it is about the search for objectives from accounting theory book, eight edition (Harry I. Wolk, James L. Dodd, John J. Rozycki)

1. THE SEARCH FOR
OBJECTIVES
Nyoman Ardiantha Putera / 344132
Muhammad Heickal Pradinanta /
350168

2. Orientation to Theory
“a cohesive set of hypothetical, conceptual and
pragmatic principles forming a general frame
of reference for a field of study”

3. 1. To identify the field of accounting so that
useful generalizations about the field can be
made and a theory developed
2. To establish standards by which accounting
information can be judged
3. To point out possible improvements in
accounting practice
4. To present useful framework for accounting
researchers seeking to extend the uses of
accounting and the scope of accounting
subject matter as the needs of society expand

4. ASOBAT definition of Theory
“process of identifying, measuring,
communicating economic information to
permit informed judgments & decisions by
users of information”

5. Objectives of Accounting

6. Making decisions concerning limited
resources
⬜ Involves an evaluations of what is expected to
happen in the future
⬜ Informal manner or Complex calculations
⬜ Users of accounting comes from diverse
groups
⬜ Accounting reports DO NOT make
predictions, give inputs for users

7. Directing and Controlling Resources
⬜ For managerial uses
⬜ Different needs from the external users
⬜ Follows same standards

8. Maintaining Custodianship of Resources
⬜ Stewardships
⬜ Funds used by Management that have been
entrusted by Investors
⬜ Agency Theory

9. Facilitating Social Functions and
Controls
⬜ Stewardships to the society as a whole
◼ Taxation, fraud deterrence and prevention,
governmental regulation, statistics information used
to measure economic activity
⬜ Entity bears additional data’s cost

10. Standards for Accounting
Information
⬜ Relevance
⬜ Verifiability
⬜ Freedom of Bias
⬜ Quantifiability

11. Guidelines for Communicating
Accounting
1.Appropriateness to expected use
2.Disclosure of significant relationships
3.Inclusion of environmental information
4.Uniformity of practice within and among
entities
5.Consistency of practices through time

12. ASOBAT is critized for being too brief, but it still
is important and has beneficial influence

13. APB Statement 4
⬜The Theory that used by DSAK
⬜published in October 1970
⬜Criticized heavily
◼inadequacy of research, lack of independence, lack
of sufficient exposure
⬜State fundamental concepts of financial
reporting as a foundation for the opinions of
the APB

14. Orientation to Definitions
⬜Definition of Accounting
◼“Accounting is a service activity. Its function is to
provide quantitative information, primarily
financial in nature, about economics entities that is
intended to be useful in making economic
decisions”
⬜Other Definitions
◼“assets, liabilities, owners’ equity, revenues, and
expenses as basic elements of financial accounting”
◼recognized and measured in conformity with
generally accepted accounting principles

15. Other Aspects of APB
Statement 4
⬜Accounting is a measurement discipline
(paragraph 67)
⬜The section on objectives aligned with the
work of ASOBAT, which overlapped
“qualitative objective” of APB Statement 4
◼relevance, understandability, neutrality, timeliness,
comparability, and completeness.
⬜Less innovative
◼rehash some of the postulates from ARS 1
◼present virtually no theoretical innovation

16. Concluding Remarks on APB
Statement 4
Still questioned
◼can the objectives be implemented to various
accounting principles?
Considering its positive aspects, it has served a
useful purpose

17. The Trueblood Committee Report
⬜AICPA formed the Trueblood Committee at
a time when APB was under heavy criticism
◼Founded April 1971
◼Charged with using APB Statement 4 as a vehicle for
refining the objectives of financial statements
⬜Enumerated 12 objectives of financial
accounting

18. 12 Objectives of Financial
Accounting
1. Basic objective of financial statements is to provide
information useful for making economic decisions.
2. An objective of financial statements is to serve primarily
users who have limited authority,ability, or resources to
obtain information and who rely on financial statements as
their principal source of information about an enterprise’s
economic activities.
3. An objective of financial statements is to provide information
useful to investors and creditors for predicting, comparing,
and evaluating potential cash flows to them in terms of
amount, timing, and related uncertainty.

19. 12 Objectives of Financial
Accounting (cont.)
3. An objective of financial statements is to provide information
useful to investors and creditors for predicting, comparing,
and evaluating potential cash flows to them in terms of
amount, timing, and related uncertainty.
4. An objective of financial statements is to provide users with
information for predicting, comparing, and evaluating
enterprise earning power.

20. 12 Objectives of Financial
Accounting (cont.)
5. An objective of financial statements is to supply information
useful in judging management’s ability to utilize enterprise
resources effectively in achieving the primary enterprise goal.
6. An objective of financial statements is to provide factual and
interpretive information about transactions and other events
which is useful for predicting, comparing, and evaluating
enterprise earning power. Basic underlying assumptions with
respect to matters subject to interpretation, evaluation,
prediction, or estimation should be disclosed.

