equity of the entity was increased or decreased from transactions made with owners.