Solution Manual For Financial Accounting Theory
7th Edition by William R. Scott, Patricia O'Brien
ii
Chapters 1 - 13, Complete
, Contents
ChapterJii1 Introduction .................................................................................................................... 1
ChapterJii2 AccountingJiiUnderJiiIdealJiiConditions................................................................... 7
ChapterJii3 TheJiiDecisionJiiUsefulnessJiiApproachJiitoJiiFinancialJiiReporting ..................... 68
ChapterJii4 EfficientJiiSecuritiesJiiMarkets .................................................................................. 129
ChapterJii5 TheJiiValueJiiRelevanceJiiofJiiAccountingJiiInformation ........................................ 153
ChapterJii6 TheJiiMeasurementJiiApproachJiitoJiiDecisionJiiUsefulness .................................. 194
ChapterJii7 MeasurementJiiApplications ..................................................................................... 237
ChapterJii8 TheJiiEfficientJiiContractingJiiApproachJiitoJiiDecisionJiiUsefulness ................... 285
ChapterJii9 AnJiiAnalysisJiiofJiiConflict .......................................................................................321
ChapterJii10JiiJiiExecutiveJiiCompensation ...................................................................................371
ChapterJii11JiiJiiEarningsJiiManagement ........................................................................................425
ChapterJii12JiiJiiStandardJiiSetting:JiiEconomicJiiIssues................................................................487
ChapterJii13JiiJiiStandardJiiSetting:JiiPoliticalJiiIssues ...................................................................527
PearsonJiiCanadaJiiInc.
ii
,Scott,JiiFinancialJiiAccountingJiiTheory Instructor’sJiiSolutionsJiiManualJiiChapter
CHAPTERJii1
ii INTRODUCTIO
N
1.1 TheJiiObjectiveJiiofJiiThisJiiBook
1.2 SomeJiiHistoricalJiiPerspective
1.3 TheJii2007-2008JiiMarketJiiMeltdowns
1.4 EfficientJiiContracting
1.5 AJiiNoteJiionJiiEthicalJiiBehaviour
1.6 Rules-BasedJiiv.JiiPrinciples-BasedJiiAccountingJiiStandards
1.7 TheJiiComplexityJiiofJiiInformationJiiinJiiFinancialJiiAccountingJiiandJiiReporting
1.8 TheJiiRoleJiiofJiiAccountingJiiResearch
1.9 TheJiiImportanceJiiofJiiInformationJiiAsymmetry
1.10 TheJiiFundamentalJiiProblemJiiofJiiFinancialJiiAccountingJiiTheory
1.11 RegulationJiiasJiiaJiiReactionJiitoJiitheJiiFundamentalJiiProblem
1.12 TheJiiOrganizationJiiofJiiThisJiiBook
1.12.1JIdealJiiConditions
1.12.2JAdverseJiiSelection
1.12.3JMoralJiiHazard
1.12.4JStandardJiiSetting
1.12.5JTheJiiProcessJiiofJiiStandardJiiSetting
1.13 RelevanceJiiofJiiFinancialJiiAccountingJiiTheoryJiitoJiiAccountingJiiPractice
, Scott,JiiFinancialJiiAccountingJiiTheory Instructor’sJiiSolutionsJiiManualJiiChapter
LEARNINGJiiOBJECTIVESJiiANDJiiSUGGESTEDJiiTEACHINGJiiAPPROACHES
TheJiiBroadJiiOutlineJiiofJiitheJiiBook
IJiiuseJiiFigureJii1.1JiiasJiiaJiitemplateJiitoJiidescribeJiitheJiibroadJiioutlineJiiofJiitheJiibook.
SinceJiitheJiistudentsJiitypicallyJiihaveJiinotJiihadJiiaJiichanceJiitoJiireadJiiChapterJii1JiiinJiithe
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firstJiicoursesession,iJiiIJiistickJiifairlyJiicloselyJiitoJiitheJiichapterJiimaterial.
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TheJiimajorJiipointsJiiIJiidiscussJiiare:
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muchJiidetailJiibecauseJiithisJiitopicJiiisJiicoveredJiiinJiigreaterJiidepthJiiinJi
i ChapterJii2.
