Tag: balance

Changes on the balance sheet and income statement items

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Finance

Changes on the balance sheet and income statement items

ECDK BALANCE SHEET FOR THE YEAR ENDED 0000
Assetsyear 1year 2ChangeLiabilitiesyear 1year 2Change
Current Assets12502100850Current Liabilities750620-130
Fixed Assets55004820-680Long Term Liabilities48005700900
Total Assets67506920170Total Liabilities55506320770
owners’ Equity72007500300
Total of owners’ Equity and liabilities12750138201070

Changes in assets- The current assets have how a positive change from year one to year two. The difference could be a change in inventory levels, debtors, or the cash at hand. The fixed assets show a negative change, which may be attributable to the company’s plant property and equipment depreciation.

Liabilities-the current liabilities show a negative change, which may be caused by the reduction of the company’s creditors. The long term liabilities show a positive change from year one to year two, which may be caused by the acquisition of a long term debt such as a mortgage.

Equity- the owners’ equity shows a positive change from year one to year two, which may be caused by the acquisition of new company shares.

ECDK INCOME STATEMENT FOR THE YEAR ENDED 0000
Year 1Year 2Change
Sales500070002000
Less cost of goods sold25153305790
Total Revenue248536951210
Less expenses70020001300
Net income17851695-90

Total revenue-from the table we can observe that the total revenue change is positive. However, this does not give the profit/loss position of the company until expenses and taxes are paid out

Net income- from the table, the net income is negative, implying that the company made a loss.

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Income and Balance Sheets

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Income and Balance Sheets

The income and balance and sheets are important statements in the financial realm, citing that they give into detail the financial accounting of any given company within a certain accounting period either quarterly, monthly, yearly, or within the two halves of a company’s accounting period.

Income and Balance Sheets

Beginning with the balance sheet, a balance sheet’s role is for detailing the liabilities and assets of a company, and hence the shareholder’s equity borne out of the difference between the value of an asset and the subsequent liability that it is attached with, within any specified period of time. Acclimatized by the above, poor performance of a company, as may be evidenced within the balance sheet, results in low asset valuation, high liability for shareholders, and a representation of low equity or low value of the company based on the differences between asset and liability value. This represents a negative connotation to the investor. On the other hand, high asset valuation, low liability of shareholders, and consequent high company equity is a positive articulation for the shareholder.

On the other hand, an income statement details the number of expenses and income over a certain period of time. It also details the amount of revenue the organisation amasses from its operations. In this light, an increase in the amount of income, and a consequent increase in the amount of revenue raised by an organization is a positive connotation from the stakeholder’s perspective. Nevertheless, an increase in the amount of income, and a consequent decreased in the amount of revenue raised, and then it has a negative connotation from the stakeholder’s perspective. On the other hand, a decrease in the amount of income and amount of revenue raised also augurs negativity from stakeholders. However, a decrease in the amount of revenue and an increase in the amount of fo revenue is a positive connotation for stakeholders.

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Preparing A Balance Sheet

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Preparing A Balance Sheet

Balance sheets are essential in human resource accounting. They provide important data and information to the department. That is, they assist in the identification of the reasons as to why the return on investment is low (Bohlander, 2012). Identifying such activities will assist the human resource to understand ways of preventing or mitigating them. Individuals having the interest of investing in an organization will want guidance from the human resource manager. Balance sheets will assist in availing important details to the investor. High turnover on investment is another hurdle that human resource department has to deal with. Balance sheets give information of various departments or levels that there is such occurrence and guide involved parties on appropriate ways of containing them. Still on financial information, balance sheets will avail monetary data to the department’s executives on the potential of that department. As such, there is direct reflection of the expenditure that HRD incurs in the staffing, recruitment, development and the training of labour (Griffin, 2001). Through balance sheets, managers will also understand the return of such expenditure to the company and its impact.

