Advanced financial accounting Assignment Example | Topics and Well Written Essays - 1500 words

Advanced financial accounting - Assignment Example Positive Accounting Theory (PAT) involves predictions of choices of firms as pertains accounting policies and the response of firms to any new accounting policies. It also seeks to explain such decision-making actions by the management of different companies. Positive Accounting Theory makes use of theories to draw predictions on the choices management would likely make when selecting accounting policies to implement or use (Deegan, 2009, p.53). According to the theory, the conduct of any firm is in such a way that would maximize its best interests. In this regard, managers would likely do what they feel is best for the company at the expense of the interests of shareholders. In arriving at the choices to pursue, firms are guided by factors within the industry in which they operate. It is such factors on which the positive accounting theory lays a focus. Positive Accounting Theory’s focus is on the relationship that exists between different stakeholders in a business. The stakeholders provide resources to the firm in different capacities. Apart from this relationship, the theory also looks at how accounting would affect the functionality of such relationships. Through agency theory, positive accounting theory explains the possible motivations that guide managers in their choice of preferred accounting methods. In this light, the assumption is that managers, who are agents, would seemingly engage in activities that would create benefits for them at the expense of their principals (Deegan, 2009, p.54). The introduction of restrictive contracts, therefore, comes handy. However, managers still need some freedom to make decisions dependent on the situation. The positive accounting theory has two perspectives namely the efficiency perspective and the opportunistic perspective. The perspectives explain the conduct of managers in as much as choosing accounting policies is concerned. Under the efficiency perspective,