1. A. Discuss the deductive, inductive and pragmatic research methods. Include i

Question

1. A. Discuss the deductive, inductive and pragmatic research methods. Include in your discussion examples of accounting research that used each method.
B. Why do business managers prefer stable earnings trends?
C. Discuss several methods business manages might be used to smooth earnings?
2. Ernest Chemist in the production of chemical products and selling them locally. The corporation wishes to extend its market and export some of its products. It has come to the attention of the financial director that compliance with international environmental requirements is a significant precondition if it wishes to sell products overseas. Although the corporation has during the past put in place a series of environmental policies, it is clear that it is also common practice to have an environmental audit done form time to time, which will cost approximately GHS120,000. The audit will encompass the following:
i. Full review of all environmental policy directives?
ii. Detailed analysis of compliance with these directives?
iii. Report containing in-depth recommendation of those physical and policy changes that would be necessary to meet international requirements?
iv. The financial director of Ernest Chemical has suggested that the GHS120,000 be capitalized as an asset and then written off against the revenue generated from export activities so that the matching of income and expense will occur.
Comment on the proposed treatment of the environmental audit?
3.a. The advantages and disadvantages of harmonizing accounting standards were summarized in this chapter. Expand on these advantages and disadvantages?

Explanation / Answer

Ans1A.

Deductve Approch :

The deductive approach constitutes developing of an assumption based on the existing theories and forming a research plan to test the assumption (Wilson, 2010). The deductive approach can be explained using the assumption driven from theory. In other words, the deductive approach includes deducing the results from the premises. When a deductive method is applied for a research project, the author formulates a set of hypotheses that need to be tested and next, using a relevant methodology, tests the hypothesis. Deductive reasoning has specific characteristics that needs be understood. If the premises of deductive reasoning are accepted, then, the conclusion must necessarily be accepted. In a deductive reasoning, thecontents of the result are implicitly stated in the premises, making such argument a non-ampliative one. If new premises are added to the argument, then the conclusion must still follow. A deductive argument is either valid or invalid and there is no degree of validity. There is no choice or decision in applying such argument and no judgment is necessary for getting the result and conclusion.

The first stage of forming an accounting theory by using a deductive approach is specifying the basic concepts of accounting (two main concepts are the concepts of proprietary and the entity of the reporting unit). The next stage that is somehow dependent on the first one, is stating the objectives of accounting. Following the objectives, the postulates would be clarified which are dependent on the previous stage. Then, the principles, rules, and procedures are drawn from the established principles using the deductive reasoning. The rulesand procedures can be practically used for creating the result. These results are used as a test of the fundamental theory (Iselin, 1971). In deductive approach, the research method does not depend on the current accounting system under any conditions. Accordingly, the obtained theory does not inherit any of the weaknesses and shortages of the current accounting system. Furthermore, based on this approach, the assumptions of a theory would be clearly specified. Thus, they can be studied meticulously. As a result, if there is any disagreement over the results, the argument would be quickly directed towards the main causes of disagreements.

Some of the criticisms about the deductive approach can be due to misunderstanding. Expecting a theory to necessarily be practical is not a right expectation. If a theory can present a framework for describing and developing new thoughts and practices, that theory is a useful one. In most cases, the technological application of the existing knowledge is not possible. The technology of providing, selecting and reporting information might not be that high to be able to operationalize the procedures obtained from the deductive approach (Saghafi, 2014).

Inductive Approach

Inductive approach begins with specific observations and the conclusions are generalized. In inductive approach, after selecting a number of observations correctly, one can generalize the conclusion to all or groups of similar conditions and situations. These generalizations need to be tested, some of which might be verified and some rejected. Accordingly, all of the principles which are derived based on inductive reasoning are theoretically falsifiable. In the induction process, the researcher as an observer, should honestly, without any prejudgments and biases, and with an impartial mind, register what they observe. Then these observations form a basis on which theories and laws are constructed which make up the scientific knowledge. Inductive researchers also believe that one can logically generalize the observations into general and inclusive rules and the scientific assumptions get verified and ratified (Godfrey and Hudson, 2010).

According to the inductive approach, at the end of research and as a result of observations, theories are constructed. The inductive approach includes looking for a pattern based on the observations and developing a theory for those patterns through hypotheses (Bernard, 2011). In inductive research, no theory is applied at the beginning of the research and the researcher enjoys complete freedom in terms of determining the course of research. Particularly, there is no assumption at the early stages of research and the researcher is not sure about the kind and the nature of findings as research is not finished yet. In inductive reasoning the researcher uses the observations in order to construct an abstract or to describe the circumstances being studied. (Lodico et al., 2010).

According to the inductive approach, at the end of research and as a result of observations, theories are constructed. The inductive approach includes looking for a pattern based on the observations and developing a theory for those patterns through hypotheses (Bernard, 2011). In inductive research, no theory is applied at the beginning of the research and the researcher enjoys complete freedom in terms of determining the course of research. Particularly, there is no assumption at the early stages of research and the researcher is not sure about the kind and the nature of findings as research is not finished yet. In inductive reasoning the researcher uses the observations in order to construct an abstract or to describe the circumstances being studied. (Lodico et al., 2010).

Pragmatic approach to research (mixed methods)

The pragmatic approach to science involves using the method which appears best suited to the research problem and not getting caught up in philosophical debates about which is the best approach. Pragmatic researchers therefore grant themselves the freedom to use any of the methods, techniques and procedures typically associated with quantitative or qualitative research. They recognise that every method has its limitations and that the different approaches can be complementary.

