Accounting Theory
This fifth edition, like its
predecessors, is designed to provide a frame of reference for junior, senior, and graduate
courses in financial accounting and financial accounting theory; seminars on financial
accounting standards and issues; and seminars on the theory of income and asset valuation.
Those who wish to obtain a good understanding of financial accounting standards or want a
general survey of financial accounting theory and those who wish to study for the theory
section of the Uniform CPA Examination should also find this book useful.
It is assumed that the reader
has a knowledge of the basic structure of accounting. Experience has shown, however, that
mature students who have not studied accounting can understand the subject matter with
concurrent additional formal or independent study of this basic structure. A background in
finance or economics can also lead into this book.
A general frame of reference
has been used to evaluate the many areas of financial accounting theory and practice. The
frame of reference includes a number of theories that are not necessarily consistent with
each other and that may lead to different conclusions. Evaluations are made at three basic
levels:
1. The structural level the
relationships between and within procedural systems and financial reports.
2. The semantic
interpretation level the relationships of descriptions and measurements to real-world
phenomena.
3. The pragmatic level the
reactions of all individuals affected by accounting reports, including users (individually
and in aggregate) and producers of accounting information.
Emphasis is placed on the
inductive-deductive and the capital market approaches in the evaluations, although other
approaches are discussed where appropriate. In some cases, the several viewpoints
resulting from the different approaches are criticized without attempting to suggest a
solution or the best alternative. In other cases, the authors have expressed their own
views and presented supporting evidence based on a priori logic and empirical
findings where available. In all cases, suggested solutions are tentative and subject to
change as new evidence becomes available.
The first eight chapters of
this edition develop the foundations of accounting theory. They include an introductory
chapter, including a section on methodology, two chapters on the development of
accounting, a chapter on how generally accepted accounting principles have evolved, a
chapter describing the elements of financial reporting, a chapter on capital market
theory, another on decision theory, and one on accounting regulation.
The next three chapters
examine the income statement. They include two chapters on income measurement and one on
revenues and expenses. A chapter on reporting for price changes emphasizes their effect on
income determination, but also discusses the problems of asset measurement under
conditions of changing prices, including the use of current costs. This is followed by
eight chapters on the statement of financial position, each growing more specific than the
last. Assets are treated first, then liabilities, and finally equity. The final chapter
discusses the disclosure of relevant information to investors, creditors, and other
interested readers of financial statements.
A revolution has occurred in
accounting in the years in which this book has appeared. Where once inductive-deductive
reasoning was dominant, today empirical studies cast in a pragmatic framework are the
rule. This edition has sought to reflect this change by expanding its coverage of recent
research, while not neglecting the contributions of earlier researchers in accounting.
Among the basic changes in this edition are:
1. Greater use of the FASB's
Conceptual Framework to unify material throughout the book.
2. The addition of two
chapters to cover the early history of accounting and the search for accounting
principles, respectively.
3. The addition of a section
on ethics to the chapter on decision making.
4. Added stress on the
importance of cash flows by integrating it with the capital-maintenance approach to income
measurement, allowing the revenue-expense approach to income measurement to be given its
own chapter.
5. The combination in one
chapter of the recognition and classification of assets and liabilities, permitting one to
survey the statement of position as a whole before examining its components.
6. Giving asset measurement
its own chapter, allowing the chapter on inventory to be folded into the chapter on
current assets.
7. Separating pensions from
income taxes, enabling each to be treated at more length.
8. The addition of much new
end-of-chapter material, including a number of new cases.
904 pages