Accounting Theory - Literature Critique Sample

Introduction

The article “Half a Defence of Positive Accounting Research” written by author Paul V Dunmore is an important article that covers the “Positive Accounting Theory” and tries to give a bigger picture to the readers about the concept. The focus is on the positive accounting theory and its implications on an individual’s life.

The main object is to understand the significance of this accounting theory which is a branch of accounting research that explains and predicts the actual and real accounting practices. The applicability of the positive accounting concept in the business world is analyzed and it gives a better understanding of how this theory increases the productivity and performance of various business concerns (Baker & Burlaud, 2015).

The purpose of undertaking this assignment is to critically analyze the various arguments that have been raised in the selected article (Baxter, 2014). The case under study believes that the current accounting research is not adequate to operate a research program successfully. A unique structure has been adopted for this assignment which encompasses the background of the article, research questions, theoretical framework, and the different limitations that arise in this particular article.

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Summary of the Article

The particular article on “Half a Defence of Positive Accounting Research” has been made based on forecasts in the actual world. It has been presented to argue with the stand that the volatility which includes the performance and intensity of the financial market and capital market cannot be predicted (Bonin, 2013). The particular article under study has pointed out the vitality of behavioral finance in terms of predictability and estimation. The author has thoroughly assessed the theory of the Efficient Market Hypothesis (EMH). He has highlighted the importance of the Positive Accounting Theory and has stated that this theory is more applicable than the EMH model. The principal findings by the author have been listed below:

The Positive Accounting Theory tries to make accurate and constructive predictions in the actual scenario and steers towards the accounting world so that it can be used for predictions related to accounting transactions. When it comes to accounting, it is vital to identify and evaluate the primary cause behind the occurrence of a specific event. The author emphasizes the utility of the positive accounting model to predict the viability of a business organization in a highly competitive environment (Deegan, 2013). It is also important for the financial managers working in a firm to have thorough knowledge and understanding of their concern’s financial capacity so that they can forecast the scope of growth based on the predictions. Few authors do not agree with author Paul and they think that positive accounting theory cannot be used by investors to predict the market performance and any other contingencies in the market. The decision-making process is a significant function of any business undertaking and it is considered vital from the positive accounting theory aspect. When the decision-making process is transparent and genuine, it has a positive impact on the effectiveness of an organization especially in the long-term functioning of the business (Freeman, et al., 2014).

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The article has also stated that forecasting mainly depends on the accounting policies and standards that have been adopted by a business concerned to perform efficiently in the market. It means that the application of efficient accounting principles and techniques will provide a favorable estimation for the business concern. After a thorough analysis of the stated argument, its authenticity and applicability were understood. The effective application of accounting models and policies is vital for the proper functioning and well-being of the business concern (Lukka & Pihlanto, 2014). Most financial practitioners have suggested the application of International Financial Reporting Standards (IFRS) since it was designed to give due importance to proper management of the financial aspects of a concern. The author emphasizes on the accounting treatment which can increase the productivity and goodwill of a business firm.

One of the most significant discussions in the article is the importance of the survival of any business organization. The focal point as per the article is that while applying positive accounting theory (PAT), the primary objective of business firms is to increase their chances of survival in the market situation. In the current business setting, the object of the PAT model is to enable business firms to identify, create, and exploit various business opportunities for their shareholders so that at the end of the day they can increase their competitive advantage in the marketplace (Oldroyd, Tyson & Fleischman, 2015). This strategy used by business associations is crucial because the increased competitive advantage of the respective firms will help them in the long-term survival of the business in the external world.

The effective and accurate application of different accounting standards and principles is vital for the effective management and functioning of different departments of a business firm. It is important to apply the relevant accounting standard which helps in the simplified understanding and accurate predictions of the actual accounting practices in the real world.

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This specific discussion highlights the fact that business companies are not recognized by the revenue that they generate at the end of the financial year but they are recognized by the number of contracts and projects that they take up during a specific financial period. The parties with whom the business firms enter into contracts and their reputation or goodwill in the industry play a vital role (Oldroyd, Tyson & Fleischman, 2015). This concept does not apply to all business concerns since the primary objective of companies is to increase their financial profits in a specific financial year. Every business organisation that is incorporated has one business objective which is to maximize its performance and productivity of the firm and therefore expand its financial profits in a cost-efficient way. The particular subject under study also points out that to create revenue efficiently, firms do not have to take up every single contract or project that comes in their business path. There is a significant interlink between a firm’s financial productivity and the specific contracts accepted by the organization (Penman, 2015). Hence the decisions involving the selection of the business projects are crucial because this decision finally determines the capacity of the business firm to expand their competitive position in the market and be considered as an economic power in the wide market.