Activity: Preparing a balance sheet

SIMONSON ENGINEERING BALANCE SHEET AS AT 30 SEMPTEMBER 2010
 £
Non-Current Assets 
Plant and equipment25,000
Property72,000
Motor Vehicles15,000
Fixtures and fittings9,000
Total Non-Current Assets121,000
  
Current Assets 
Trade receivables48,000
Inventories45,000
Cash1,500
Total Current Assets94,500
  
Total Assets215,500
Equity (Owner’s Claim) 
Equity at 1 October 2009117,500
Drawings for the year to 30 September 201015,000
Profit for the year to 30 September 201018,000
Total120,500
  
Non-current liabilities 
Long term borrowing51,000
Current liabilities 
Short-term borrowing26,000
Trade payables18,000
Total Current and Long-term95,000
Total Equity and liabilities215,500

This activity of preparing a balance sheets lead to the realization of the fact managers in the HR can use them to acquire information and data on the value and the cost human resource (Talwar, 2006). It also illuminates quantum related to the acquisition of labour. An executive might also have an interest on the cost of running the department and comparing such cost with the benefits that the firm will derive from such activities (Boudreau, 2000). They will, in addition, assist an executive to manage the resource in a manner that maintains cost at lower levels while at the same time avoiding the compromise of the quantity and quality of the this resource. Such will allow the manger to improve or maintain the efficiency of this department on the entire department.

Human resource executives can use the information a balance sheet provides to make effective and proper decisions in management (Griffin, 2001). That is maintenance, allocation, acquisition, and the development of human resources to achieve objectives in the organisation that are cost-effective. Balance sheets also reflect the usage of human resources by management. In accordance to this, they provide important information to the manager making it easier to track the usage (Balkin, 2009). On long-term basis, managers can use financial information that a balance sheet will provide to make an analysis of the entire human labour asset. That is, they can easily decide of the assets in terms of if they are appreciating, conserving or depleting (Boudreau, 2000). There is also the provision of aid in the sector of developing important management principles. This assists human resource managers to make sustainable decision that will be relevant in the future.

Transfers and promotions are relevant in any organisation. Human resource manager has the responsibility of managing such activities. Making such decisions requires the availability of important information on the part of human resource department. Balance sheets provide the human resource manager with relevant information that will be critical in making such decisions. That is, it will give a reflection of areas that require additional human resource and levels that have excess labour. Balance sheets will also indicate areas that have low levels of training and allow the human resource manager to make recommendations to those departments to improve the skills of their personnel (Bohlander, 2012). Retrenchment issues or making the decisions of departments that will have to lay off employees is also the mandate of HRM. They can however use financial information that balance sheets provide to make evidence-based decisions.

Training of employees is expenditure to a firm. Using the balance sheets will give HRM the financial information that will reflect on the relevance of such activities (Balkin, 2009). Afterwards, HRM can make recommendation to department on whether there is good utilization of training finances awarded such departments. Such information gives executives the authority of making decisions that will steer the company in the desired direction (Noe, 2000). That is, through human resource accounting, a balance sheet allows policy-makers in the department to assess and understand a company’s internal strengths and weaknesses. Such data makes it possible for them to guide other departments in the organisation into the right direction for the benefit of the entire company (Pieper, 2000). This is an important vice especially if the company is facing unfavourable or adverse conditions at that particular moment.

In normal business practices, accounting for the human resource department is a challenge to a firm. Using balance sheets in the department will indeed be an attempt to account for the department (Pieper, 2000). As such, HR managers can use a balance sheet to identify investments made by the department of human resource. It also makes it easier to report such investments to the relevant parties. Balance sheets preparation will avail information of the entire system on the changes that are occurring in human resource department of any organisation. It is also important in quantifying value and the costs of employing the employees of that organisation (Weihrich, 2006). This has the meaning that it will provide human resource manager with systematic information that will enable efficient organisation of accounts in the department.

