Introductory Accounting

A Measurement Approach for Managers

Daniel P. Tinkelman

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317353201
• Edition: 1
• Topic: Commerce
• Subtopic: Comptabilité financière

Introductory Accounting adopts a measurement approach to teaching graduate students the basics of accounting. Integrating both financial and managerial principles from the U.S. and around the globe, it links accounting to other areas of business (such as finance, operations, and management).

Providing students with the context to understand how and why accounting is a valuable part of business, readers will gain an understanding of accounting's role in financial analysis and managerial decision-making. Tinkelman discusses accounting as an imperfect measurement system, offering guidance on how quantitative data can benefit analysts and managers when used with an understanding of its limitations. The book is strongly grounded in research, and also draws on plenty of examples and cases to bring these issues to life.

The conversational style of Introductory Accounting will appeal to MBA students, while key terms and illustrative problems make assignments easy for instructors. Additional materials for students and instructors are available on the book's companion website.

Part 1
Introduction

1
Introduction to Accounting as a Measurement System

Outline

• Preliminary Thoughts
• Learning Objectives
• Why Approach Accounting as a Measurement System?
• Measurements and Measurement Systems
• Accounting is a Measurement System
• Areas of Knowledge Related to Accounting Measurement
• What Different Fields of Accounting Measure
• How Society Shapes Accounting
• How External Accounting Measurement Affects Society
• Measuring Shapes the Measurers

Preliminary Thoughts

Counting is the most fundamental quantitative procedure of science.

Yuji Ijiri (1967, p. 78, note 11)

There is no task so simple, yet so profound in its consequences, as the act of taking a measurement. The scientific and technological foundations of modern society depend upon it. Without it, that which we call knowledge would have little objective meaning and our understanding of the natural world would reduce to mythological proclamations.

Neil deGrasse Tyson (1999, p. ix)

When astrophysicists are at work, chances are we are trying to measure something about the universe. How tall? How far? How luminous? How massive? How hot? How big? How fast? How energetic?

Neil deGrasse Tyson (1999, p. xii)

Does accounting measure anything? Should accounting measure anything? Can accounting measure anything? If the answers to these questions are affirmative, what does, what should, or what can accounting measure? If the answers are negative, of what other use is accounting? And why are accountants so concerned with definitions of terms and discussions of ways of quantifying things?

R. J. Chambers (1965, p. 33)

Only with accounting … have economic concepts become coherent, comprehensive, axiomatic, codified, comparable, reportable, demonstrable, controllable and altogether account-able to the extent that we now know them.

Tomo Suzuki (2003, p. 69)

Learning Objectives

After studying this chapter, you should understand:

1. The nature of measurement systems
2. The different parts of accounting measurement systems
3. The criteria used to judge measurement systems’ quality
4. That many academic fields are related to accounting measurement
5. The key objectives, objects and attributes of the financial and management accounting measurement systems
6. That accounting is shaped by the surrounding social system
7. That accounting systems affect the societies around them
8. Different perspectives on how accounting rules should be set
9. That managerial accounting changes as business needs change
10. 10 That the role and image of accountants has changed over time.

Why Approach Accounting as a Measurement System?

There are various ways to approach the role of accounting. Accounting has been described as: a historical record; a branch of economics; an information system; a language; a form of rhetoric; a political activity; mythology (to justify decisions); magic;¹ a form of discipline and control; a method of domination and exploitation; ideology; and a commodity (Morgan 1988). While some of these descriptions may seem crazy, as one learns more about accounting each has some merit.

This book teaches accounting as a measurement system for several reasons:

1. Measurement is an essential characteristic of accounting. Accounting is used to measure and report on economic activities.
2. This approach highlights similarities of accounting issues with measurement issues in other fields. All social and natural sciences measure things. The text discusses broad, generally applicable concepts rather than the details of particular business transactions.²
3. Considering the measurement issues that arise in business helps us understand that accounting rules have evolved as imperfect solutions to measurement issues. Accounting is not just a collection of rules.
4. A measurement focus requires understanding how people use accounting reports. There are many types of users, who make many different decisions. Accounting is not a “one-size-fits-all” discipline. Instead, accounting must adapt to users’ needs. Discussing how this adaptation process has worked in the past, and in different countries, provides insight into the differences in accounting in different times, in different countries, and in different aspects of business. Accounting is not immutable. As economic activities and the needs of users change, accounting changes. That process has occurred for millennia, and will continue to occur.
5. Finally, a measurement system, like a language, shapes our conceptions of reality. Language affects our thinking in two ways. First, it provides definitions, which limit what can be spoken of. Second, it defines relations between objects.³ As Tomo Suzuki (2003, p. 69) notes, our thoughts about the economy are shaped by the way in which we learn about it:
   We do not observe it with our direct senses. We observe the data of the economy, and a number of economic data take the form of statistics. An important question is whether statistics of numerical data best present the entity of economic society. There is no obvious logical reason why economic society has to take statistics as its form of presentation. Moreover, there is no apparent rationale why economic statistics have to take the form of accounting.

