Management And Accounting Web

Hendriksen, E. S. 1977. Accounting Theory. 3rd. edition. Richard D. Irwin, Inc.

Contents provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Accounting Theory Main Page | Theories Main Page

Chapter 1: The Methodology of Accounting Theory. 1-32.

Levels of Accounting Theory: Syntactical theories, interpretational or semantical theories, and behavioral or pragmatic theories.

Theories Relating to the Accounting Structure

Interpretational Theories

Behavioral Theories

Deductive and Inductive Reasoning

Deductive Reasoning

The Inductive Approach

Alternative Behavioral Objectives

Theories of Investment Valuation

Intrinsic Value Theories

The Efficient Markets Hypothesis

Portfolio Theory

Predictive Indicators

The Events Approach

The Ethical Approach

Communication Theory Approach

Sociological Approach

Macroeconomic Approach

The Pragmatic Approach

Nonspecific Behavioral Objectives

Verification of Accounting Theories

Controversy in the Development of Accounting Principles and Procedures

Selected Additional Reading on Chapter Topics

Chapter 2: History and Development of Accounting Theory to 1959. 33-74.

The Origins of Accounting Theory

The Theory Behind the Italian Method

Development of Accounting Thought in the 17th and 18th Centuries

Development of Accounting Thought in the 19th and early 20th Centuries

The Effect of Technological Changes

The Development of Cost Accounting

The Influence of Railroad Growth

The Influence of Governmental Regulatory Bodies

The Influence of Income Taxation

The Influence of the Corporation

The Development of Accounting Thought Prior to 1930

The Presentation of Financial Statements

Accounting Practices of the 1920s

The Income Statement

The Balance Sheet

Accounting Literature in the 1920s and 1930s

Development of Accounting Principles by the American Institute of Certified Public Accountants

The Special Committees

The Committee on Accounting Procedure

The Accounting Research Bulletins

The Terminology Bulletins

The Securities and Exchange Commission

The Development of Accounting Standards by the American Accounting Association

A Comparison of the AAA Statements

Objectives of Financial Statements

Asset Valuation

The Measurement of Income

Selected Additional Reading on Chapter Topics

Chapter 3: The Development of Accounting Theory since 1959. 75-103.

Development of Accounting Principles by the American Institute of Certified Public Accountants

The Accounting Principles Board

The Accounting Research Division

APB Statement No. 4

The Financial Accounting Standards Board

The Securities and Exchange Commission

The Cost Accounting Standards Board

The Development of Accounting Standards by other Societies and Agencies Interested in Accounting

The American Accounting Association

The National Association of Accountants

The Financial Executives Institute

The Institute of Chartered Accountants in England and Wales

The Canadian Institute of Chartered Accountants

Australian Societies

International Associations

The Frontiers of Research in Accounting Theory

Selected Additional Reading on Chapter Topics

Chapter 4: Concepts, Measurement, and Structure of Accounting Theory. 104-138.

The Framework of Accounting Theory

The Nature of Accounting Postulates

Environmental Postulates

The Accounting Entity


The Objectives of Accounting


Information and Data

User Constraints



Uniformity and Comparability


Measurement in Accounting

Measurement Constraints


Objectivity and Verifiability

Freedom from Bias

Limitations of the Monetary Unit


The Framework of Accounting Theory

Selected Additional Reading on Chapter Topics

Chapter 5: Income Concepts for Financial Reporting. 139-175.

The Objectives of Net Income Reporting

Income Concepts at the Structural Level

The Transactions Approach to Income Measurement

The Activities Approach to Income Measurement

Interpretive Concepts of Income

Capital versus Income

The Wealth Maintenance Concepts of Income


Market Valuation of the Firm

Current Cash Equivalent

Historical Input Prices

Current Input Prices

Maintenance of Constant Purchasing Power


Income as a Measurement of Efficiency

Behavioral Concepts of Income

Income as a Predictive Device

Other Behavioral Concepts

1. Managerial Decision Making

2. Estimation Theory

3. User-Orientation Approaches

What Should be Included in Income?

The Current Operating Concept of Income

The All-Inclusive Concept of Income

Recurring and Nonrecurring Income

Prior Period Adjustments

Extraordinary Items

Net Income to Whom?

The Value-Added Concept of Income - Selling price of firm's product less cost of goods and services acquired by transfer. Income recipients include all employees, owners, creditors, and governments.

Enterprise Net Income - Excess of revenues over expenses; all gains and losses. Expenses do not include interest charges, income taxes, and true profit-sharing distributions. Recipients include stockholders, bondholders, and government.

