Solution Manual For Financial Accounting Theory 7th Edition byWilliam R. Scott, Patricia O'Brien Chapters 1 - 13, Complete DR ERIC

Solution Manual For Financial Accounting Theory 7th Edition byWilliam R. Scott, Patricia O'Brien Chapters 1 - 13, Complete DR ERIC DR ERIC Pearson Canada Inc. Contents Chapter 1 Introduction ............................................................................................. 1 Chapter 2 Accounting Under Ideal Conditions ....................................................... 7 Chapter 3 The Decision Usefulness Approach to Financial Reporting .................... 68 Chapter 4 Efficient Securities Markets................................................................... 129 Chapter 5 The Value Relevance of Accounting Information................................... 153 Chapter 6 The Measurement Approach to Decision Usefulness.............................. 194 Chapter 7 Measurement Applications..................................................................... 237 Chapter 8 The Efficient Contracting Approach to Decision Usefulness .................. 285 Chapter 9 An Analysis of Conflict ....................................................................... 321 Chapter 10 Executive Compensation...................................................................... 371 Chapter 11 Earnings Management.......................................................................... 425 Chapter 12 Standard Setting: Economic Issues....................................................... 487 Chapter 13 Standard Setting: Political Issues.......................................................... 527 DR ERIC DR ERIC Scott, Financial Accounting Theory Instructor’s Solutions Manual Chapter 1 CHAPTER 1 INTRODUCTION 1.1 The Objective of This Book 1.2 Some Historical Perspective 1.3 The Market Meltdowns 1.4 Efficient Contracting 1.5 A Note on Ethical Behaviour 1.6 Rules-Based v. Principles-Based Accounting Standards 1.7 The Complexity of Information in Financial Accounting and Reporting 1.8 The Role of Accounting Research 1.9 The Importance of Information Asymmetry 1.10 The Fundamental Problem of Financial Accounting Theory 1.11 Regulation as a Reaction to the Fundamental Problem 1.12 The Organization of This Book 1.12.1 Ideal Conditions 1.12.2 Adverse Selection 1.12.3 Moral Hazard 1.12.4 Standard Setting 1.12.5 The Process of Standard Setting 1.13 Relevance of Financial Accounting Theory to Accounting Practice DR ERIC DR ERIC Scott, Financial Accounting Theory Instructor’s Solutions Manual Chapter 1 LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES 1. The Broad Outline of the Book I use Figure 1.1 as a template to describe the broad outline of the book. Since the students typically have not had a chance to read Chapter 1 in the first course session, I stick fairly closely to the chapter material. The major points I discuss are: • Accounting in an ideal setting. Here, present-value-based accounting is natural. I go over the ideal conditions needed for such a basis of accounting to be feasible, but do not go into much detail because this topic is covered in greater depth in Chapter 2. • An introduction to the concept of information asymmetry and resulting problems of adverse selection and moral hazard. These problems are basic to the book and I feel it is desirable for the students to have a “first go” at them at this point. I concentrate on the intuition underlying the two problems. For example, adverse selection can be illustrated by asking who would be first in line to purchase life insurance if there was no medical examination, or what quality of used cars are likely to be brought to market. For moral hazard I try to pin them down on how hard they would work in this course if there were no exams. • The environment in which financial accounting and reporting operates. My main goal at this point is that the students do not take this environment for granted. I discuss the procedures of standard setting briefly and point out that this is really a process of regulation. In the past, there have been well-known cases of deregulation, such as airlines, trucking, financial institutions, power generation. However, we are entering what is likely to be a period of increasing regulation, at least for financial institutions. Instructors DR ERIC DR ERIC Scott, Financial Accounting Theory Instructor’s Solutions Manual Chapter 1 may wish to discuss briefly the pros and cons of markets v. regulation (since this book tends to be market-oriented) of economic activity. 2. The Concept of Information By now, I will have referred to the term “information” several times. I suggest that it is easy to take this term for granted, and call for definitions. This usually generates considerable hesitation by the students. The purpose at this point is simply to get them to realize that information is a complex commodity. Indeed, I make an analogy between the financial accounting and reporting industry and a stereotypical manufacturing industry such as agriculture or automobiles, and ask what is the product of the accounting industry, why is it valuable, how is it quantified? I do not go deeply into the answers to questions like these, since some decision-theoretic machinery needs to be developed (Section 3.3) before a precise definition of information can be given. Nevertheless, I try to end up with the conclusions that information has something to do with improving the process of decision-making, and that it is crucial to the operation of securities markets. 3. Relevance to Accounting Practice My undergraduate accounting theory classes usually consist of a majority of students who are heading for a professional accounting designation. There are usually also some students heading for careers in management. Since students who are facing professional accounting exams can be quite focused in their learning objectives, it is essential that the nature of the course in relation to these objectives be discussed up front. I begin by pointing out that the book is intended to give the student an appreciation and understanding of the financial reporting environment, which should help with breadth questions on professional exams. I also argue that one’s career continues well beyond attainment of a professional accounting designation, and that the nature of the textbook is longer-run and designed to DR ERIC DR ERIC Scott, Financial Accounting Theory Instructor’s Solutions Manual Chapter 1 foster a critical awareness of the financial accounting environment which is needed if one is to become a thoughtful professional. Arguments such as these can only be pushed so far. Nevertheless, I think it is important to make them. I also point out that the text includes coverage of major accounting standards such as financial instruments, impairment, consolidations, de-recognition, and that they will have the opportunity to learn about these standards on the way through. I also refer the students to Section 1.13, and emphasize that the text recognizes an obligation to convince them that the material is relevant to their careers. To do this, the text explains theoretical concepts in intuitive terms, and illustrates and motivates the concepts based on a series of Theory in Practice vignettes, and problem material based frequently on articles from the financial press and relevant research findings. For the management students in the class, and for the professional accounting students who may some day be managers, I emphasize that the text does not ignore them. Chapters 8 to 11 inclusive (the bottom branch of Figure 1.1) deal with topics of interest to managers, including economic consequences, conflict resolution, executive compensation and earnings management. All of these topics demonstrate that management has a legitimate interest in financial reporting. I also argue that Chapters 2 to 7 inclusive (the top branch of Figure 1.1) are relevant to managers since they give insights into how financial accounting information is used by investors. Finally, since management is a major constituency in standard-setting, a critical awareness of the need for standard setting and the standard-setting process (Chapters 12 and 13) is useful for any manager. I have not had problems with student course evaluations as a result of using the material in this book. In fact, I have constantly been surprised at how far one can push the students in a theoretical direction providing that I rely on the textbook material to give the students an intuitive understanding, and concentrate in class