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What are the merits and weakness of inductive, deductive, and hierarchical approaches to accounting system classification? Illustrate your arguments with example.

Inductive classification: started with the data about the facts of accounting practices and generate the groups by statistical analysis.

Advantages:
1. Supposed to be more objective;
2. Appropriate to detect changes;
3. Replicable.

The inductive approach to identifying accounting patterns based on an analysis of individual practices, which supposes to be more objective. According to Da Costa et al (1978)’s research, a principal components analysis is applied to identify seven factors that can explain practices: degree of financial disclosure, company law, income measurement, conservatism, tax law, inflation and stock market orientation. Nair and Frank (1980)’s research separated data concerning accounting measurement practices from data concerning information disclosure practices. Their research shows that the countries, which are affected by the differences between reporting and measurement practices are the Latin American and Continental European countries. Furthermore, Comparing the research results with the groupings obtained in the previous section reveals that the clustering of countries can change depending upon the subset of accounting practices used.

The second advantage is that the inductive classification is appropriate to detect changes. The results in the Nair and Frank’s research of the 1973 have the different number in the results of the 1975 data analysis, which reveals it is appropriate to detect changes.

Replicable. The data used in the inductive classification research could be replicable. According to the Nair and Frank’s research (1980), the source of the data was from the PWC’s 1973 survey and it was also replicable used in the 1975’s survey.

Weakness:
1. Data unavailable;
2. Problems in data;
3. Outcome depending on statistics methods;...
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