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CHAPTER 5
MEASUREMENT
THEORY
Importance of
measurement
Campbell:
The assignment of numerals to
represent properties of material
systems other than numbers
Assignment
Assignment of
of numerals
numerals to
to objects
objects or
or events
events
according
(Stevens)
according to
to rules.
rules.
(Stevens)
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Importance of
measurement
Involves linking the formal number
system to some property of objects
or events by means of semantic rules
e.g. semantic rules in accounting are
represented by transactions
Scales
Every measurement is made on a
scale
Created when a semantic rule is used
to relate the mathematical statement
to objects or events
The scale shows what information
the numbers represent
Nominal scale
In this scale, numbers used only as
labels
Numbers represent classification
e.g. numbering footballers
e.g. the classification of assets and
liabilities into different classes
Ordinal scale
In this scale, rank orders objects with
respect to a given property
e.g. tallest to shortest person
e.g. investment alternatives that are
ranked 1, 2, 3 according to the size of
their net present values
Interval scale
In this scale, rank orders objects with
respect to a given property
The distance between each interval
is equal and known
An arbitrarily selected zero point
exists on the scale
e.g. celsius temperature scale
e.g. standard cost accounting
Ratio scale
In this scale, rank orders objects with
respect to a given property
Intervals between objects are known
and equal
A unique origin exists
e.g. measurement of length
e.g. use of dollars to measure assets
and liabilities
Permissible operations of
scales
Invariance of a scale means that the
measurement system will provide the
same general form of the variables, and
the decision maker will make the same
decisions
This is not the case in accounting there
is more than one accounting system
The information they provide will differ
and different decisions will be made
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Permissible operations of
scales
Nominal and ordinal scales
no arithmetic operations
Interval scale
addition and subtraction
Ratio scale
all arithmetic operations
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Types of measurement
There must be a rule to assign
numbers before there can be
measurement
The formulation of the rules gives
rise to a scale
Measurement can be made only on a
scale
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Fundamental
measurements
Numbers are assigned by reference
to natural laws
Fundamental properties are additive
e.g. length, number and volume
Derived measurements
Is one that depends on the measurement
of two or more other quantities
Depends on known relationships to
fundamental properties
e.g. the measurement of density depends on
the measurement of both mass and volume
e.g. the measurement of profit depends on
the measurement of both income and
expenses
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Fiat measurements
Typical in social sciences including
accounting
Based on arbitrary definitions - e.g. of
profit
Numerous ways in which scales can be
constructed
May lead to poor levels of confidence in
the scale e.g. there are hundreds of
ways to measure profit
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Sources of error
The sources of error include the following:
Measurement operations stated imprecisely
Measurer
Instrument
Environment
Attribute unclear
Risk and uncertainty
We need to establish limits of acceptable
error
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Reliable measurement
What is reliable measurement?
proven consistency
repeatable or reproducible
precision
Accurate measurement
Consistency of results, precision and
reliability do not necessarily lead to
accuracy
Accuracy has to do with how close the
measurement is to the true value of
the attribute measure - representation
True value may not be known
e.g. in accounting accuracy relates to the
pragmatic notion of usefulness
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Accurate measurement
Many accounting measurements are
on a ratio scale
This is the most informative scale
Weakest theoretical foundation as
they are fiat measurements
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Measurement in
accounting
Two fundamental measures
capital & profit
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Measurement in
accounting
Two notable developments in
international standards (2005, IASB)
profit measurement and revenue
recognition should be linked to timely
recognition
the fair value approach should be adopted
as the working measurement principle
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Summary
Measurement
Nominal scale
Ordinal scale
Interval scale
Ratio scale
Invariance of a scale
Fundamental measurements
Derived measurements
Fiat measurements
Reliability in measurement
Accuracy in measurement
Capital and profit as derived measurements
Appropriate measurement in an auditing context
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