Scribd Logo
Upload

Welcome to Scribd!

  • 19 views

    Chapter 1

    Uploaded by

    Jax Teller
    This chapter introduces key concepts in financial accounting theory. It discusses the purpose of financial reporting in a market economy and historical events that shaped accounting standards, such as the Great Depression. It also covers topics like information asymmetry, the role of accounting in controlling adverse selection and moral hazard, and challenges in satisfying the different information needs of investors and managers. The chapter introduces relevant theoretical frameworks for financial accounting, such as the rational investor, efficient markets, behavioral theories, and agency theory.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Chapter 1

    Uploaded by

    Jax Teller
    19 views13 pages
    This chapter introduces key concepts in financial accounting theory. It discusses the purpose of financial reporting in a market economy and historical events that shaped accounting standards, such as the Great Depression. It also covers topics like information asymmetry, the role of accounting in controlling adverse selection and moral hazard, and challenges in satisfying the different information needs of investors and managers. The chapter introduces relevant theoretical frameworks for financial accounting, such as the rational investor, efficient markets, behavioral theories, and agency theory.

    Original Description:

    acco 400

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This chapter introduces key concepts in financial accounting theory. It discusses the purpose of financial reporting in a market economy and historical events that shaped accounting standards, such as the Great Depression. It also covers topics like information asymmetry, the role of accounting in controlling adverse selection and moral hazard, and challenges in satisfying the different information needs of investors and managers. The chapter introduces relevant theoretical frameworks for financial accounting, such as the rational investor, efficient markets, behavioral theories, and agency theory.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    19 views13 pages

    Chapter 1

    Uploaded by

    Jax Teller
    This chapter introduces key concepts in financial accounting theory. It discusses the purpose of financial reporting in a market economy and historical events that shaped accounting standards, such as the Great Depression. It also covers topics like information asymmetry, the role of accounting in controlling adverse selection and moral hazard, and challenges in satisfying the different information needs of investors and managers. The chapter introduces relevant theoretical frameworks for financial accounting, such as the rational investor, efficient markets, behavioral theories, and agency theory.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    Financial Accounting

    Theory
    Seventh Edition
    William R. Scott

    Purpose: To create an awareness and


    understanding of the financial reporting
    environment in a market economy

    Chapter 1
    Introduction

    Organization of The Book

    Some Historical Perspective

    Great depression of 1930s reinforced


    historical cost accounting

    Alternatives to historical cost


    accounting

    Collapse of the Stock Market


    Boom of Late 1990s

    Burst of dot-com bubble


    Massive accounting frauds

    Enron
    WorldCom

    Collapse of public confidence in capital


    markets
    Effects on financial reporting

    Increased regulation and corporate


    governance

    Sarbanes-Oxley Act

    Tighten rules re off-balance sheet entities

    Financial Crisis, 2007-2008

    Implications for accountants

    Need for transparency


    Fair value vs. value-in-use
    accounting
    Full disclosure of off-balance sheet
    activities
    New accounting standards to help
    prevent future abuses?
    6

    The Complexity of Information

    Individual reactions to same


    information may differ

    Reporting to investors vs. reporting


    on stewardship complicates reporting

    Information affects how well markets


    work

    Information Asymmetry

    What is information asymmetry?

    Implications for a market economy

    Capital markets: Adverse selection problem

    Managerial labour markets: Moral hazard


    problem

    Role of Accounting Information


    in a Market Economy

    Control adverse selection

    Control moral hazard

    Convert inside information into outside


    Supply useful information to investors
    Control manager shirking
    Improve corporate governance

    Both roles crucial if markets are to


    work well
    9

    The Fundamental Problem of


    Financial Accounting Theory

    The best measure of net income to


    control adverse selection is not the
    same as the best measure to motivate
    manager performance

    Investors want information about future


    firm performance

    Current value accounting?

    Good corporate governance requires


    that managers work hard

    Does more reliable information and


    conservatism (historical cost accounting)
    better reflect manager effort than current
    10

    Role of Standard Setting

    Standard setting mediates between


    conflicting interests of investors and
    managers

    Investors want lots of useful information

    Managers may object to releasing all the


    information that investors desire

    Due process in standard setting


    mediates between investors and
    managers interests
    11

    Theories Relevant to
    Financial Accounting

    The rational investor

    A model of how an investor may use new


    information to revise beliefs about future firm
    performance
    Rationality holds on average, not necessarily for
    each individual

    Efficient securities markets

    Efficiency is a matter of degree


    Share prices reasonably reflect all publicly
    available information
    Efficiency is relative to a stock of information
    Role of financial reporting in
    12
    improving/expanding the stock of information

    Theories Relevant to
    Financial Accounting (cont.)

    Behavioural theories

    Investors do not use all the


    information in financial statements
    securities markets not fully efficient

    Agency theory

    Efficient contracts to motivate


    manager performance (stewardship)
    and achieve good corporate
    governance
    13

    You might also like