WEEKLY TASK

ACCOUNTING THEORY
(SUBJECT CODE: ECAU601401)
Chapter 12
CAPITAL MARKET RESEARCH
(Godfrey et.al. Accounting Theory 7th Ed)

Lecturer:
Mrs. Siti Nuryanah, S.E., M.S.M., M.Bus.Acc., Ph.D.

Group Member
1. Eggie Auliya Husna 1706105246
2. Fendhi Birowo 1706105290
3. Yolanda Tamara 1406612275

SALEMBA EXTENSION CLASS

ACCOUNTING PROGRAM
FACULTY OF ECONOMICS AND
BUSINESS UNIVERSITY OF INDONESIA
YEAR 2018
MINDMAP FOR CHAPTER 12

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 CHAPTER 12
CAPITAL MARKET RESEARCH

A. THE PHILOSOPHY OF POSITIVE ACCOUNTING THEORY

 Positive theory seeks to understand the phenomenon of accounting to observe empirical
events and using the results to make predictions about observations and or to predict the
future. This is different from descriptive theory, which focuses only on describing events,
and from normative theory, which regulates what must happen. Milton Friedman states
about positive accounting theory in economics: "The aim of positive science is the
development of valid 'theories' or 'hypotheses' and meaningful predictions about
 phenomena that have not been observed."
 Zimmerman emphasizes the purpose of positive accounting theory is to explain and
 predict accounting practices. This explanation means giving reasons for observed
practice. For example positive accounting theory seeks to explain why companies
continue to use historical cost accounting and why certain companies switch between a
number of accounting practice techniques means that this theory predicts phenomena.
Observed
 phenomena are not always future phenomena, they are phenomena that have occurred, but
are based on systematic evidence that has not been collected. Positive theory research
seeks to obtain empirical evidence about the attributes of companies that continue to use
the same accounting techniques from year to year versus the attributes of companies that
are constantly switching, even though standards have been realized.
 Positive accounting theory also has an economic focus and seeks to answer questions
 below:
a) What are the costs and benefits of using alternative accounting methods?
 b) What are the costs and benefits of regulations and the accounting standard-setting
 process?
c) What is the effect of reported financial statements on share prices?
d) Which accounting valuation models are superior in predicting future prices, returns,
earnings or cash flows?
 In order to answer these questions, positive accounting theory is based on several
assumptions about individual behavior:
a) Managers, investors, lenders and other individuals are assumed to be rational,
evaluative financial utility maximisers (REMs).
 b) Managers have discretion to choose accounting policies that directly maximise their
utility (self-interest) or to alter the firm’s  financing, investment and production
 policies to indirectly maximise their self interests.
c) Managers will take actions that maximize company value.

B. THE STRENGHTS OF POSITIVE THEORY

 Jensen argues that previous normative accounting theory became a positive theory of
accounting. Thus, in order for the corresponding material accounting policies, he believes

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 that it is necessary to know how the real world operates. Thus, we need to know what the
world of finance today when making adjustments to historical values before there are
normative changes in accounting standards.
 Dissatisfaction with the standard perspective, one of the criticisms of changes in
accounting standards is that accounting practices and audit practices are not entirely
based on identification, empirical observation or methods. Watt and Zimmerman
emphasized that the validity of data in accounting requires the specifications of both
purpose and objective functions. A positive example of an objective function is a
specification of how the measurement of assets at fair value affects the distribution of
wealth between shareholders, creditors and managers. This goes beyond more than
setting normative goals to change accounting to measure fair value.
 A normative theory based on value judgements, however, produces irrefutable
 prescriptions even if accounting theory is developed logically, does not determine
purpose or objective functions that are independent of the problem. With this
approach,
 prescription validity is irrefutable. According to Popper, there is no amount of empirical
testing –t hat is, theoretical testing of real world data can prove the theory to be true, but
theory must be refuted, or capable of falsification.
 Several factors prevent falsifiable theories:
a) It is not possible to prove or refute the claim that financial accounts should provide
lenders with a measure of the firm’s solvency because this is an value-laden
 judgement.
 b) It is not possible to prove or refute the claim that an objective of a financial accounts
should be report to investors about maintenance of the operating capacity  –  again,
 because this is a value-laden judgment.
 Theoretical requirements cannot be rated objectively because it is not possible to prove or
refute claims that either objective is more important than other. Thus, by Popper
standard’s normative and prescriptive theory is methodologically weak.
 There is a further methodological problem with normative and prescriptive theories: even
if they were falsifiable, the choice of the objective function would still have to be
justified.

C. THE SCOPE OF POSITIVE ACCOUNTING THEORY

 It is instructive to look at the development of positive accounting theory in two stages.
First and chronological research phase had previously been involved in accounting and
capital market behavior. The literature from this stage did not explain accounting
 practices, but it investigates the relationship between the announcement of accounting
data and share price reactions, which shows that financial statements prepared with the
historical cost method do not provide information used by the capital market in share
valuation, but, at the same time, accounting also does not monopolize information used
for companies. This value is an assumption that supports the argument that the best
accounting reports that might be able to service a function. Finally, financial economic

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REFERENCES:

Godfrey, Jayne, Allan Hodgson, Ann Tarca, Jane Hamilton, and Scott Holmes. (2010).
 Accounting Theory, 7th Ed.  John Wiley & Sons, Inc. (GOD)