Discussions provided in this paper indicate the relevance of preparing balance sheets. Human resource managers derive lots of importance from the activity (Noe, 2000). They can understanding the investment that their firm is making and compare such investments with the compensation that the company acquires from it (Talwar, 2006). Such will allow the human resource manager to make important investment decisions and guide other departments. The long-term implication of this is that balance sheets preparation will have a direct reflection on the success of a HRM (Weihrich, 2006). This is why human resource accounting is an essential tool in any HR department. This is because the kind of information that the human resource manager acquire from the process will determine the success of that department. In addition, it will allow HRM to make evidence-based decisions.

References

Talwar, P. (2006). Human Resource Management. New York: Gyan Publishing.

Weihrich, H. (2006). Essentials of Management. New York; McGraw- Hill Publishers.

Pieper, R. (2000). Human Resource Management: An International Comparison. Berlin: Walter de Gruyter.

Balkin, R. L. (2009). Managing Human Resources. London: Pearson/Prentice Hall.

Boudreau, J. W. (2000).Human resource management. California: Irwin Publishers.

Noe, R. Y. (2000). Human resource management: gaining a competitive advantage. New York: McGraw Hill.

Bohlander, G. W. (2012). Managing Human Resources. Stamford: Cengage Learning.

Griffin, R. W. (2001). Human Resource Management. London: Houghston.

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The following is the draft balance sheet of ACGC Limited for the year ended 31 March 2012.

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QUESTION TWO

The following is the draft balance sheet of ACGC Limited for the year ended 31 March 2012.

ACGC LIMITED

BALANCE SHEET AS AT 31 MARCH 19X9

                                                                                                   2011             2012

                                                                                                     Ksh              Ksh

Fixed Assets

Tangible assets                                                                                 99,400         73,000

            Investments                                                                           85,100       101,400

                                                                                                         184,500           174,400

            Development expenditure                                                     59,810         

                                                                                                           244,310      174,400

Current Assets

            Stock                                                                                     58,190              63,010

            Debtors                                                                                  184,630        156,720

            Cash at Bank and in hand                                                        9,970           62,620

                                                                                                           252,790       282,350

 

            Creditors: amounts falling due within one year                276,510      215,900

            Net current (liabilities)/assets                                                (23,720)         66,450

            Total assets less current liabilities                                          220,590      240,850

            Creditors: amounts falling due after more than one year     53,100         46,320

            Provisions for liabilities and charges

            Deferred taxation                                                                       3,080         2,520

            Capital and reserves

            Share capital                                                                               89,700    89,700

            Share premium account                                                              11,300    11,300

            Revaluation reserve                                                                      9,750      9,750

            Profit and loss account                                                               63,660     81,260

                                                                                                             174,410   192,010

ACGC Ltd produces garden furniture and has incurred expenditure during the year ended 31 March 2012 on the development of moulding for a new range of plastic garden furniture.  The directors wish to carry forward the development expenditure indefinitely as they feel that the company will benefit from the new mouldings for many years. The product range is being developed because profits have been declining over the last few years owing to the uncompetitiveness of the products made by the company.  The company has sold many of its fixed assets during the year and purchased new machinery which will enable the company’s productivity to increase. The directors decided not to fund the above expenditure using outside finance but to generate the necessary resources internally by taking extended credit from its suppliers and utilising its liquid funds held at the bank.  The company also sold part of its investments, which are made up of stocks and shares of public limited companies.

One of the reasons for this method of financing the expenditure was that the company already has a loan of Ksh 45,000 outstanding which has been included in the figure for creditors: amounts falling due after more than one year. This loan is secured on the fixed assets of the company and is repayable over ten years.  The sale of the fixed assets and investments did not yield as much as was expected and a small loss on sale of Ksh1, 200 has been included in the profit and loss account as part of the amounts shown for `other expenses’.

As well as selling some of its assets the company had the remainder revalued by a professional valuer.  The gain on revaluation of fixed assets has been credited by the company to the profit and loss account and treated as an extraordinary gain.

The directors felt that the shareholders should share in this `windfall’ gain and have increased the proposed dividend accordingly.  Over 90% of the shares of the company are held by the directors.

Answers

  1. Existence Test on the value of  development expenditure

 One of these is existence test through physical inspection of the new machinery. The auditor would need to inspect the condition of the new machinery in order to obtain valuable evidence to the reasonableness of valuation. 

