The Importance Of Accounting Theory In The Field Of Accounting

1912 words - 8 pages

The Importance of Accounting Theory to the Field Of Accounting

The objective of theory is to explain and predict. One of the basic goals of the theory of a particular discipline is to have a well-defined body of knowledge that has been systematically accumulated, organized, and verified well enough to provide a frame of reference for future actions. The Webster’s definition of theory is the 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. Theories may be described as ...view middle of the document...

An income statement is a financial statement for companies that indicate how net revenue is transformed into net income. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. Income statements should help investors and creditors determine the past performance of the enterprise; predict future performance; and assess the risk of achieving future cash flows. However, information in an income statement has several limitations for instances, items that might be relevant but cannot be reliably measured are not reported, some numbers depend on accounting methods used, and some numbers depend on judgments and estimates. In the operating section of the income, net revenue are inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations, which is usually presented as sales minus sales discounts, returns, and allowances. And Expenses are outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. Under the non-operating section in the income statement are other revenues or gains and other expenses or losses. Other revenues or gains are revenues and gains from other than primary business activities. It also includes unusual gains and losses that are either unusual or infrequent, but not both. Other expenses or losses are expenses or losses not related to primary business operations. They are reported separately because this way users can better predict future cash flows - irregular items most likely won't happen next year. These are reported net of taxes. Discontinued operations are the most common type of irregular items. Shifting business location, stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected nature disaster, expropriation, prohibitions under new regulations. Changes in accounting principle is, for example, changing method of computing depreciation from straight-line to sum-of-the-years'-digits. However, changes in estimates do not qualify. Because of its importance, earnings per share (EPS) are required to be disclosed on the face of the income statement. A company which reports any of the irregular items must also report EPS for these items either in the statement or in the notes. There are two forms of EPS reported in the income statement. Those forms are the basic form and the diluted form. The basic form in this case, is the weighted average of shares outstanding includes only actual stocks outstanding. The diluted form in this case, is the...

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