Chapter 1 Financial Accounting Theory

1.1 What is Financial Accounting Theory?

Henderiksen (1970) Theory is defined as:
A coherent set of hypothetical, conceptual and pragmatic principles
forming the general framework of reference for a field of inquiry.
FASB a coherent system of interrelated objectives and fundamentals that
can lead to consistent standards.
Introduction theories of financial accounting
Accounting is a human activity and will consider such thing as peoples
behavior and/or peoples needs as regards financial information, or the
reason why people within organizations might select to supply particular
information to particular stakeholder group.
Theories will include consideration of:
Prescribe how, asset should be valued for external reporting purpose
(normative theories Current cost accounting), based on a particular
perspective of the role of accounting.

Predict that managers paid bonus on the basis of measures such as

profits will seek to adopt those accounting method that lead to an
increase in reported profit (i.e. Positive Accounting theory)

Predict that the relative power of a particular stakeholder group.

Seek to explain how an individuals cultural background will impact on

the types of accounting information to provide to people outside the
organization.

Predict that organization seeks to be perceived by the community as

legitimate and that accounting information can be used as a means of
gaining, maintaining or regaining the legitimacy to the organization
(i.e. Legitimacy Theory)