Test for right of obligations 

The ownership rights of the new machinery and assets sold through inspection of the available documents that provide proof of sale and purchase. This will help to gather evidence that the company has been paid for the assets sold and has paid for the assets purchased (Gray & Manson, 2007).

Test for occurrence

Test for occurrence involves verifying that the stated transactions took place during the stated period. This can be done through inspection of document such as purchase invoices raised by supplier of the new machinery (Gray & Manson, 2007). 

Test for Completeness 

This test is designed to confirm that there are no unrecorded transactions, assets and liabilities related to the development expenditure. This involves investigation of any missing numbers in the numerical sequence for documents that are pre-numbered (Gray & Manson, 2007).. Cut-off procedures are performed in order to confirm that transactions with their related movement of assets have been fully recorded in the same and correct accounting periods. An auditor will also need to review the reconciliation between subsidiary records and control accounts and between third party records and subsidiary records. 

Valuation test 

This involves determination of ACGC Ltd’s accounting policy and testing of suitability and applicability of the policy (Gray & Manson, 2007). The accounting policy adopted by this company determines the valuation results of the development expenditure. 

Measurement:

It involves determining that recorded transactions or events related to development expenditure have been recorded in the correct amounts and if the company’s revenue or expenses have been allocated to the correct period (Gray & Manson, 2007)..

Presentation and Disclosure tests

This involves between the company’s presentation and disclosure of transactions and balances in books of accounts with the presentation and disclosure requirements. This will help to provide evidence as to the occurrence and completeness and measurement of balances and events (Gray & Manson, 2007)..

  1. The reason why development expenditure should not be carried forward indefinitely in the financial statements

According to the prudence concept of accounting, costs should be written off unless it is reasonably certain that sales will be made in the future which will fully cover these costs (Coles, 1997). Under this concept, development expenditure should be written off if be the end of an accounting period, it is not reasonably certain that profitable production will ensue. Though ACGC Ltd expects to benefit from the new mouldings in the future, it is not reasonably certain that profits will ensue. Hence, the development expenditure for ACGC Ltd should not be carried forward indefinitely in financial statements, but should be written off. 

There are certain circumstances in which costs may be differed to the future. First, costs are differed only to the extent that future benefits are expected beyond reasonable doubt, to equal or exceed those costs, any previously differed costs and any future costs necessary to give rise to the expected benefits (Coles, 1997). Secondly, there should be evidence for adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.  Further, a cost should be carried forward to indefinite future only if the resultant asset has an indefinite useful life. (Coles, 1997).

 

 

 

 

 

© Audit procedure: 

  • The following are the audit procedures that an auditor should carry out in order to verify the gain arising on the revaluation of fixed assets:
  • First, an auditor should obtain and prepare a summary of the fixed assets showing how their gross book value, accumulated depreciation and net book value reconcile with the opening position (Bragg, 2009)
  • The auditor should then make comparison the general ledger and the fixed assets register and obtain explanations for any differences in the value of fixed assets.
  • The auditor should confirm that the assets that physically exist are recorded in the fixed assets register 
  • In case the fixed asset register does not exist, the auditor should obtain a schedule showing the original costs and present depreciated value of the fixed assets 
  • This is followed by reconciliation of schedule of fixed assets with the general ledger 
  • The auditor should confirm that the company physically inspects all items in the fixed asset register every year 
  • Inspect the listed assets and confirm that they actually exist exist, are in use, have correct serial numbers and are in good condition
  • Inspect whether any acquisition or disposal of fixed assets has been authorized by the board of directors through inspection of minutes of meetings of the board
  • Verify valuation certificate of the valuer and consider his or her experience, the scope of work, the methods and assumptions used and whether the valuation bases followed the requirements of international accounting standards. 
  • Re-perform calculation of revaluation gain 
  • Inspect that all revaluation losses have been recognized and that revaluation gains have been credited to equity 
  • Review the rates of depreciation and ensure that depreciation has been charged on all assets with a limited useful life 
  • Ensure that the depreciation charges on re-valued items are based on the re-valued amount 
  • Review insurance policies and consider the adequacy of fixed assets insured values and check expiry dates 
  • Examine documents of title for the existing fixed assets 
  • Review evidence of charges in statutory books and by company search 
  • Examine invoices received after year-end, orders and minutes for capital commitments 
  • Inspect a sample of fixed asset accounts for a sample of purchases to ensure they have been properly allocated 
  • Obtain independent evidence to support the findings and discuss any variation with the management
  • Verify disposals of fixed assets, recalculate profit or loss on disposal and consider whether the proceeds are reasonable.
  • Ensure that the audit work or results are well documented in the working papers (Bragg, 2009)

