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How are accounting principles incorporated into policy and practice?

SFAS No. 13 allows for a 'better' measurement of debt-equity ratios from the perspective of shareholders - less of a problem violating debt covenants - which, as a result, makes it easier to pay dividends. Shareholders benefit from the ability to more easily receive dividends, which can work to the detriment of the firm's bondholders.

SFAS No. 19 would have lowered the income of firms using full costing. These were generally medium-sized firms. The claim was that the lower income under successful efforts would raise the cost of borrowing to firms that were using full costing. Of course, efficient-market advocates would say that the market should be able to see behind the income difference between the two methods, but the lower debt-equity ratio that would result under successful efforts could indeed more easily threaten violation of debt covenants. This could affect potential dividend payments and could, therefore, raise the cost of capital. Of course, this latter effect could also lower the cost of debt capital, since it would be better protected, but that also depends upon players in the market understanding this issue. Of course, use of one method - successful efforts - rather than two methods might also benefit users of financial statements, who would not have the problem of reconciling incomes for different firms using different methods. Use of one method would also improve verifiability.

SFAS No. 87 results, in most cases, in keeping debt off the balance sheet which benefits debt-equity ratios which are often used as debt covenants in bond indentures, As a result, it favors stockholders over bondholders.

SFAS No. 96 would have had a detrimental effect on debt-equity ratios and would likewise have resulted in lower income when deferred tax assets were not recognized. Hence it would have been beneficial for bondholders over stockholders. The lower income which would have resulted in some cases - where deferred tax assets would not have been recognized - might have resulted in lower security prices.

What are the additional relationships between policy and consequence?

How are accounting principles incorporated into policy and practice?

Is accounting an "objective" profession? Why or why not?

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What are the additional relationships between policy and consequence? (1 Paragraph)
There is first the prime relationship between policy and consequence. This is the objective of the policy. For example, if SFAS 13 has the objective of a fair measurement of the debt-equity ratio. However, this allows the presentation of a debt-equity ratio that favors the shareholders. This is the additional effect. Again the policy may have one stated objective, but its effects may touch the interests of several stakeholders, these are the additional relationships between policy and consequence. For instance, we have SFAS 19 that would lower the income of firms that used full costing. Accounting policy decisions also have strong economic consequences. The additional relationships between policy and consequence would include raising the cost of borrowing to the firm, a lower debt-equity ratio that would lead to violation of lending norms and help users of financial statements this policy would ...

Solution Summary

Four paragraphs on these matters.

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