AnJiiintroductionJiitoJiitheJiiconceptJiiofJiiinformationJiiasymmetryJiiandJiire
sultingJiiproblemsJiiofJiiadverseJiiselectionJiiandJiimoralJiihazard.JiiTheseJi
i problemsJiiareJiibasicJiitoJiitheJiibookJiiandJiiIJiifeelJiiitJiiisJiidesirableJiiforJiitheJ
ii studentsJiitoJiihaveJiiaJii“firstJiigo”JiiatJiithemJiiatJiithisJiipoint.JiiIJiiconcentrate
Jii onJiitheJiiintuitionJiiunderlyingJiitheJiitwoJiiproblems.JiiForJiiexample,Jiiadv
erseJiiselectionJiicanJiibeJiiillustratedJiibyJiiaskingJiiwhoJiiwouldJiibeJiifirstJiiin
Jii lineJiitoJiipurchaseJiilifeJiiinsuranceJiiifJiithereJiiwasJiinoJiimedicalJiiexamin
ation,JiiorJiiwhatJiiqualityJiiofJiiusedJiicarsJiiareJiilikelyJiitoJiibeJiibroughtJiitoJiim
arket.JiiForJiimoralJiihazardJiiIJiitryJiitoJiipinJiithemJiidown
ii onJiihowJiihardJiitheyJiiwouldJiiworkJiiinthisiJiicourseJiiifJiithereJiiwereJiin
oJiiexams.
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ii operates.JiiMyJiimainJiigoalJiiatJiithisJiipointJiiisJiithatJiitheJiistudentsJiidoJiinot
ii takethisiJiienvironmentJiiforJiigranted.JiiIJiidiscussJiitheJiiproceduresJiiofJiis
tandardJiisettingJiibrieflyJiiandJiipointJiioutJiithatJiithisJiiisJiireallyJiiaJiiprocess
Jii ofJiiregulation.JiiInJiitheJiipast,JiithereJiihaveJiibeenJiiwell-
knownJiicasesJiiofJiideregulation,JiisuchJiiasJiiairlines,Jiitrucking,Jiifinanci
al
7th Edition by William R. Scott, Patricia O'Brien
ii
Chapters 1 - 13, Complete
, Contents
ChapterJii1 Introduction .................................................................................................................... 1
ChapterJii2 AccountingJiiUnderJiiIdealJiiConditions................................................................... 7
ChapterJii3 TheJiiDecisionJiiUsefulnessJiiApproachJiitoJiiFinancialJiiReporting ..................... 68
ChapterJii4 EfficientJiiSecuritiesJiiMarkets .................................................................................. 129
ChapterJii5 TheJiiValueJiiRelevanceJiiofJiiAccountingJiiInformation ........................................ 153
ChapterJii6 TheJiiMeasurementJiiApproachJiitoJiiDecisionJiiUsefulness .................................. 194
ChapterJii7 MeasurementJiiApplications ..................................................................................... 237
ChapterJii8 TheJiiEfficientJiiContractingJiiApproachJiitoJiiDecisionJiiUsefulness ................... 285
ChapterJii9 AnJiiAnalysisJiiofJiiConflict .......................................................................................321
ChapterJii10JiiJiiExecutiveJiiCompensation ...................................................................................371
ChapterJii11JiiJiiEarningsJiiManagement ........................................................................................425
ChapterJii12JiiJiiStandardJiiSetting:JiiEconomicJiiIssues................................................................487
ChapterJii13JiiJiiStandardJiiSetting:JiiPoliticalJiiIssues ...................................................................527
PearsonJiiCanadaJiiInc.