 

(d) Audit implications of the directors’ decision to generate internally the funds required for the development of the business.

The directors for ACGC Ltd decided to generate internally the funds required for the development of the business. One of the audit implications of such a decision is that it becomes difficult identify whether and the point of time when, there is an identifiable asset that will generate probable future economic benefits (Ruppel, 2011). Secondly, it is difficult for an auditor to determine the cost of the asset reliably. Sometimes, the cost of generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the organization’s internally generated goodwill or of running day-to-day operations. An auditor has a task to identify the intangible asset and investigate whether future economic benefits from the asset are probable (Ruppel, 2011).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Bragg, S. M., (2009), Accounting Control Best Practices, London: John Wiley & Sons

Coles M, (1997), Financial Management for Higher Awards, New York: Heinemann

Gray, I. & Manson, S. (2007), The Audit Process: Principles, Practice and Cases, Washington D. C.: Cengage Learning

Ruppel, W., (2011), Wiley GAAP for Governments 2011: Interpretation and Application of Generally Accepted Accounting Principles for State and Local Governments, London: John Wiley & Sons

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RAPID FINANCE Pty Ltd has a Balance Sheet as follows

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RAPID FINANCE Pty Ltd has a Balance Sheet as follows.

THE UNIVERSITY OF ADELAIDE LAW SCHOOL
COMMLAW 3501 (104969)
BUSINESS TAXATION & GST III
Tutorial Questions – Tax Entity Issues
Question 1:
RAPID FINANCE Pty Ltd has a Balance Sheet as follows:
$
Paid-up capital 10,000
Capital Gain 60,000
Capital Loss (20,000) 40,000
Cash on Hand 50,000
Advise, using the principle from the Archer Brothers case, how the liquidator could best distribute the available assets of the company to minimise the tax payable by the shareholders.
Question 2:
Dax Pty Ltd (an Australian resident private company) makes an interest free loan of $120,000 to it shareholder on 30 June 2017. The loan remains outstanding at the time the company’s 2017 tax return is due to be lodged.
Dax Pty Ltd’s Balance Sheet for the Year Ended 30 June 2017 shows the following:
Assets Liabilities
Cash $220,000 Equity
Loan to Shareholder $120,000 Capital $230,000
Retained earnings $110,000
Total Assets $340,000 Total Equity $340,000
Do any Division 7A issues arise in respect of this loan?
Question 3:
Dodgy Brothers Pty Ltd is a beneficiary of the Dodgy Brothers Trust along with Arthur and Wayne Dodgy. Each has a fixed entitlement to 1/3rd of the net income of the trust.
For the income year ended 30 June 2017, the Dodgy Brothers Trust had net income of $270,000. The Trustee of the Dodgy Brothers Trust did not pay the $90,000 entitlement to Dodgy Brothers Pty Ltd but rather the trustee decided to loan $60,000 to each of Arthur and Wayne Dodgy directly. This is in addition to the $90,000 trust distribution made to each of Arthur and Wayne out of their present entitlement.
Arthur and Wayne are the only 2 shareholders of Dodgy Brothers Pty Ltd.
The distributable surplus in Dodgy Brothers Pty Ltd for the year ended 30 June 2017 is $100,000.
Do any Division 7A issues arise from this loan by the Dodgy Brothers Trust?
Question 4:
Copy Cats Pty Ltd is a resident private company that was incorporated on 1 July 2012. From 1 July 2012 until 30 June 2016, it conducted a trucking business (freight operation).
During this time, the company’s trading results were as follows:
• $50,000 profit for the year ended 30 June 2013;
• $40,000 profit for the year ended 30 June 2014;
• $30,000 loss for the year ended 30 June 2015; and
• $15,000 loss for the year ended 30 June 2016.
In July 2016, the company discontinued its trucking business, restructured and acquired a public hotel in the country. The company’s shareholdings of ordinary shares at the close of each financial year were:
Shareholders 2013 2014 2015 2016 2017
$ $ $ $ $
A 50 50 50 50 50
B 150 150 200 200 200
C – – – 100 100
D – – – – 160
$200 $200 $250 $350 $510
In the year ended 30 June 2017, the company reported taxable income of $85,000.

