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Research Methodology and Theories

on the Uses of Accounting Information


• Research Methodology
• Deductive Approach
• Inductive Approach
• Pragmatic Approach
• Scientific Method of Inquiry
• The Outcomes of Providing Accounting Information
• Fundamental Analysis
• The Efficient Market Hypothesis
Research Methodology and Theories on
the Uses of Accounting Information

To have a science is to have recognized a domain


and a set of phenomena in that domain, and next
to have defined a theory whose inputs and outputs
are descriptions of phenomena.
-The first are observations,
- The second are Predictions, whose terms
describe the underlying reality of the domain the
underlying reality of the domain.
-The FASB's Conceptual Framework Project was
introduced as the state- of the theory of accounting.
However, this theory does not explain how accounting
information is used because very little Predictive
behavior is explained by existing accounting theory.

- Over the years, accountants have done a great deal of


theorizing, Providing new insights and various ways of
looking at accounting and is outcomes.

- A distinction can be made between theorizing and theory


construction.

- Theorizing is the first step to theory construction, but it is


frequently lacking because its results are untested or
untestable value judgments.
- Several research that might be used to develop
theories of accounting and it’s a number of
theories in the outcomes of the use of
accounting information.

- Including model agency theory, human


information processing, and critical perspective
research.

- None of these theories is completely accepted;


consequently, Each of them is somewhere along
the path between theorizing and theory.
Research Methodology
Accounting theory can be developed by using several
research methodologies. Among the more commonly
identified methodologies are:

(I) the deductive approach.


(2) the inductive approach.
(3) the pragmatic approach.
(4) the scientific method of inquiry. (The scientific
method of inquiry, which is essentially a combination
of deductive and inductive reasoning, as a guide to
research, accounting theory development).
(5) the ethical approach.
(6) the behavioral approach.
Deductive Approach:
The deductive approach to the development of theory begins
with:
1) The establishment of objectives.
2) Once the objectives have been identified.
3) Certain key definitions and assumptions must be stated.
4) The researcher must then develop a logical structure for
accomplishing the objectives, based on the definitions and
assumptions.
5) This methodology is often described as "going from the
general to the specific."
6) If accounting theory is to be developed using the deductive
approach, the researcher must develop a structure that
includes the objectives of accounting, the environment in
which accounting is operating, the definitions and
assumptions of the system, and the procedures and
practices, all of which follow a logical pattern.
7) Certain a special measurement constraints and using
accounting information .
8) Certain a general frame which it shows the information for
using double entry system .
9) A certain understood for accounting terminology .
10) Conclude general principle.
11) Drawing out the principle and ways for application .

- The deductive approach is essentially a mental or "armchair"


type of research.
- The validity of any accounting theory developed through this
process is highly dependent on the researcher's ability to
identify correctly and relate the various components of the
accounting process in a logical manner.
- To the extent that the researcher is in error as to the
objectives, the environment, or the ability of the procedures to
accomplish the objectives. the conclusions reached will also
be in error.
Inductive Approach
The inductive approach to research emphasizes:
1) Making observations .
2) Drawing conclusions from those observations.
3) This method is described as "going from the specific to the
general" because the researcher gener-alizes about the universe
on the basis of limited observations of specific situations.

- Accounting Principles Board Statement No. 4 is an example of


inductive research‘.
The generally accepted accounting principles (GAAP) describe in
the statement were based primarily on observation of current
practice.

- The APB acknowledged that the then current principles had not
been derived from the environment, objectives, and basic
features of financial accounting. Thus, the study was essentially
inductive in approach.
Pragmatic Approach
- The pragmatic approach to theory development is based on
the concept of utility or usefulness.
- Once the problem has been identified, the researcher
attempts to find a utilitarian solution; that is, one that will
resolve the problem.
- This does not suggest that the optimum solution has been
found or that the solution will accomplish some stated
objective. (Actually, the only objective may be to find a
"workable" solution to a problem.) Thus, any answers obtained
through the pragmatic approach should be viewed as tentative
solutions to problems.

Unfortunately in accounting. most of the current principles and


practices have resulted from the pragmatic approach, and the
solutions have been adopted as GAAP rather than as an
expedient resolution to a problem.
Scientific Method of Inquiry:
- The scientific method of inquiry as the name
suggests, was developed for the natural and physical
sciences and not specifically for social sciences such
as accounting.

