Solution Manual For Financial Accounting Theory
n n n n n n
7th Edition byWilliam R. Scott, Patricia O'Brien
n n n n n n n n
Chapters 1 - 13, Complete
n n n n n
, Contents
Chapter 1 n Introduction .................................................................................................. 1
Chapter 2 n Accounting Under Ideal Conditions ........................................................... 7
n n n
Chapter 3 n The Decision Usefulness Approach to Financial Reporting ...................... 68
n n n n n n
Chapter 4 n Efficient Securities Markets ....................................................................... 129
n n
Chapter 5 n The Value Relevance of Accounting Information ..................................... 153
n n n n n
Chapter 6 n The Measurement Approach to Decision Usefulness ................................ 194
n n n n n
Chapter 7 n Measurement Applications......................................................................... 237
n
Chapter 8 n The Efficient Contracting Approach to Decision Usefulness .................... 285
n n n n n n
Chapter 9 n An Analysis of Conflict ........................................................................... 321
n n n
Chapter 10 Executive Compensation ......................................................................... 371
n n n
Chapter 11 Earnings Management ............................................................................. 425
n n n
Chapter 12 Standard Setting: Economic Issues ......................................................... 487
n n n n n
Chapter 13 Standard Setting: Political Issues ............................................................ 527
n n n n n
,Scott, Financial Accounting Theory
n n n Instructor’s Solutions Manual Chapter 1
n n n n
CHAPTER 1 N
INTRODUCTIO
N
N
1.1 The Objective of This Book
n n n n
1.2 Some Historical Perspective
n n
1.3 The 2007-2008 Market Meltdowns
n n n
1.4 Efficient Contracting n
1.5 A Note on Ethical Behaviour
n n n n
1.6 Rules-Based v. Principles-Based Accounting Standards
n n n n
1.7 The Complexity of Information in Financial Accounting and Reporting
n n n n n n n n
1.8 The Role of Accounting Research
n n n n
1.9 The Importance of Information Asymmetry
n n n n
1.10 The Fundamental Problem of Financial Accounting Theory
n n n n n n
1.11 Regulation as a Reaction to the Fundamental Problem
n n n n n n n
1.12 The Organization of This Book
n n n n
1.12.1 Ideal Conditions n
1.12.2 Adverse Selection n
1.12.3 Moral Hazard n
1.12.4 Standard Setting n
1.12.5 The Process of Standard Setting
n n n n
1.13 Relevance of Financial Accounting Theory to Accounting Practice
n n n n n n n
, Scott, Financial Accounting Theory
n n n Instructor’s Solutions Manual Chapter 1 n n n n
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
N N N N N
1. The Broad Outline of the Book
n n n n n
I use Figure 1.1 as a template to describe the broad outline of the book. Since
n n n n n n n n n n n n n n n
the students typically have not had a chance to read Chapter 1 in the first course
n n n n n n n n n n n n n n n n
session, I stick fairly closely to the chapter material.
n n n n n n n n n
The major points I discuss are:
n n n n n
• Accounting in an ideal setting. Here, present-value-based
n n n n n n
accounting is natural. I go over the ideal conditions needed for such
n n n n n n n n n n n n
a basis of accounting to be feasible, but do not go into much detail
n n n n n n n n n n n n n n
because this topic is covered in greater depth in Chapter 2.
n n n n n n n n n n n
• An introduction to the concept of information asymmetry and
n n n n n n n n
resulting problems of adverse selection and moral hazard. These
n n n n n n n n n
problems are basic to the book and I feel it is desirable for the
n n n n n n n n n n n n n n
students to have a ―first go‖ at them at this point. I concentrate on
n n n n n n n n n n n n n n
the intuition underlying the two problems. For example, adverse
n n n n n n n n n
selection can be illustrated by asking who would be first in line to
n n n n n n n n n n n n n
purchase life insurance if there was no medical examination, or
n n n n n n n n n n
what quality of used cars are likely to be brought to market. For
n n n n n n n n n n n n n
moral hazard I try to pin them down on how hard they would work in
n n n n n n n n n n n n n n n
this course if there were no exams.