They may also use different techniques at the same time or one after the other. For example, they might start with face-to-face interviews with several people or have a focus group and then use the findings to construct a questionnaire to measure attitudes in a large scale sample with the aim of carrying out statistical analysis.

Depending on which measures have been used, the data collected is analysed in the appropriate manner. However, it is sometimes possible to transform qualitative data into quantitative data and vice versa although transforming quantitative data into qualitative data is not very common.

Being able to mix different approaches has the advantages of enabling triangulation. Triangulation is a common feature of mixed methods studies. It involves, for example:

In some studies, qualitative and quantitative methods are used simultaneously. In others, first one approach is used and then the next, with the second part of the study perhaps expanding on the results of the first. For example, a qualitative study involving in-depth interviews or focus group discussions might serve to obtain information which will then be used to contribute towards the development of an experimental measure or attitude scale, the results of which will be analysed statistically.

Ans B :Business managers prefer stable earnings trends because they believe that the earnings reported influence stakeholders in their decision making and that stable earnings will positively impact the decisions of stakeholders. In other words, stable earnings provide investor confidence. Often, having stable earnings trends also helps top management reach their quarterly goals and thus receive their financial incentives.

Ans C :

Revenue and Expense Recognition

"Earnings" is just another word for profit, and profit is simply revenue minus expenses. So the simplest way for a company to manage earnings is by changing the dates on which it enters certain revenues and expenses in its books. To increase earnings in the current period, the company can recognize future revenue prematurely -- before that revenue has been fully earned -- or delay recognizing expenses. Similarly, if it wants to shift "extra" earnings from the current period to the next, it could delay the recognition of revenue that has been earned, or recognize expenses prematurely, before they're actually incurred.

"Cookie Jar" Accounting

Accounting rules require companies to recognize future expenses at the time they recognize the revenue associated with those expenses. For example, when a company sells an item with a warranty, it must estimate its future warranty costs and recognize that expense at the time it makes the sale. Similarly, when a company sells items to customers on credit, it must estimate the value of customer bills that will eventually go unpaid and immediately recognize that "bad debt expense." If a company overestimates these kinds of expense in the current period, it won't have to recognize as big an expense in future periods. Therefore, it shifts earnings from the current period to the future. This tactic goes by the name "cookie jar accounting."

Changing Accounting Methods

In many areas of business bookkeeping, accounting standards allow companies to choose the reporting method that works best for them. Examples include the system the company uses to account for the value of its inventory and the schedule it uses to depreciate its capital assets. Over the long term, different methods for doing the same thing should produce the same end result -- the same total value will go into and out of inventory, for example, or the same amount of value will get depreciated. In the short term, however, a company's choice of methods can significantly affect its earnings from one period to the next. If a company switches from one accounting method to another primarily to affect earnings, it's engaging in earnings management.

One-Time Charges

From time to time, companies may have to report a particularly large one-time expense -- writing off the cost of a failed project, for example, or significantly reducing the value of an asset on the balance sheet. Companies that practice earnings management may try to "save" these charges for a time when earnings are high enough to absorb the hit -- or take the charges prematurely if current earnings are high. Similarly, a company that must take a big one-time charge in the current period might use the opportunity to accelerate all kinds of other expenses to that period, too. This is called the "big bath," after the idea that if the company is going to "take a bath" -- suffer bad results in a particular period -- it might as well take a big bath and get as many future expenses out of the way as possible.

Ans 2 : Skipped

Ans 3A :

The advantages of harmonization include providing comparability of financial statements across international companies and countries. This provides many benefits to the companies operating and the countries that adopt the standardized rules. The first of these benefits is that investing in international companies is now easier. Companies can be compared to each other with ease and the risk of investing is reduced. This will lead to more investment and an economic boost to both the country and companies. Another benefit is that now emerging third world countries can adopt the new standards without going through the process to create their own. This process can be expensive and time consuming but with harmonization this is not a problem. It also decreases the expenses of international companies since they would not need to, "consolidate divergent financial information when more than one set of reports is required to comply with different national laws or practice" (Turner 1). This allows companies to take the money they would have spent on making these different financial statements and invest them back into their company.

As good as the idea of harmonization seems there are also some disadvantages to this concept. The first is the language and culture barriers of each country. Translating a standard set of accounting principles to each different language would be extremely difficult since each language doesn't translate exactly to each other. Another downside to harmonization is trying to get every country to agree on the set standards. Since each country believes that harmonizing accounting standards will, "dilute the quality of their financial reports" (Roy 1) this becomes an increasingly difficult task. Currently each country with different standards has different views on certain topics such as amounts of disclosure. Getting each country to come to an agreement would be very challenging. Also, adoption of a new set of accounting standards would be costly to smaller companies in smaller countries that now have to figure out how to adjust to the new standards.

The idea of creating one set of accounting standards for every country to adopt seems like an extraordinary idea but as we've seen there can also be some disadvantages and drawbacks. The advantages include creating comparability among financial statements of companies in different countries as well as allowing smarter and better investing. However, the drawbacks are that creating these standardized rules would be extremely difficult. The translation between different languages and the priorities of different countries is what makes it so difficult to accomplish. It is obviously apparent that a globalized set of accounting standards would benefit everyone but creating the actual standards that benefits everyone is the major problem.

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