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
Meetings between NYSE and AIA
1930

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
The
BOARD
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
fund
------|
|
|

Financial
Accounting
Foundation

Govern

Board of
Trustees

Appoint

Appoint and
fund

Financial
Accounting
Standards
Advisory
Committee
(approx.
20 members)

Admin.
Staff

Financial
Accounting
Standards
Board
(7 members)

Appoint

Research Staff

Task Forces
of the
Standards
Board

Electors

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

1.

Two major changes in the accounting profession have

taken place in the wake of the accounting scandals:
Arthur Andersen

formerly one the Big 5 audit firms

has gone out of business

Sarbanes-Oxley Act

2.

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.

2.

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
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