21. 12 Objectives of Financial
Accounting (cont.)
7. An objective is to provide a statement of financial position,
useful for predicting, comparing, and evaluating enterprise
earning power. This statement should provide information
concerning enterprise transactions and other events that are
part of incomplete earning cycles. current values should be
reported when they differ significantly from historical costs.
Assets and liabilities should be grouped or segregated by the
relative uncertainty of the amount and timing of prospective
realization or liquidation.

22. 12 Objectives of Financial
Accounting (cont.)
8. An objective is to provide a statement of periodic earnings
useful for predicting, comparing, and evaluating enterprise
earning power. The net result of completed earnings cycles
and enterprise activities resulting in recognizable progress
toward completion of incomplete cycles should be reported.
changes in the values reflected in successive statements of
financial position should be reported, but separately, since
they differ in terms of their certainty of realization.

23. 12 Objectives of Financial
Accounting (cont.)
9. Another objective is to provide a statement of financial
activities useful for predicting, comparing, and evaluating
enterprise earning power. This statement should report mainly
on factual aspects of enterprise transactions having or
expected to have significant cash consequences. This
statement should report data that require minimal judgment
and interpretation by the preparer.
10.An objective of financial statements is to provide information
useful for the predictive process. Financial forecasts should
be provided when they will enhance the reliability of users’
predictions.

24. 12 Objectives of Financial
Accounting (cont.)
11.An objective of financial statements for governmental and
not-for-profit organizations is to provide information useful
for evaluating the effectiveness of the management of the
resources in achieving the organization’s goals. Performance
measures should be quantified in terms of identified goals.
12.An objective of financial statements is to report on those
activities of the enterprise that affect society which can be
determined and described or measured and which are
important to the role of the enterprise in its social
environment.

25. SATTA
A Statement on Accounting Theory and Theory
Acceptance (1973)
⬜provide a survey for:
◼the current financial accounting literature
◼a statement of where the profession stood relative
to accounting theory
Very cautionary document in terms of the
possibility for adopting any one valuation theory

26. Theory Approaches in
Accounting
Classical Approaches
◼Old systems
◼Primarily normative and deductive
◼Considered superior for user needs by the
developers
◼in some cases, used inductive approach (a gleaning
from accounting literature, from some observations
of practice)

27. Theory Approaches in
Accounting (cont.)
Decision-Usefulness Approach
concentrates on:
⬜users of accounting reports
⬜users decisions
⬜information needs
⬜information-processing abilities
Dichotomized into Decision Models and Decision Makers

28. Decision-Model Orientation
⬜Normative and Deductive, criteria of a
metatheoretical framework
⬜Some form of relevance for particular
decisions by a particular user groups is
stressed
⬜The relevance criterion is instrumental in
measuring:
◼assets, liabilities, and income transactions

29. Decision-Maker Orientation
⬜Descriptive and Inductive
◼assumes: the information that is desired should be
supplied
◼empirical
◼produces advocacy for particular valuation systems
and income measurement systems

30. Theory Approaches in
Accounting (cont.)
Information Economics Approach
⬜does not deal directly with alternative
valuation systems
⬜concerned with costs and benefits from
information production and usage
Views accounting information as economic good

31. Deficiencies of Present
Approaches to Theory
The acceptance of a particular valuation system
⬜Problem: diversity of users -> different
information needs
“the heterogeneity of users
information need is still unproven”
Concluding Remarks on SATTA

32. User objectives
⬜Two major areas where broad information is
applicable to many user groups
◼Predictive Ability
◼Accountability

33. User objectives (cont.)
Predictive ability
⬜The usefulness of accounting data as an aid
to predict future variables.
⬜Predict future income on the basis of
present and past income numbers
⬜Two other sets of accounting-generated
numbers:
◼quarterly earnings announcements as
predictors of annual earnings
◼financial ratios as predictors of bankcruptcy

34. User objectives (cont.)
Accountability
⬜The responsibility of management to report
on achieving goals for the effective and
efficient utilization of enterprise resources.
⬜The measurements based on earnings per
share and return on investment and its
components.

35. User objectives (cont.)
Secondary objectives
⬜Capital maintenance
◼gives information about the amount of
dividends that are paid during a period without
returning capital to the stockholders
⬜Adaptability
◼concerned with measuring, total liquidity
available to the firm.

36. User diversity
⬜Some of the information needs of different
user groups may be complementary.
⬜Two further points that are quite important:
◼There may be considerable overlap among these
group
◼The specialized information that is needed by these
various groups may already exist and information
technology makes dissemination of the information
relatively inexpensive.