Net Income to Investors - Same as enterprise net income, but after deducting income taxes. Recipients include stockholders of long-term debt.

Net Income to Stockholders - Net income to investors less interest charges and profit sharing distributions. Recipients include stockholders (preferred and common).

Net Income to Residual Equity Holders - Net income to shareholders less preferred dividends. Recipients include current and potential common stockholders unless priority payments cannot be met.

Summary of Net Income Classification by Income Recipients. (See above).

Selected Additional Reading on Chapter Topics

Chapter 6: Revenues and Expenses, Gains and Losses. 176-211.


The Nature of Revenue

What Should be Included in Revenue?

The Measure of Revenue

The Timing of Revenue

The Reporting of Revenue during Production - Establishment of a firm price based on contract or general business terms or existence of market prices at various stages of production.

Long-Term Constricts


The Reporting of Revenue at the Completion of Production - Existence of a determinable selling price or stable market price. No substantial cost of marketing.

The Reporting of Revenue at the Time of Sale - Established price for the product. Reasonable method for estimating amount collectible. Estimation of all material related expenses.

The Reporting of Revenue Subsequent to Sale - At time of collection - Impossible to value assets received with fair degree of accuracy. Additional material expenses are likely, and these cannot be estimated with a fair degree of accuracy at the time of sale.

Summary of Revenue Reporting


What Should be Included in Expense?

How Should Expenses be Measured?

Historical Cost

Current Prices

The Timing of Expenses

The Matching Concept

Direct or Product Matching

Indirect or Period Matching

The Allocation Concept

Gains and Losses



Selected  Additional Reading on Chapter Topics

Chapter 7: Financial Reporting and Price Changes. 212-240.

The Nature of Price Changes

General Price-Level Changes

Specific Price Changes

Relative Price Changes

The Monetary and Nonmonetary Classifications

Gains and Losses on Monetary Items

The Restatement of Nonmonetary Items

Price-Level Restatement Models

General Price-Level Adjustments

Restatement of Specific Price Changes

Relative Price Changes

An Evaluation of Price-Level Restatements

General Purchasing Power

Purchasing Power of Stockholders

Investment Purchasing Power of the Firm

Specific Replacement Purchasing Power

Foreign Currency Translations and Price Changes

Selected Additional Reading on Chapter Topics.

Chapter 8: Cash and Funds Flows. 241-255.

The Objective of Cash Flow Information

Cash Flows and the Prediction of Dividends

The Presentation of Cash Flow Information

Funds Flow Concepts

Short-Term Monetary Asset Flows

Net Monetary Asset Flows

Working Capital Concept of Funds

The All Financial Resources Concept of Funds

The All Significant Financial Events Approach

Accounting Principles Board Opinion No. 19

An Evaluation of Cash and Funds Flow Concepts

Selected Additional Reading on Chapter Topics

Chapter 9: Assets and Their Measurement. 256-285.

The Nature of Assets

The Objectives of Asset Measurement

Valuation as a Method of Measuring Income

Valuation as a Step in the Matching Process

Valuation as a Measure of Accretion

The Presentation of Financial Position to Investors

The Balance Sheet as a Step between Two Income Statements.

The Position Statement as a Means of Prediction

The Presentation of the Claims of the Several Equity Holders

Valuation for Use by Creditors

Valuation for Use by Management

Valuation Concepts

Exchange Output Values

Discounted Future Cash Receipts or Service Potentials

Current Output Prices

Current Cash Equivalents

Liquidation Values

Exchange Input Values

Historical Costs

Current Input Costs

Discounted Future Costs

Standard Costs

Absorption Costing and Direct Costing

Absorption Costing

Direct Costing

The Lower-of-Cost-or-Market Valuation

Evaluation of Measurement Concepts

Selected Additional Reading on Chapter Topics

Chapter 10: Current Assets and Current Liabilities. 286-311.

The Objectives of Asset and Liability Classifications

The Presentation of Solvency to Creditors

The Description of Enterprise Operations

Classification According to the Accounting Structure

Classification According to Valuation Methods

The Prediction of Cash Flows

Working Capital

The Definition of Current Assets

The Definition of Current Liabilities

Inadequacies of the Current Asset and Current Liability Classifications

Monetary Current Assets



The Installment Basis

Monetary Investments

Nonmonetary Current Assets

Nonmonetary Investments

Prepaid Expenses

The Measurement of Current Liabilities

Monetary Current Liabilities

Nonmonetary Current Liabilities

Selected Additional Reading on Chapter Topics

Chapter 11: Inventories. 312-355.