Can Copy Cats Pty Ltd claim a deduction for any of its prior year losses in the year ended 30 June 2017?
Question 5:
BigCo has a market value of $80,000 and a carry forward loss of $20,000 (from a prior year). BigCo owns 100% of the issued shares in LittleCo and 100% of the issued shares in SmallCo.
LittleCo has a market value of $20,000 and losses of $6,000 and SmallCo has a market value of $20,000 and losses of $1,000.
Before any adjustment for prior year losses, BigCo has a taxable income of $30,000 in 2017.
If Big Co forms a consolidated group with LittleCo and SmallCo in the 2017 income tax year what is BigCo’s taxable income in 2017 after consolidation?
Question 6:
Delta Company issued 8- year convertible notes for $8.50 each. The notes have a coupon interest payable of 12% and repayment is not subject to any contingency and so payment cannot be deferred under any circumstances.
The ordinary shares of Delta Co were valued at $3 on the issue date. Delta Co used the proceeds of the note issue to satisfy working capital requirements of its business.
Are the payments on the notes deductible for tax purposes? Explain.
Question 7:
The Greenfields Trust has had the same trustee for many years (Bob Green) and it is mainly a discretionary trust, but not a family trust, except that Bob Green holds a 20% fixed interest in the income and capital of the trust.
The trust has always had net income every year since it was established except in 2016 when a loss of $30,000 was realised.
Bob advises that the income distributions made by the trust since 2014 and
proposed for 2017 are shown below.
YE 30 June 2014 30 June 2015 30 June 2017
Bob 20% 20% 20%
(from fixed portion)
Gary 30% 5% 15%
Heather 20% 5% 65%
James 15% 40% 15%
Eric 15% 20% 0%
Bob wants to know whether the Greenfields Trust can utilise the $30,000 loss from the 2016 year in the 2017 year when the trust (before applying this loss) has $80,000 in net income. Please advise Bob.

RAPID FINANCE Pty Ltd has a Balance Sheet as follows

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Whenever you use balance sheet items to calculate ratios, for each year be sure to average the beginning-of-year and end-of-year amounts to get the average for that year.

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Whenever you use balance sheet items to calculate ratios, for each year be sure to average the beginning-of-year and end-of-year amounts to get the average for that year..

Question

Financial Statement Analysis Our purpose this week: learning how to measure the performance of companies by analyzing their financial statements. Show us that you have read and understood the required readings, links and attached files quote them where appropriate.

Assignment:

You are the assistant to the CEO of a major company. Your CEO keeps an eye on the competition, and asks you to do the following. Using ratio analysis, compare two major competitors in the same industry.

Instructions:

Pick any two U.S. public companies in the same industry.

Select the 10 most important financial ratios for your two companies and calculate each for the last 2 fiscal years using Excel.

Follow the same format as in the examples posted in the file attached in the Week 3 Conference for the Drugstore Chains example. Use the œCompare worksheet. The œW, œC, œProfiles and œZ Score worksheets are not required, and nor is the Dupont Analysis.