n n n n n n n
• The environment in which financial accounting and reporting
n n n n n n n
operates. My main goal at this point is that the students do not take
n n n n n n n n n n n n n n
this environment for granted. I discuss the procedures of standard
n n n n n n n n n n
setting briefly and point out that this is really a process of
n n n n n n n n n n n n
regulation. In the past, there have been well-known cases of
n n n n n n n n n n
deregulation, such as airlines, trucking, financial institutions, power
n n n n n n n n
generation. However, we are entering what is likely to be a period
n n n n n n n n n n n n
of increasing regulation, at least for financial institutions. Instructors
n n n n n n n n n
n n n n n n
7th Edition byWilliam R. Scott, Patricia O'Brien
n n n n n n n n
Chapters 1 - 13, Complete
n n n n n
, Contents
Chapter 1 n Introduction .................................................................................................. 1
Chapter 2 n Accounting Under Ideal Conditions ........................................................... 7
n n n
Chapter 3 n The Decision Usefulness Approach to Financial Reporting ...................... 68
n n n n n n
Chapter 4 n Efficient Securities Markets ....................................................................... 129
n n
Chapter 5 n The Value Relevance of Accounting Information ..................................... 153
n n n n n
Chapter 6 n The Measurement Approach to Decision Usefulness ................................ 194
n n n n n
Chapter 7 n Measurement Applications......................................................................... 237
n
Chapter 8 n The Efficient Contracting Approach to Decision Usefulness .................... 285
n n n n n n
Chapter 9 n An Analysis of Conflict ........................................................................... 321
n n n
Chapter 10 Executive Compensation ......................................................................... 371
n n n
Chapter 11 Earnings Management ............................................................................. 425
n n n
Chapter 12 Standard Setting: Economic Issues ......................................................... 487
n n n n n
Chapter 13 Standard Setting: Political Issues ............................................................ 527
n n n n n
,Scott, Financial Accounting Theory
n n n Instructor’s Solutions Manual Chapter 1
n n n n
CHAPTER 1 N
INTRODUCTIO
N
N
1.1 The Objective of This Book
n n n n
1.2 Some Historical Perspective
n n
1.3 The 2007-2008 Market Meltdowns
n n n
1.4 Efficient Contracting n
1.5 A Note on Ethical Behaviour
n n n n
1.6 Rules-Based v. Principles-Based Accounting Standards
n n n n
1.7 The Complexity of Information in Financial Accounting and Reporting
n n n n n n n n
1.8 The Role of Accounting Research
n n n n
1.9 The Importance of Information Asymmetry
n n n n
1.10 The Fundamental Problem of Financial Accounting Theory
n n n n n n
1.11 Regulation as a Reaction to the Fundamental Problem
n n n n n n n
1.12 The Organization of This Book
n n n n
1.12.1 Ideal Conditions n
1.12.2 Adverse Selection n
1.12.3 Moral Hazard n
1.12.4 Standard Setting n
1.12.5 The Process of Standard Setting
n n n n
1.13 Relevance of Financial Accounting Theory to Accounting Practice
n n n n n n n
, Scott, Financial Accounting Theory
n n n Instructor’s Solutions Manual Chapter 1 n n n n
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
N N N N N
1. The Broad Outline of the Book
n n n n n
I use Figure 1.1 as a template to describe the broad outline of the book. Since
n n n n n n n n n n n n n n n
the students typically have not had a chance to read Chapter 1 in the first course
n n n n n n n n n n n n n n n n
session, I stick fairly closely to the chapter material.
n n n n n n n n n
The major points I discuss are:
n n n n n
• Accounting in an ideal setting. Here, present-value-based
n n n n n n
accounting is natural. I go over the ideal conditions needed for such
n n n n n n n n n n n n
a basis of accounting to be feasible, but do not go into much detail
n n n n n n n n n n n n n n
because this topic is covered in greater depth in Chapter 2.
n n n n n n n n n n n
• An introduction to the concept of information asymmetry and
n n n n n n n n
resulting problems of adverse selection and moral hazard. These
n n n n n n n n n
problems are basic to the book and I feel it is desirable for the
n n n n n n n n n n n n n n
students to have a ―first go‖ at them at this point. I concentrate on
n n n n n n n n n n n n n n
the intuition underlying the two problems. For example, adverse
n n n n n n n n n
selection can be illustrated by asking who would be first in line to
n n n n n n n n n n n n n
purchase life insurance if there was no medical examination, or
n n n n n n n n n n
what quality of used cars are likely to be brought to market. For
n n n n n n n n n n n n n
moral hazard I try to pin them down on how hard they would work in
n n n n n n n n n n n n n n n
this course if there were no exams.
n n n n n n n
• The environment in which financial accounting and reporting
n n n n n n n
operates. My main goal at this point is that the students do not take
n n n n n n n n n n n n n n
this environment for granted. I discuss the procedures of standard
n n n n n n n n n n
setting briefly and point out that this is really a process of
n n n n n n n n n n n n
regulation. In the past, there have been well-known cases of
n n n n n n n n n n
deregulation, such as airlines, trucking, financial institutions, power
n n n n n n n n
generation. However, we are entering what is likely to be a period
n n n n n n n n n n n n
of increasing regulation, at least for financial institutions. Instructors
n n n n n n n n n