Measurements and Measurement Systems

Measurement in General: Definitions and Rules

A measurement is formally defined as a way of assigning numbers to objects. It is a special type of language. The purpose of measurement is to allow us to represent relations between objects by the relation between the numbers (Ijiri 1967).

For example, if we know the measured heights of two students, we can conclude, even without looking at the students or knowing anything else about them, that the student with the height of 6 feet is taller than the student with the height of 5 feet, because “6” is greater than “5.” The height measurements summarize one characteristic of these two students in a way that can be easily communicated. Mathematics allows us to compare the two measures, even though we know nothing else about these students.

There are some fundamental rules for measurements.

1. Quantities are always defined within some class of objects. For example, the 5 foot height of one student and the 130 pound weight of another are measurements from different classes.
2. Quantities must be additive. If the 5-foot-tall student grows by six inches, his or her height will now be 5 1/2 feet. The two students have a combined height of 11 feet.
3. The user must be indifferent between two items in the same class with the same measurement. Thus, the user must be willing to say two 5-foot-tall students are the same height (Ijiri 1967).
4. The measures must be objective, in the sense that different measurers should, within limits of error, come up with the same measurement (Micheli and Mari 2014).
5. The measures should come from observations of real world things (Micheli and Mari 2014).

Parts of a measurement system

A measurement system is an organized way of creating, communicating and verifying useful measurements. A measurement system generally has the following components:

• Objects to be measured
• Rules for measuring attributes of the objects, and methods of forming secondary measures. The existence of rules implies the existence of standard-setters that create the rules
• Measurers
• Verifiers
• Users and their decision models
• Communication or reporting of measurements to users

For example, consider the measurement system needed to determine the total numbers of students of various heights in the United States.

• “Students in the United States” would be the objects of measure. But, what is a “student”? Do we mean children? Are university students, graduate students, or enrollees in adult education courses included? Are we planning to include students living in overseas possessions of the United States?
• Height would be the key attribute. Secondary measures might include totals of the students with various heights who meet other criteria, for example who are 8 years old.
• Rules for measurement and a measuring device must be chosen. Units of measure, such as inches or centimeters, must be determined, along with rules about what fraction of a measurement is to be reported. Procedures need to be uniform. For example, there need to be rules about how to deal with the effect of hair styles on measurements.
• Standard-setters are needed to create and publicize the measurement rules.
• Measurers, such as school nurses or doctors, would measure the students.
• Someone needs to verify that the measurements were collected properly and were transmitted and summarized properly.
• The entire measurement exercise only has a purpose if there is a user, for whom this information is input into some thought process or mental model.
• The measurements must be reported to the intended user. In some cases, it may also be important not to communicate the data to unintended users.

Relation of Measurement and Theory

Measurement systems and theories are always developed together. As a committee of the American Accounting Association wrote, in 1971:

Theory construction and measurement development are inseparable. The theory specifies, in a conceptual sense, what is to be measured, how the measurements are to be manipulated, and what measurable outcomes one can expect. This implies that the theory is constrained by what can be measured. It also implies that the measurements interact with the theory in that the predicted occurrences will either be verified or falsified by separate measurements.

(American Accounting Association 1971b, p. 62)

The student height example indicates the need for measurements and theory to proceed together. Without underlying theory, we don’t know whether “students” should include both kindergarten children and graduate students. We don’t know what subclassifications are appropriate. If the information is to be used to test hypotheses about children’s growth rates from birth through age 10, then we would only include children of the appropriate age. If the hypothesis is about a subtle effect of environment on growth, we need exact measurements. If the information is being used by a manufacturer of school uniforms to determine how many of what size garments to produce, both the definition of the object of measure, and the degree of precision, would be different. However, once measurements of heights are performed, the scientists studying children’s growth can form new hypotheses, requiring new types of measures.

Relations Between Parts of Measurement Systems

Different parts of the measurement system are not independent of each other. In particular, there is a critical relationship between the types of rules and the qualities required of the measurers. As Ijiri (1967) notes:

If the measurement rules in the system are specified in detail, we expect the results to show little deviation from measurer to measurer. On the other hand, if the measurement rules are vague or poorly stated, then the implementation of the measurement system will require judgment on the part of the measurer; hence the output of the measurement system is more likely to show wider deviation from measurer to measurer.

(p. 135)

In some fields, professionals are expected to use a great deal of discretion, and rules are either nonexistent or broadly specified. In the student height example, measurers are probably trusted to get the students to stand up straight, and to make rational decisions concerning the impact of unusual hairstyles. In other fields, the use of discretion is not desired, and rules tend to be quite specific. Where no discretion at all is required, the measurement can be computerized.

Theodore Porter (1995) suggests that quantitative measurements and precise standards for measurement arise when society does not trust the professionals to use their discretion wisely. One reason why U.S. accounting has developed so many rules is that tax authorities and investors do not trust companies to report objectively.

What Makes a Measurement System Good or Bad?

Certain criteria can help judge how good a measur...