Accounting Theory Alumina Case
Accounting Theory Alumina Case
Accounting Theory Alumina Case
CASE STUDY
recommend the most appropriate methods for given situations based on evidence. For example, when the statistical tests show that the results obtained have less than a 5 per cent probability of occurring by chance. 3. Which of the approaches described in the answer to question (2) do you believe is most useful? Why? In my opinion, the most useful approach is decision usefulness approach, because this approach demonstrates that major professional accounting standard-setting bodies have adopted the theory as a guide to the preparation of useful financial accounting information. 4. Explain the importance to investors of developing a theory to explain the relationship between earnings announcements and share price movements? A theory must be based on a careful and rational examination of the facts, a clear distinction needs to be made between facts. A theory is based upon a hypothesis and backed by evidence. Developing theory will help investors to make decision in expanding their investment, for example, the random walk theory states that market and securities prices are random and not influenced by past events (referred as the weak form efficient-market hypothesis), this theory will help investors in predicting the future growth, it means that, momentum doesnt generally exist and calculations of past earnings growth doesnt predict future growth and all methods of predicting share prices are futile in long run. Share prices usually rise, in days around earnings announcement and when firms announce their quarterly earnings, as they are required to do, considerable price volatility and increases in trading volume are evident. They hypothesize that the predictable rise in stock prices is driven by the predictable rise in volume generated by earnings announcements. They go on to show that the premium is strongly correlated with the concentration of trading activity around previous earnings announcements, and that stocks with high volume around earnings announcements in particular subsequently have both high premiums and high imputed buying by individual investors. This suggests that, at least for some stocks, prices are boosted around announcement dates by demand from individual buyers