The positive accounting model plays a prime role in the selection of productive contracts by business concerns since PAT can minimize the expenses and costs incurred while undertaking such contracts. The positive accounting theory helps a business undertaking to focus only on the contracts and projects that have the potential to maximize the financial profit and income of a business firm with effective utilization of resources, thus minimizing the costs incurred by the company (Rutherford, 2016). The positive accounting theory helps firms to pay relevant attention to the main goal of earning financial profits by selecting efficient projects and contracts.

The author of “Half a Defence of Positive Accounting Research” object is to present the theory of positive accounting and make the readers understand its vitality and essence in the accounting world. This concept has a wide application in different fields since it helps in the better understanding of human behavior.

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Research Question

The research question is a crucial part of any research report because it helps the readers understand the need or purpose of conducting the particular research activity. The researcher of a specific study needs to gain insight into the underlying concern in a subject and the different queries that arise in the specific research subject. Below are the main research questions that have been pointed out in this specific study:

How is Positive Accounting Theory (PAT) applicable to the functioning of a business firm?
What is the PAT’s impact on the financial performance and efficiency of a business firm?
How does Positive Accounting Theory affect the strategies of a business?
What is the link between the Positive Accounting Theory model and the management of accounting standards?

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Theoretical Framework

Theoretical Framework refers to the outline that assists the theories of a particular research study. This framework gives a precise and simple explanation of the research concern and the very reason for its existence. It strengthens the whole research activity that is being conducted and helps the reader to assess and analyze the topic critically.

All the research activities where different quantitative techniques and hypotheses are used in the research have a theoretical framework attached to them which enables the research team as well as the readers to understand the prime concern that is being researched. The same model has been used in our current research study as well (Singleton-Green, 2016).

This research study has evaluated the vitality of the Positive Accounting Theory and how it can be used to improve the financial performance of a business undertaking and positively affect the strategy function of the particular business organization. It also covers the topic of how the model helps business firms to have solid sustainability in the highly competitive and ever-changing business environment (Singleton-Green, 2016). The diagram presented below helps the readers to understand the application of Positive Accounting Theory in a business undertaking and how it influences different aspects of the business like its financial performance, strategy decisions and planning activities, and the overall viability in the market.

Figure 1: PAT

Source: (Singleton-Green, 2016)

The theoretical framework has been adopted in our research article gives the readers an understanding of how the positive accounting theory impacts any business concern and its operations. It also includes the different aspects which get affected by the application of PAT in any given business scenario.

Significance and Limitation of the Article

This segment is crucial because it highlights the various pros and cons of the case which has been studied. The topic that has been considered in our particular research has an impact on almost every business firm and its operations in the given business scenario. It helps the readers to understand some key concepts related to accounting management (Singleton-Green, 2016). Since finance activities are prevalent in all business firms, irrespective of their size and the type of activities they do, the correct understanding of accounting management concepts and principles is necessary for all business undertakings otherwise they will find it difficult to grasp the different accounting standards and models adopted by their particular concern.

The vitality of our current study is vast and it can be relevant for various parties including business organizations and individuals. This research can be helpful for different firms that decide to adopt the Positive Accounting Theory in their particular business activities and processes. Our article is important for the various researchers who intend to carry out a research activity on the same topic.

There are some limitations of our article like it includes an exploratory form of research design. The particular research study was initiated after believing that this was the very first ever research conducted on the topic. Since this belief was not correct, the initial research articles were ignored while conducting this specific research study (Penman, 2015). The research design suitable for this type of study needs to be casual because it enables a better understanding and evaluation of the cause and effect of the interlink of influence of the PAT model on various aspects of business like financial performance, strategic function, etc.

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Conclusion

Our article highlights the impact and application of Positive Accounting Theory in the activities of any business undertaking. The study has taken into account some key elements that are related to the concept and its various implications on a business and its operations. The research has given necessary importance to the process of choosing vital business contracts that can influence the profit standing of the organization and maximize the financial performance of a business. The concept’s application can benefit all firms by increasing their viability in the market environment.

The primary aim of our article is to understand the PAT model and its use in the actual world. The author tells the readers that there are vast areas for improvement and new models need to be developed but currently PAT is quite helpful in the business context.