Solution Manual for Financial Accounting Theory, 7th Edition | Verified Complete Answers & Comprehensive Guide 2025

Solution Manual For Financial Accounting Theory
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7th Edition by William R. Scott, Patricia O'Brien
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Chapters 1 - 13, Complete
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, Contents


Chapter 1 b Introduction.................................................................................................. 1

Chapter 2 Accounting Under Ideal Conditions .......................................................... 7
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Chapter 3 The Decision Usefulness Approach to Financial Reporting ...................... 68
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Chapter 4 Efficient Securities Markets.......................................................................129
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Chapter 5 The Value Relevance of Accounting Information .....................................153
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Chapter 6 The Measurement Approach to Decision Usefulness ................................ 194
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Chapter 7 Measurement Applications ........................................................................237
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Chapter 8 The Efficient Contracting Approach to Decision Usefulness .................... 285
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Chapter 9 An Analysis of Conflict .......................................................................... 321
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Chapter 10 Executive Compensation ........................................................................ 371
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Chapter 11 Earnings Management ............................................................................ 425
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Chapter 12 Standard Setting: Economic Issues ........................................................ 487
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Chapter 13 Standard Setting: Political Issues ........................................................... 527
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Pearson bCanada bInc.
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,Scott, Financial Accounting Theory
b b b Instructor’s Solutions Manual Chapter 1
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CHAPTER 1 b




INTRODUCTIO
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N

1.1 The Objective of This Book
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1.2 Some Historical Perspective
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1.3 The 2007-2008 Market Meltdowns
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1.4 Efficient Contracting
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1.5 A Note on Ethical Behaviour
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1.6 Rules-Based v. Principles-Based Accounting Standards
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1.7 The Complexity of Information in Financial Accounting and Reporting
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1.8 The Role of Accounting Research
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1.9 The Importance of Information Asymmetry
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1.10 The Fundamental Problem of Financial Accounting Theory
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1.11 Regulation as a Reaction to the Fundamental Problem
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1.12 The Organization of This Book
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1.12.1 Ideal Conditions b




1.12.2 Adverse Selection b




1.12.3 Moral Hazard b




1.12.4 Standard Setting b




1.12.5 The Process of Standard Setting
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1.13 Relevance of Financial Accounting Theory to Accounting Practice
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, Scott, Financial Accounting Theory
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LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
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1. The Broad Outline of the Book
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I use Figure 1.1 as a template to describe the broad outline of the book. Since
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the students typically have not had a chance to read Chapter 1 in the first
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coursesession, I stick fairly closely to the chapter material.
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The major points I discuss are:
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• Accounting in an ideal setting. Here, present-value-based b b b b b b




accounting is natural. I go over the ideal conditions needed for
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sucha basis of accounting to be feasible, but do not go into much
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detail because this topic is covered in greater depth in Chapter 2.
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• An introduction to the concept of information asymmetry and
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resulting problems of adverse selection and moral hazard. These
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problems are basic to the book and I feel it is desirable for the
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students to have a ―first go‖ at them at this point. I concentrate on
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the intuition underlying the two problems. For example, adverse
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selection can be illustrated by asking who would be first in line to
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purchase life insurance if there was no medical examination, or
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b what quality of used cars are likely to be brought to market. For
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moral hazard I try to pin them down on how hard they would work
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inthis course if there were no exams.
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• The environment in which financial accounting and reporting
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operates. My main goal at this point is that the students do not
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takethis environment for granted. I discuss the procedures of
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standard setting briefly and point out that this is really a process of
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regulation. In the past, there have been well-known cases of
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deregulation, such as airlines, trucking, financial institutions,
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powergeneration. However, we are entering what is likely to be a
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period of increasing regulation, at least for financial institutions.
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