The Nature of Inventories

The Objectives of Inventory Measurement

The Determination of Inventory Quantities

The Bases for Valuation of Inventories

Output Values

Discounted Money Receipts

Current Selling Prices

Net Realizable Values

Input Values

Historical Cost

Current Replacement Costs

Net Realizable Value Less a Normal Markup

The Lower of cost or Market

Normal-Stock Valuation

What Should be Included in Cost?

The Association of Costs with Inventories and Cost of Sales

The Objectives of Cost Association

Specific Identification of Cost

Average Cost Methods

First-In, First-Out

Last-In, First-Out Methods

Last-In, First-Out

Lifo or Market

Dollar-Value Lifo

Retail Inventory Methods

Retail Lower of cost or Market

Lifo Applied to the Retail Method

The Gross Profit Method

Comparison of the Various Cost Methods during Periods of Price Changes

Summary of Cost Association Methods

Selected Additional Reading on Chapter Topics

Chapter 12: Plant and Equipment: Purchased and Leased. 356-387.

The Nature of Plant and Equipment

The Bases of Valuation

Input Values

Historical Input Values

Historical Cost to the Firm

Prudent Cost

Original Cost

Current Input Values

Current Replacement Cost

Appraisal Value

Fair Value

Current Recommendations

Definition and Content of Cost

The Content of Initial Cost

Capital and Revenue Expenditures

Self-Constructed Assets

Leases of Plant and Equipment

Leases Having Sale or Financing and Purchase Characteristics

Leases Reported by the Lessee

Leases Reported by Lessors

Sales-Type Leases Reported by the Lessor

The Operating Lease

Leveraged Leases

Capitalization of All Long-Term Noncancelable Commitments

Disclosure of Leases

Selected Additional Reading on Chapter Topics

Chapter 13: Depreciation. 388-425.

Definition of Depreciation

Decline in Service Potential

The Maintenance of Capital

The Current Cost of Services Consumed

Concepts of Depreciation

Depreciation as a Decline in Asset Value

Decline in Discounted Net Revenue Contribution

Decrease in Resale Price of Used Asset

Depreciation as a Process of Matching Costs with Expected Benefits

Time-Adjusted Depreciation

Depreciation Based on a Constant Cost to Net Revenue Contribution Ratio

Depreciation as an Allocation of Cost to Physical Service Units

Depreciation Allocation Based on the Usefulness of the Reported Figures

The Net Service Contribution

Depreciation, Repairs, and Replacements

Repairs, Maintenance, and Asset Life

Repairs and Replacements

Repairs and Efficiency

Evaluation of Various Depreciation Methods

Methods Preceding the Use of Cost Allocation

Inventory Method

The Replacement Method

Cost Allocation Methods

Variable Charge Methods

Straight-Line Allocation

Increasing Charge Methods

Decreasing Charge Methods of Depreciation

Summary of Depreciation Methods

Summary of Conditions under Which Each pattern is Applicable

Depreciation For Nonprofit Organizations

Selected Additional Reading on Chapter Topics

Chapter 14: Intangibles, Noncurrent Investments, and Deferred Charges. 426-445.

The Nature of Intangibles

The Valuation of Intangibles

The Amortization of Intangible Assets

Intangibles with Limited Life

Intangibles with Indefinite Lives

Research and Development Costs


The Valuation of Favorable Attitudes toward the Firm

The Present Value of Superior Earnings

Goodwill as a Master Valuation Account

The Recording of Goodwill

Purchased Goodwill

"Negative Goodwill"

Investments in Unconsolidated Subsidiaries

Deferred Charges

Selected Additional Reading on Chapter Topics

Chapter 15: Liabilities and Their Measurement. 446-462.

The Nature of Liabilities

Circumstances for Liabilities to Exist

Equitable and Legal Obligations

Unconditional right of Offset

Measurability of Liabilities

Should the Payee be Known or Ascertainable?

Basic Characteristics of Liabilities

The Valuation of Liabilities and the Computation of Interest

Contingent Liabilities

Current Valuation of Liabilities

Long-Term Liabilities

Early Extinguishment of Debt

Convertible Debt

Deferred Credits

Selected Additional Reading on Chapter Topics

Chapter 16: Income Taxes and Pension Costs. 463-486.

