Question 1

Earnings management is a concept that uses accounting techniques that help to develop financial reports representing a positive view of the business’ activities with regards to its financial position. The view that earnings management that leads to decreases in earnings is more ethical is quite disturbing. This is because earnings management works to smooth out fluctuations in earnings to help present consistent profits every year. The action will be misleading to investors since the stock prices will not be representing the actual value.  With time, the action reduces the credibility of accounting numbers hence damaging the reputation of the accounting profession.

Question 2

1. Emphasizing Adherence to the Prescribed Rules and Regulations.

Accounting rules enshrined in varied standards are designed to ensure that the individuals in the accounting profession behave ethically. As a result, if accountants followed these rules to the letter, the prospect of corporate social responsibility reporting will be actualized.

2. Teaching Accountability.

When accountants become accountable, it means that they are willing to accept the responsibility for their actions. This is something that will prompt them to enhance corporate social responsibility reporting since if they were to act in an unethical manner, it would be traced back to them.

3. Establishing an Ethical Culture in firms

If the profession succeeds in engraining ethical culture in accounting firms, enhancement of corporate social responsibility reporting will come as an automatic thing since every stakeholder associated with the firm will always strive to act ethically.

4. Continuous Monitoring

When there is monitoring, the people involved will always ensure that they act accordingly at all times. No one wants to fall on the wrong side of regulations due to the likely negative consequences hence compliance becomes mandatory.

Question 3

Efficient Markets Hypothesis is a theory in investment that asserts it is not possible to “beat the market” since stock market efficiency ensures that prevailing share prices incorporate and reflect all the relevant information.

The capital market encompasses the market for financial assets having a long or indefinite maturity. The nature of capital markets research is usually dependent on the aspects under investigation such as goodwill among others. (…………………………………………)

Question 4

The role of theory in accounting is to provide broad principles that are used as the general frame of reference to evaluate the accounting practice and guide development of new procedures and practices. The optimal role is that of acting as a utility to resolve complex accounting issues, improve accounting practices and contribute to the formulation of useful accounting standards. The implications that efficient market hypothesis has on the role of accounting is the imperfections that are prevalent in financial markets due to aspects of cognitive biases such as overreaction, information bias, overconfidence and predictable human errors with regards to reasoning and information processing.

Question 5

Economic consequences present a threat to standard setting since accounting standards can have detrimental implications on wealth levels of the providers of financial information. As a result, there is a limitation to standard setting since the standards being considered should not have negative economic consequences. The FASB or SEC should make decisions based on economic consequences. Standard setting is meant to ensure that the financial reporting involved serves the needs of the investors, lenders and other relevant users. As a result, reporting standards ought to result to enhance better aggregate outcomes including greater economic stability, higher rates of economic growth and more desirable distribution of income.

Question 6

Arguments in Favor

• They represent future long-term cash flows and failure to consider time value for money is inconsistent with current accounting models when it comes to treatment of long-term assets and liabilities, and it also implies unrealistic zero discount rate.
• Discounting the resulting timing difference allows a firm to reflect the advantage through increased net income when the timing difference arises.
• Discounting has the ability to represent a compromise between those that want total allocation and those that believe the large deferred tax liabilities will never be paid.

Arguments Against

• Differed tax liabilities tend to differ from conventional liabilities in a variety of ways. A good example is how they are not fixed sums that are payable at fixed dates.
• Discounting deferred tax liabilities represents a departure from the incurred cost standard that underlies the accounting for other liabilities.
• The discounting aspect increases the complexity of accounting for income taxes since determining the discount period requires considerable mechanics.

In my opinion, deferred tax assets and liabilities should not be discounted due to the uncertain element that comes with deferred tax assets and liabilities.

Question 7

A universally accepted theory of accounting is needed. Among the reasons include:

• A universal theory of accounting helps to provide a common basis for discussing and identifying issues. Having such a theory helps to narrow the number of accounting choices that are available to the management hence reducing its ability to manipulate the financial statements.
• The theory will help in the development of consistent accounting principles. This makes it easier to compare financial statements due to the eradication of inconsistencies.
• A universal theory will also help to reduce managerial bias when it comes to reporting results for operations and financial position. It would also help to reduce personal bias in the standard setting process.

Question 8

Current value is more relevant than historical cost. Historical cost has shown its limitations, and this is why the FASB is looking for alternatives to help bring a more reliable method. The prevailing era is marked by widespread use of complicated financial instruments and risk management strategies that tend to render yesterday’s prices obsolete. Using a current-cost system would help to increase accuracy in financial reporting. As opposed to historical cost, current value tends to take account of the inflationary adjustment of the acquired cost. The current value tends to reveal the economic realities that are hidden by historical cost accounting. This means that it is more relevant to creditors and investors due to the reflection of the current market price for a liability or an asset. There is a provision of transparency for the users.

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