ACCOUNTING

THEORY:
TEXT AND READINGS
RICHARD G. SCHROEDER
MYRTLE CLARK
JACK CATHEY
 CHAPTER 1

THE DEVELOPMENT OF
ACCOUNTING THEORY
Introduction
What is theory?

Webster defines theory as:

Systematically organized knowledge, applicable in a relatively wide
variety of circumstances, a system of assumptions, accepted principles
and rules of procedure to analyze, predict or otherwise explain the
nature of behavior of a specified set of phenomena.
Normative theory
Positive theory
Why is the development of a general theory of
accounting important?
What is the relationship of accounting research
to accounting theory?
THE EARLY HISTORY OF
ACCOUNTING
The Zenon Papyri
The impact of the Renaissance
Fra Luca Pacioli
The evolution of joint ventures into ongoing
businesses
The impact of the industrial revolution and the
progressive movement
The concept of capital maintenance
The accountant as a protector of business interests
ACCOUNTING IN THE
UNITED STATES SINCE
1930
Meetings between NYSE and AIA
AAA
SEC
Securities Act of 1933
Securities Exchange Act of 1934
Committee on Accounting Procedure
Accounting Principles Board
Financial Accounting Standards Board
THE ACCOUNTING
PRINCIPLES BOARD
Formation and structure
Types of pronouncements
APB Opinions
The flap over accounting for the investment
tax Credit
Rule 203
Criticism of the APB
 THE FINANCIAL
ACCOUNTING STANDARDS
BOARD
The Wheat Committee
The Trueblood Committee
The FASB was established
The structure of the FASB
is illustrated in the
following diagram
 Structure of the FASB
Appoint and Financial Govern Appoint
Board of Electors
fund
------- Accounting
| Trustees
| Foundation
|
Appoint and
fund
Financial
Accounting Financial
Task Forces
Standards Accounting Appoint of the
Advisory Standards
Standards
Committee Board
Board
(approx. (7 members)
20 members)

Admin. Research Staff

Staff
 FASB
Mission
Types of pronouncements

Statements of Financial Accounting Concepts

Statements of Financial Accounting Standards
Interpretations
Technical Bulletins
FASB
Emerging Issues
Standards Overload
Standard setting as a political process
Economic Consequences
 GAAP

Evolution of phrase:
Changed wording of auditors certificate brought about by
meetings between NYSE and AIA
The APBs definition
The Auditing Standards Executive Committees definition
The current sources of GAAP consist of four levels
described as A, B, C, and D by Statement of Auditing
Standards No 69
GAAP Hierarchy

LEVEL A:
FASB Statements
FASB Interpretations
SEC Rules and Interpretive Releases
Accounting Principles Board Opinions (unless amended)
Account Research Bulletins (unless amended)

LEVEL B:
FASB Technical Bulletins
AICPA Industry Audit Guides that have been reviewed by the FASB
GAAP Hierarchy

LEVEL C:
AcSEC Practice Bulletins that have been reviewed by the FASB
Consensuses reached by the EITF

LEVEL D:
AICPA Accounting Interpretations (no longer issued)
FASB Implementation Guides
Other widely recognized or prevalent accounting practices
The Business Reporting
Research Project
Steering Committee
Working Groups
THE ROLE OF ETHICS IN
ACCOUNTING
The public accountant as a
watchdog
Accounting in Crisis The
Events of the Early 2000s
Enron and the Accounting Scandals
 Accounting in Crisis The
Events of the Early 2000s
Two major changes in the accounting profession have
taken place in the wake of the accounting scandals:
1. Arthur Andersen

formerly one the Big 5 audit firms

has gone out of business
2. Sarbanes-Oxley Act
President Bush signed into law July 2002
imposes a number of corporate governance rules on publicly traded
companies (Discussed in Chapter 17).
 International Accounting
Standards
The concept of harmonization
The IASB
The IASBs objectives:
1. To formulate and publish in the public interest accounting
standards to be observed in the presentation of financial
statements and to promote their worldwide acceptance and
observance
2. To work generally for the improvement and harmonization of
regulations, accounting standards, and procedures relating
to the presentation of financial statements.
41 Statements of Accounting Standards and 5
Statements of Financial Reporting Standards to date