- There are some clear limitations on the application of


this research methodology to accounting; for example,
the influence of people and the economic environment
make it impossible to hold the variables constant.

- Nevertheless, an understanding of the scientific


method can provide useful insights as to how research
should be conducted.
Conducting research by the scientific method involves
five major steps, which may also have several
substeps:

1- Identify and state the problem to be studied.

2- State the hypotheses to be tested.

3- Collect the data that seem necessary for testing the


hypotheses.

4- Analyze and evaluate the data in relation to the


hypotheses.

5- Draw a tentative conclusion.


- Although the steps are listed sequentially, there is
considerable back-and forth movement between the steps.
for example, at the point of stating the hypotheses. it may be
necessary to go back to step 1 and state the problem more
precisely. Again, when collecting data, it may be necessary
to clarify the problem or the hypotheses, or both, This back-
and-forth motion continues throughout the process and is a
major factor in the strength of the scientific method.

- The back-and-forth movement involved in the scientific


method also suggests why it is difficult to do purely deductive
or inductive research.
- Once the problem has been identified. the statement of
hypotheses is primarily a deductive process, but the
researcher must have previously made some observations in
order to formulate expectations.
- The collection of data is primarily an inductive process.
but determining what to observe and which data to collect
will be influenced by the hypotheses.

- Thus, the researcher may, at any given moment,


emphasize induction or deduction, but each is influenced
by the other and the emphasis is continually shifting so
that the two approaches are coordinate aspects of one
method.

- Unfortunately, the scientific method of inquiry has received


only limited attention in accounting research.

- Those procedures found to have "utility" have become


generally accepted regardless of whether they were tested
for any relevance to a particular hypothesis.
The Outcomes of Providing Accounting Information:
- The development of a theory of accounting will not solve
all of the needs of the users accounting information.

- Theories must also be developed that Predict market


reactions to accounting information and how users react
to accounting date.

Fundamental Analysis:
- The FASB has indicated that the primary goal of
accounting information is to provide investors with
relevant an reliable information so they can make
informed investment decisions.
Individual investors make the following investment decisions:

• Buy-A potential investor decides to purchase a particular


security on the basis of available information.
• Hold-An actual investor decides to retain a particular
security on the basis of available information.
• Sell-An actual investor decides to dispose of a particular
security on the basis of available information.

- Individual investors use an available financial information to


assist in acquiring or disposing of the securities contained in
their investment portfolios that are consistent with their risk
preferences and the expected returns offered by their
investments.
- The decision process used by individual investors is
termed fundamental analysis. Fundamental analysis
is an attempt to identify, individual securities that are
mispriced by reviewing all available financial
information .

- These data are then used to estimate the amount


and timing of future cash flows offered by investment
opportunities and to incorporate the associated
degree of risk to arrive at an expected share price for
a security.

- This discounted share price is then compared to the


current market price of the security, thereby allowing
the investor to make buy-hold-sell decisions.
- Investment analysis may be performed by investors
themselves or by security analysts. Because of their training
and experience.
- Security analysis are able to process and disseminate
financial information more accurately and economically than
are individual investors.
- Security analysis and individual investors use published
financial statements, quarterly earnings reports, and the
information contained in the Management Discussion and
Analysis section of the annual report, particularly those
sections containing forward-looking information and the
company's plans.
- Upon review of these information sources, security analysts
frequently make their own quarterly earnings estimates for the
most widely held companies.
-Subsequently, as company quarterly information is released,
security analysts comment on the company's performance
and may make buy-hold-sell recommenda-tions.

- Security analysts' estimates and recommendations may


affect the market price of a company's stock.

- One school of thought, the efficient market hypothesis,


holds that fundamental analysis is not a useful investment
decision tool because a stock's current price reflects the
market's consensus of its value.

-As a result, individual investors are not able to identify


mispriced securities.
The Efficient Market Hypothesis
Economists have argued for many years that in a free market
economy with perfect competition, price is determined by:
(1) The availability of the product (supply).
(2) The desire to possess that product (demand).

Accordingly. the price of a product is determined by the


consensus in the marketplace. This process is generally
represented by the following diagram.