SOLUTION MANUAL
All Chapters Included
, Financial Accounting Theory 7th Edition by William R. Scott, Patricia
O'Brien Chapters 1 - 13
Table of 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
Pearson Canada Inc.
,Scott, Financial Accounting Theory Instructor’s Solutions Manual Chapter 1
CHAPTER 1
INTRODUCTIO
N
1.1 The Objective of This Book
1.2 Some Historical Perspective
1.3 The 2007-2008 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
, 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 coursesession, 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
sucha 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 inthis 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
takethis environment for granted. I discuss the procedures of
standard setting briefly and point out that this is really a
All Chapters Included
, Financial Accounting Theory 7th Edition by William R. Scott, Patricia
O'Brien Chapters 1 - 13
Table of 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
Pearson Canada Inc.
,Scott, Financial Accounting Theory Instructor’s Solutions Manual Chapter 1
CHAPTER 1
INTRODUCTIO
N
1.1 The Objective of This Book
1.2 Some Historical Perspective
1.3 The 2007-2008 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
, 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 coursesession, 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
sucha 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 inthis 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
takethis environment for granted. I discuss the procedures of
standard setting briefly and point out that this is really a