Income Tax Allocation

Intraperiod Allocation

Interperiod Allocation

The Matching Concept Applied to Income Taxes

Tax Allocation as a Process of Valuation

Tax Allocation and Cash Flows

Carry-Back and Carry-Forward of Tax Losses

The Investment Tax Credit

Cost Reduction

Tax Reduction

A Summary Evaluation

Accounting For Pension Costs and Obligations

The Allocation of Pension Costs

Current Service Cost

Past Service Costs

Actuarial Gains and Losses

Presentation of Pension Assets and Liabilities

Financial Statements of the Fund or Plan

Selected Additional Reading on Chapter Topics

Chapter 17: Ownership Equities. 487-511.

The Nature of Ownership Equities

The Proprietary Theory

The Entity Theory

The Residual Equity Theory

The Enterprise Theory

The Fund Theory

The Commander Theory

Summary of the Equity Theories

The Classification of Single Proprietorship and Partnership Equities

The Classification of Stockholder Equities

Classification by Source of Capital

The Disclosure of Legal Capital

The Disclosure of Restrictions on the Disposition of Income

The Disclosure of Restrictions on Liquidation Distribution

Consolidated Financial Statements

The Purpose and Nature of Consolidated Financial Statements

Consolidated Balance Sheet

Consolidated Income Statements

The Classification of Consolidated Equities

Selected Additional Reading on Chapter Topics

Chapter 18: Changes in Stockholders' Equities. 512-544.

Increase in Invested Capital

Capital Stock Subscriptions

Conversions of Debt and Preferred Stock

Stock Dividends and Stock Splits

The Nature of Stock Dividends

The Capitalization of Par or Stated Value

The Capitalization of Market Price

Stock Options and Stock Warrants

Rights Granted to the Purchasers of Other Securities

Noncompensatory Employee Stock Purchase Plans

Compensatory Stock Option Plans

Decreases In Invested Capital

Treasury Stock

The Single-Transaction Concept

The Two-Transactions Concept

Evaluation of the Single-Transaction and Two-Transactions Concepts

Business Combinations

Combinations Treated as Purchases

Pooling of Interest

An Evaluation of Purchases and Pooling of Interests

The Valuation of Assets in a Combination

The classification of the Stockholders' Equity of the Combination

Earnings Per Share

Objectives of Earnings per Share

Computation of Number of Shares

Primary Earnings per Share

Fully Diluted Earnings per Share

Computation of the Earnings


Selected Additional Reading on Chapter Topics

Chapter 19: Disclosure in Financial Reporting. 545-567.

The Nature of Disclosure

What Should be Disclosed?

Disclosure of Quantitative Data

Nonquantitative Information

Accounting Policies

Accounting Changes

Disclosure of Post-Statement Events

Disclosure of Segments of a Business Enterprise

Need for Segment Disclosures

Accounting Difficulties

Opposition to Segment Disclosures

Methods of Disclosure

Form and Arrangement of Formal Statements

Position Statement

Income Statement

Cash Flow and Funds Statements

Terminology and Detailed Presentations

Parenthetical Information


Nature and Purpose of Footnotes

Accounting Policy and Accounting Changes

Prior Rights of Creditors

Contingent Assets and Contingent Liabilities

Restrictions to Dividend Payments

Rights of Equity Holders

Executory Contracts

Supplementary Statements and Schedules

The Auditor's Certificate

The President's Letter

Summary of Disclosure Methods

Selected Additional Reading on Chapter Topics

Appendix: Selected CPA Examination Questions. 569-622.

Index: 623-636.


Related Summaries:

Backer, M. editor. 1966. Modern Accounting Theory: A Revision of Handbook of Modern Accounting Theory. Prentice-Hall, Inc. (Contents).

Covaleski, M. and M. Aiken. 1986. Accounting theories of organizations: Some preliminary considerations. Accounting, Organizations and Society 11(4-5): 297-319. (Summary).

Covaleski, M. A., M. W. Dirsmith and S. Samuel. 1996. Managerial accounting research: The contributions of organizational and sociological theories. Journal of Management Accounting Research (8): 1-35. (Summary).

Johnson, H. T. 1983. The search for gain in markets and firms: A review of the historical emergence of management accounting systems. Accounting, Organizations and Society 8(2-3): 139-146. (Summary).

Johnson, H. T. 1987. The decline of cost management: A reinterpretation of 20th-century cost accounting. Journal of Cost Management (Spring): 5-12. (Summary).

Martin, J. R. Not dated. 200 years of accounting history dates and events. Management And Accounting Web.

Neimark, M. and T. Tinker. 1986. The social construction of management control systems. Accounting, Organizations and Society 11(4-5): 369-395. (Summary).

Tiessen, P. and J. H. Waterhouse. 1983. Towards a descriptive theory of management accounting. Accounting, Organizations and Society 8(2-3): 251-267. (Summary).