Accounting perspective

Question 1

Why is accounting studied through a utilitarian perspective?

Answer 1

Accounting being utilitarian refers to accounting being useful when making decisions.

(Accounting is a social science because it socially constructed and serves a human purpose)

Question 2

What is useful accounting referred to?

Answer 2

When accounting provides users with information that lets them make informed decisions

Question 3

What are the two principal reasons why we focus on capital market participants as the main users?

Answer 3

1. They have a lot of vested interests (takes huge risks when providing resources)
2. Major accounting standards take this perspective

(it could also be argued that the detailed information needed by capital market also is sufficient for other stakeholders)

Question 4

What’s the most important accounting item?

Answer 4

Net income, as it serves as an indicator of future earnings and credit worthiness

Question 5

Paint the four-fielder of how information can differentiate

Answer 5

(Quantitative and Financial) = financial statements and notes
(Qualitative and Non-financial) = number of employees, co2 emissions
(Qualitative and Financial) = Text discussing financial figures
(Qualitative and Non-financial) = Text discussing social or environmental strategies that aren’t directly quantifiable

Question 6

Which are the two other important perspectives to consider (except market participants)? And when can accounting be useful for them?

Answer 6

Taxation perspective - useful if it helps determine correct amount of tax
Social perspective - useful depending on the case, but could for example be useful on how a company works with environmental concerns

Question 7

Describe the Neoclassical firm

Answer 7

Owner is the entrepreneur (no principal agent problem)
No transaction costs 
Profit maximization 
Perfect information 
(Thus no need for financial reporting)

Question 8

What are the determinants of accounting quality?

Answer 8

Firm specific factors

 - Underlying transactions (faithfully represented and relevant)
 - Reporting incentives (accounting requires choices and incentives will always affect choices) 
 - Monitoring mechanisms 

Institutional factors

 - Industry and country regulation 
 - Enforcement of external parties

Question 9

What two reasons are there for not capturing underlying transactions?

Answer 9

Unintentional measurement errors (caused by uncertainty)

Intentional errors (earnings management)

Question 10

What does faithful representation mean?

Answer 10

Information is:

1. Complete
2. Neutral
3. Free from errors

Question 11

What does relevant information mean?

Answer 11

Information has:
1. Predictive value
(or)
2. Confirmatory value

Question 12

What types of incentives are there?

Answer 12

Economic incentives

 - Firm level (triggered by dept or adverse selection)
 - Managerial lever (tied to a manager's personality or goals)

Social/ Legitimisation incentives

 - Institutional theory (isomorphism)
 - Legitimisation theory (focused on implicit and explicit pressure from stakeholders)

Question 13

What monitoring mechanisms are there?

Answer 13

Board of directors
Auditors
Efficient contracts
(Keeps an eye on managements opportunistic behavior)

Question 14

What two types of theories exist?

Answer 14

Prescriptive (Normative) – explains how things should be done

Descriptive (Positive) – describes current practice, in observed behavior given structures and norms

Question 15

What’s the difference between scientific and non-scientific theories?

Answer 15

Scientific – constitutes a well-researched and rigorous explanation of a phenomenon

Non-scientific – a belief, conjecture, or hypothesis

Question 16

Paint the four-fielder of how theories can differentiate?

Answer 16

(Scientific and Descriptive) = positive theories in academic research
(Scientific and Prescriptive) = normative theories in academic research
(Non-scientific and Descriptive) = governmental statistics, firm-specific consulting research
(Non-scientific and Prescriptive) = standard setting

Question 17

What’s the main idea behind Positive accounting theory (PAT)?

Answer 17

Accounting should be concerned with what is and not what ought to be

Focus on utility maximizing actors, the sources of incentives, and the effect this has on accounting practise

It states that accounting choice defines contracts –> affects contracting costs –> have economic consequences

Question 18

What focus does journals primary take?

Answer 18

Capital market perspective

Positive data-driven research designs

Question 19

Explain Legitimacy theory

Answer 19

Organizational actions are shaped in a social context and therefore affected by society’s expectations
(Primary used in a CSR context)