Financial Accounting

Financial Accounting Theory, 8e William Scott, Patricia O'Brien (Solutions Manual All Chapters) 1 / 4

Scott, Financial Accounting Theory, 8th Edition Instructor’s Solutions Manual Chapter 1 1 Copyright © 2020 Pearson Canada Inc.

CHAPTER 1

INTRODUCTION

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 versus 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

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Scott, Financial Accounting Theory, 8th Edition Instructor’s Solutions Manual Chapter 1 3 Copyright © 2020 Pearson Canada Inc.markets v. regulation now since this topic becomes important in Chapters 12 and 13.

• 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.

• 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 foster a critical awareness of the financial accounting environment, which is needed if one is to become a thoughtful professional. 3 / 4

Scott, Financial Accounting Theory, 8th Edition Instructor’s Solutions Manual Chapter 1 4 Copyright © 2020 Pearson Canada Inc.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, and de-recognition; and that they will have the opportunity to learn the broad outlines of 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 on illustrating, motivating and discussing the application of the concepts. For this, I find that the financial media are helpful sources of current articles which I bring to class to serve as a basis for discussion. Numerous such articles form the basis of most “Theory in Practice” vignettes scattered throughout the text.

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