Decision Usefulness approach vs. Measurement Approach - Research Paper Example

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Decision Usefulness approach vs. Measurement Approach

This research will begin with the Decision Useful Approach. This approach motivates the application of decision models. The approach is based on the concept that if financial statements cannot be prepared correctly, then financial statements must be presented in such a manner so as to reflect useful information focusing on users and the decision problems that they face. The approach assumes that if the financial and accounting is useful to investors, then trading volume of stocks should experience a surge and securities prices are also expected to increase or respond in predictable manner relative to publicly available accounting information. The Single-Pearson decision theory aims to understand how an investor makes rational decisions under circumstances of certainty. The theory appreciates the concept of information and enables decision makers to keep informed and modernize their beliefs. The concept uses the publicly available financial statements as source of information. The rationale or principle of portfolio diversification is as follows:

Maintain a balance between risk and return
Assurance that the different securities held for investment are negatively correlated which will give an assurance of protection in case of any market shortfall and an expectation of positive returns.
Diversification of investment reduces the risk underlying the investment. Investment in a single stock of a particular company increases the substantial risk attached with the particular investment. ...Show more

Summary

This research is the best example of comparison of the ‘Decision Usefulness’ and ‘measurement’ approach, two perspectives of Accounting Theory. The objectives of these approaches aim to identify the purposes and goals of financial accounting.

Author : bmurazik
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