1. Create a single Excel file for your entire assignment.
2. You may obtain financial information and the companieslatest annual reports on the web directly from MSN Money or Yahoo Finance.For additional information, look for the SEC Form10-K link from one of the MSN Money or Yahoo Finance financial sites.
3. You should calculate, and comment upon, all 10 financial ratios for the last 2 fiscal years.
4. All calculations should be shown, and all answers should be thoroughly explained.
5. Whenever you use balance sheet items to calculate ratios, for each year be sure to average the beginning-of-year and end-of-year amounts to get the average for that year.
6. What can you tell from your analysis? What are the strengths and weaknesses of each company? Which is the stronger competitor? Give your reasons.

DrugstoreChains.xls. contains a comprehensive analysis of the financial statements of two large drugstore chains. It also shows how to predict bankruptcy with reasonable accuracy by using financial ratios. In addition, there is optional material in the attached DrugstoreChains.xls file that:

a) Illustrates and explains how different companies succeed by focusing on different key ratios like Net Income/Sales, or Sales/Total Assets (asset turnover) or Total Assets/Common Equity (leverage).

c) Shows the source for every number on every Excel worksheet: just click on any number in any Excel worksheet and you will see where it comes from. Showing the source for every number on every Excel worksheet is very important and helpful to readers, and you should do this on all of your Excel spreadsheets. These assignments are designed to help you to develop your analytical ability and your ability to explain your analysis in words. There are many uses for financial statement ratio analysis, especially in business strategy for an example, see the œStrategic Control Map developed by McKinsey & Company, the well-known international strategy consulting firm

Whenever you use balance sheet items to calculate ratios, for each year be sure to average the beginning-of-year and end-of-year amounts to get the average for that year.

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A Balance Between Nomothetic and Idiographic Approaches Essay

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A Balance Between Nomothetic and Idiographic Approaches Essay.

The idiographic and nomothetic approaches in psychology are often regarded as representing opposing and conflicting positions about how best to study people, especially intelligence and personality. However, the two may be seen as complementary, with both necessary to gain a fuller understanding of human beings. The idiographic approach focuses on: ‘the individual and recognises the uniqueness of the person in terms of their experiences, feelings, developmental history, aspirations and motivations in life, and the values and moral codes by which they live’.

The word idiograph comes from the Greek word idios, meaning ‘own’ or ‘private’.

Hence the idiographic approach in psychology is concerned with the private, subjective and unique aspects of a person and employs methods of inquiry which provide information about subjective experiences. The idiographic approach is characterised by qualitative methods of investigation. Qualitative methods include unstructured interviews, case studies, self report measures, introspection, and the psychoanalytic techniques of free association and dream analysis. The idiographic approaches is holistic and places great value on the individual’s conscious experiences.

The humanistic perspective in psychology perhaps best exemplifies the idiographic approach. Freudian psychoanalysis can also be said to adopt an idiographic approach as he did not use any scientific method to test or find evidence for his theoretical claims. Approach The nomothetic approach in psychology focuses on: ‘similarities between people and attempts to establish general laws of behaviour and thought that can be applied to large populations of people, or indeed to all people’ The word nomothetic comes from Greek words nomos, meaning ‘law’.

Hence, the nomothetic approach is most closely aligned with the scientific approaches in psychology. This means that it uses scientific methods of investigation, particularly experiments, to test hypotheses that are derived from theories about human behaviour and thought. The nomothetic approach adopts a reductionist viewpoint, placing great value on objectivity and replication. The behaviourist, cognitive ad biological perspectives best exemplify the nomothetic approach. Freudian theory also attempts to establish laws or rules about human beings, for example the psychosexual stages and the Oedipus complex.

Freud believed these were applicable to all and the theory is nomothetic in this respect. Background Humanistic psychology adopt a more idiographic approach, seeking the more unique aspects of individuals, rather than producing generalised laws of behaviour that apply to everyone. It highlighted the value of more individualistic and idiographic methods of study, particularly in areas of personality and abnormalities. Classification manuals like the DSM-IV, which lists the essential behavioural criteria of diagnosing autism, adopts a nomothetic approach and classify people according to particular type of disorders.

