Normative Accounting Theories - Example

Normative Accounting Theories Surname: Accounting: Date: Quiz one Theories of regulation The public interest theory Regarding the public interest theory, the correction of the market failure demands that regulation is the manifestation of political pressure borne by the public (Watty et al., 2013). For instance, the railroad companies have been enjoying monopoly power giving rise to discriminatory merchandise charges to the disadvantage of farmers and commercial firms operating in rural areas. To correct this market failure, Interstate Commerce Commission (ICC) was created and given the mandate to regulate it. Property rights incompletely specify the possibility of spillovers or externalities like air pollution. The Clean Air Act and regulation of firms are also regulated by the Environmental Protection Agency. Regulation is said to be a welfare enhancing which is better than natural monopolies. However the public interest theory has not got much support from economists in the contemporary life because of its assumptions that regulation need be there when needed and regulation aims at maximizing the societal interests whereas the firms are operating in the opposite way and in a way that the regulators are manipulated by the influential figures in the society to have their political gains. The capture theory The legal coercive power has been given to the government and therefore the supply of the monopoly power would be regulated. Thru this, the government can help control and protect small firms against rivalrous Government regulation can prevent the entry into lucrative markets and also protect incumbent firms from rivalrous price wars. Private firms always compete for a limited supply of regulation since the controlled firm often at times has a more stable and remunerative existence than the non-regulated firm. The regulatory body invariably tends to issue rules that function and favor the controlled businesses. For instance, at times, the regulatory agencies’ mandate shifts and they tend to work for the firms they regulate. This theory predicts that the regulated firms are likely to earn more profits as compared to the unregulated firms. As much as the theory is in operation it has some drawbacks. The theory does not supply a theoretical account of the process by which the regulators get captured. It does not square with the extensive practice of cross-subsidization in controlled firms. The theory finally cannot be reconciled with the long list of guidelines adopted by regulatory bodies but faced by controlled firms. Economic theory. This theory has not been famous since the 1960s as it was not generally accepted. There were other emergent theories like the capture theory which state that a regulation only come to serve the regulated individuals and responds to the interests of their demands and majorly focuses on the issue of rent seeking traits. The theory operates around the direct subsidies, controls on substitutes, entry restrictions or tariffs or price fixing. Thru the supply of votes, the regulation is sought and factors such as the cost of the mentioned regulated localization of benefits or costs will reflect those factors to politicians. However, there are issues including why the industry cannot bar the establishment of the regulator in the first place and the quest behind the regulation for imposed burdens on the industry while favoring others and why expensive regulations are accepted and are in operation. Assumptions made about the motivations of regulators in; The public interest theory of regulation In this theory, it is assumed that the correction of the market inefficiencies in inequities calls for the response from the regulatory bodies. It is assumed that regulators maximize social welfare without looking on their personal interests but rather have the best interests of society as a whole at heart. The capture theory of regulation It is initially assumed that initially regulation is undertaken to target to benefit the public but in the process it is captured and manipulated by the influential individuals and also those in power will eventually benefit and control the resources at the expense of the society. Most likely those particular groups dominate the economy at large and industry. The economic interest theory of regulation In this case, the forces of demand and supply are regulated to serve private interests of particular groups. It is also arguable that the government supplies what a particular group demands. It is also be assumed that the main motive behind the regulatory actions is to satisfy most people such that they can gain political fame and gunner votes or gain the most voters/supporters or finances. It eventually leads to individuals forming and joining together along particular strong similar minded groups and lobby for preferred control. Question two According Watty et al., 2013, a fundamental account of a particular empirical characteristic with apparent formulations and systematic organization, mounted and well verified generalization about a given future prediction of a phenomenon is what is referred to as theory. The normative accounting theory provokes the existing theories trying to articulate the new thinking measures that are meant to attain efficacy in the modern accounting operations. While trying to question the existing theories, they lay a ground to have a way of thinking different in the place of work. In order to analyze the various approaches and set up objectives that will require logical analysis and critical thinking, it has been necessary to develop the general normative accounting theories to have a deductive thinking in the subsequent accounting work. The Normative Accounting Theories: The applicability of the normative accounting theories have been evolving over time since the 1960s seeking to attain efficiency in the present accountants’ life. They are as discussed below: Current cost accounting (CCA) Current operating profit (COP) and Realizable cost savings (RCS) are both most important parts of this theory. In this RCS are the upward trend in the current cost of the assets held by the firm in the contemporary period whereas COP is the excess of the present value of the output sold over the nominal cost of the interrelated inputs The Current Cost Accounting has alternative options to chronological accounting and it has obtained much of its acceptance in the contemporary accounting. The trading profits according to this theory should be differentiated from value of holding an asset that is not included in the transactions from the previous periods. The Current Purchasing Power Accounting theory The Current Purchasing Power evolved from its initial code CPPA, CCA to CoCoA. Collectively, the theory was developed in 1960s to 70s and it has been accepted by the accounting body as the applicable theory in operation (Watty et al., 2013). The sunk costs should be taken into consideration and also any adjustment to the costs should be done at the end of the transactions. Capital maintenance and Purchasing power of the Current Purchasing Power has developed on the grounds that during inflationary pressures in an economy, the unadjusted profits are taken into consideration. Also, capital and sunk costs are partially distributed at the end of the trading period (Watty et al., 2013). Working on the valuations of an asset, the theory advocates for the use of the indices and it proves to be the easiest way to work with. The AICPA supported general price-level restatement in Accounting Since 1975, giant organizations have majorly applied the Current Cost Accounting and the require that the approximated value of an asset should be accompanied with a balance sheet that is most current and an updated one to carry out a performance comparison between any consecutive trading periods. The asset’s depreciation is then valued from the figures of the most current periods (Watty et al., 2013). Due in the course of development of the theories, The FASB released SFAS 33 as an example of the mixture of information, proposed by majority of the accounting standard setters who published a proposal that favored revelation based on the amalgamation of Current Purchasing Power accounting and Current Cost Accounting on a combination of current purchasing power accounting and current cost accounting. Continuously contemporary accounting – CoCoA Scholar Raymond Chamber from Australia developed the CoCoA theory in the period 1955 to around 1966. In this theory, the owners’ objectives are put at the forefront by the managers and it is always depicted in their mindful choice of strategies directed to achieve the best for their bosses. According to Chamber, the firm is a unique being linked with the buying and selling of goods and services. In case of a decline in productivity, necessary adjustments are likely to be put in place to avoid any further losses. In order to continue being economically relevant in the present robust and vibrant world of production, the firm therefore has to adjust to suit the present demand in the market. The price by the end of the trading period is used to value an asset. Among the factors that could be considered are demand and cost of production according to the advocates of theory before a firm can decide to produce in the future. The present price of a commodity will not most probably give a sure guarantee that a firm it will sell in the future. (Watty et al., 2013). References Watty, K., Sugahara, S., Abayadeera, N. and Perera, L. (2013). Developing a Global Model of Accounting Education and Examining IES Compliance in Australia, Japan, and Sri Lanka. Accounting Education, 22(5), pp.502-506. Read More