ii
,Scott,JiiFinancialJiiAccountingJiiTheory Instructor’sJiiSolutionsJiiManualJiiChapter
CHAPTERJii1
ii INTRODUCTIO
N
1.1 TheJiiObjectiveJiiofJiiThisJiiBook
1.2 SomeJiiHistoricalJiiPerspective
1.3 TheJii2007-2008JiiMarketJiiMeltdowns
1.4 EfficientJiiContracting
1.5 AJiiNoteJiionJiiEthicalJiiBehaviour
1.6 Rules-BasedJiiv.JiiPrinciples-BasedJiiAccountingJiiStandards
1.7 TheJiiComplexityJiiofJiiInformationJiiinJiiFinancialJiiAccountingJiiandJiiReporting
1.8 TheJiiRoleJiiofJiiAccountingJiiResearch
1.9 TheJiiImportanceJiiofJiiInformationJiiAsymmetry
1.10 TheJiiFundamentalJiiProblemJiiofJiiFinancialJiiAccountingJiiTheory
1.11 RegulationJiiasJiiaJiiReactionJiitoJiitheJiiFundamentalJiiProblem
1.12 TheJiiOrganizationJiiofJiiThisJiiBook
1.12.1JIdealJiiConditions
1.12.2JAdverseJiiSelection
1.12.3JMoralJiiHazard
1.12.4JStandardJiiSetting
1.12.5JTheJiiProcessJiiofJiiStandardJiiSetting
1.13 RelevanceJiiofJiiFinancialJiiAccountingJiiTheoryJiitoJiiAccountingJiiPractice
, Scott,JiiFinancialJiiAccountingJiiTheory Instructor’sJiiSolutionsJiiManualJiiChapter
LEARNINGJiiOBJECTIVESJiiANDJiiSUGGESTEDJiiTEACHINGJiiAPPROACHES
TheJiiBroadJiiOutlineJiiofJiitheJiiBook
IJiiuseJiiFigureJii1.1JiiasJiiaJiitemplateJiitoJiidescribeJiitheJiibroadJiioutlineJiiofJiitheJiibook.
SinceJiitheJiistudentsJiitypicallyJiihaveJiinotJiihadJiiaJiichanceJiitoJiireadJiiChapterJii1JiiinJiithe
ii
firstJiicoursesession,iJiiIJiistickJiifairlyJiicloselyJiitoJiitheJiichapterJiimaterial.
ii
TheJiimajorJiipointsJiiIJiidiscussJiiare:
AccountingJiiinJiianJiiidealJiisetting.JiiHere,Jiipresent-value-based
ii accountingJiiisJiinatural.JiiIJiigoJiioverJiitheJiiidealJiiconditionsJiineededJiifor
ii suchaiJiibasisJiiofJiiaccountingJiitoJiibeJiifeasible,JiibutJiidoJiinotJiigoJiiintoJii
muchJiidetailJiibecauseJiithisJiitopicJiiisJiicoveredJiiinJiigreaterJiidepthJiiinJi
i ChapterJii2.
AnJiiintroductionJiitoJiitheJiiconceptJiiofJiiinformationJiiasymmetryJiiandJiire
sultingJiiproblemsJiiofJiiadverseJiiselectionJiiandJiimoralJiihazard.JiiTheseJi
i problemsJiiareJiibasicJiitoJiitheJiibookJiiandJiiIJiifeelJiiitJiiisJiidesirableJiiforJiitheJ
ii studentsJiitoJiihaveJiiaJii“firstJiigo”JiiatJiithemJiiatJiithisJiipoint.JiiIJiiconcentrate
Jii onJiitheJiiintuitionJiiunderlyingJiitheJiitwoJiiproblems.JiiForJiiexample,Jiiadv
erseJiiselectionJiicanJiibeJiiillustratedJiibyJiiaskingJiiwhoJiiwouldJiibeJiifirstJiiin
Jii lineJiitoJiipurchaseJiilifeJiiinsuranceJiiifJiithereJiiwasJiinoJiimedicalJiiexamin
ation,JiiorJiiwhatJiiqualityJiiofJiiusedJiicarsJiiareJiilikelyJiitoJiibeJiibroughtJiitoJiim
arket.JiiForJiimoralJiihazardJiiIJiitryJiitoJiipinJiithemJiidown
ii onJiihowJiihardJiitheyJiiwouldJiiworkJiiinthisiJiicourseJiiifJiithereJiiwereJiin
oJiiexams.
TheJiienvironmentJiiinJiiwhichJiifinancialJiiaccountingJiiandJiireporting
ii operates.JiiMyJiimainJiigoalJiiatJiithisJiipointJiiisJiithatJiitheJiistudentsJiidoJiinot
ii takethisiJiienvironmentJiiforJiigranted.JiiIJiidiscussJiitheJiiproceduresJiiofJiis
tandardJiisettingJiibrieflyJiiandJiipointJiioutJiithatJiithisJiiisJiireallyJiiaJiiprocess
Jii ofJiiregulation.JiiInJiitheJiipast,JiithereJiihaveJiibeenJiiwell-
knownJiicasesJiiofJiideregulation,JiisuchJiiasJiiairlines,Jiitrucking,Jiifinanci
al