Traditionally, the idiographic and nomothetic approaches are seen as conflicting, with the implication that as a psychologist you can only operate from one of these positions. Cronbach (1957) identified this potential source of conflict between psychologists about how best to study the nature of what it is to be human. If the psychologist seeks to develop theories that apply to large populations then the nomothetic approach is preferable. If, however, the psychologist is interested in the uniqueness of a person, then the idiographic approach is the one to adopt.

Subjective experience The idiographic approach is often regarded as non-scientific, as subjective experience cannot be empirically tested and it is difficult to generalise from detailed subjective knowledge about a person. Some psychologists argue that scientific principles can be applied to study the uniqueness of individuals and the norms and rules by which a specific person operates can be identified. The idiographic approach can be used to study topics such as privation which are relatively rare and depends upon the circumstances surrounding the individual.

Most evidence for effects of privation has come from case studies of children who have been raised in conditions of neglect. The case of Genie (Curtiss, 1977) suggests that severe privation has permanent effects. At the age of 13 years she was unable to speak, physically underdeveloped and showed inappropriate emotional responses. Despite fostering and intellectual stimulation, Genie apparently never recovered from her years of privation, although there was a suggestion that other factors may have contributed to her problems.

Koluchova’s longitudinal study followed the long-term development of twin boys who had suffered severe privation in early childhood showed that children who have experienced severe privation seem able to overcome the effects of their early suffering with appropriate treatment and care. As such the nomothetic approach would be unsuitable and unable to gather any information which would contribute towards our understanding of the topic. The two approaches can be complementary as the idiographic approach can shed further light on a general law of behaviour established through a nomothetic approach.

Idiographic research may disprove a general law of behaviour. For example nomothetic research supported the idea of a multi-store model of memory with information flowing through the STM to LTM. However case studies of patients with brain damage suggest that the multi-store model is over-simplified. A patient known as KF suffered brain damage following a motorcycle accident, and underwent brain surgery. Some years later he was found to have normal LTM storage but an STM capacity of only two items.

If STM was necessary for the transfer of information to LTM, then KF’s LTM should also be affected. As a consequence, further models of memory have been proposed and tested. On the other hand, idiographic findings can lead to large scale research. Piaget used the idiographic approach gaining rich and detailed information about the development of his own children’s thinking. These finding inspired further nomothetic research and theories into cognitive development were developed. Scientific approach

Both approaches can contribute to the scientific approach – the aim of science are to “understand and describe” which corresponds to the idiographic approach and to “predict and control” which corresponds to the nomothetic approach. The nomothetic approach generalise findings e. g. in terms of the primacy and recency effects, more words are recalled from the beginning and the end of the list, irrespective of the length of the list. However an idiographic approach could be used to find the different techniques that people have used to recall the items

In contemporary psychology, the idiographic-nomothetic debate is still an important distinction. Attempts have been made to bring the two approaches together in an interactionist model (Bandura, 1986), but no influential solution has been found. It could be argued that the strengths of one approach compensate for the limitations of the other and so both approaches are needed for a complete study of psychology. The nomothetic approach has helped psychology to become scientific by developing laws and theories of human behaviour that can be empirically tested.

This approach attempts to determine laws and common characteristics for all people or large groups of people in a culture. It also helps to combine biological and social aspects of a person. However, the focus on general laws and theories neglects the subjective and unique experiences of the person. The extensive use of controlled laboratory experiment means that there is a problem of generalisation to everyday life. Some psychologists also argued that this approach overemphasises the similarities between people and gives little attention to differences.

Alternatively, the idiographic approach focuses on the subjective experiences of the person making the individual feeling valued and unique. Each person is valued as an individual rather than seen as one amongst many. Conclusion This approach provides detailed psychohistories and attempts to understand the many influences on how they come to be as they are. Humanistic psychology uses an idiographic approach to enable people to develop their full potential. However, this approach largely neglects biological, especially genetic influences.

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A Balance Between Nomothetic and Idiographic Approaches Essay

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