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10 9 8 7 6 5 4 3 2 1 [EB]
Library and Archives Canada Cataloguing in Publication
Scott, William R. (William Robert), 1931-, author
Financial accounting theory / William R. Scott. – Seventh
edition.
Includes bibliographical references and index.
ISBN 978-0-13-298466-9 (bound)
1. Accounting—Textbooks. I. Title.
HF5635.S36 2014 657’.044 C2013-906491-5
ISBN 978-0-13-298466-9
Contents
Preface xi
Acknowledgments xv
1 Introduction 1
1.1The Objective of This Book 1
1.2Some Historical Perspective 1
1.3The 2007–2008 Market
Meltdowns10
1.4Efficient Contracting 16
1.5A Note on Ethical Behaviour 18
1.6Rules-Based versus Principles-
Based Accounting Standards 20
1.7The Complexity of Information
in Financial Accounting and
Reporting21
1.8The Role of Accounting
Research21
1.9The Importance of Information
Asymmetry22
1.10The Fundamental Problem of
Financial Accounting Theory 24
1.11Regulation as a Reaction to the
Fundamental Problem 26
1.12The Organization of This
Book27
1.12.1 Ideal Conditions 27
1.12.2 Adverse Selection 27
1.12.3 Moral Hazard 28
1.12.4 Standard Setting 28
1.12.5 The Process of Standard
Setting 29
1.13Relevance of Financial
Accounting Theory to
Accounting Practice 32
2Accounting Under Ideal
Conditions 37
2.1Overview37
2.2The Present Value Model Under
Certainty38
2.2.1 Summary 41
2.3The Present Value Model Under
Uncertainty41
2.3.1 Summary 47
2.4Examples of Present Value
Accounting48
2.4.1 Embedded Value 48
2.4.2 Reserve Recognition
Accounting 49
2.4.3 Critique of RRA 52
2.4.4 Summary of RRA 56
2.5Historical Cost Accounting
Revisited56
2.5.1 Comparison of Different
Measurement Bases 56
2.5.2 Conclusion 58
2.6The Non-Existence of True Net
Income58
2.7Conclusion to Accounting Under
Ideal Conditions 59
3The Decision Usefulness
Approach to Financial
Reporting 72
3.1Overview72
3.2The Decision Usefulness
Approach73
3.2.1 Summary 74
ivContents
3.3Single-Person
DecisionTheory 74
3.3.1 Decision Theory Applied 74
3.3.2 The Information System 78
3.3.3 Information Defined 82
3.3.4 Summary 83
3.4The Rational, Risk-Averse
Investor83
3.5The Principle of Portfolio
Diversification85
3.6Increasing the Decision Usefulness
of Financial Reporting 87
3.6.1 Introduction 87
3.6.2 Objectives of Management
Discussion and Analysis 88
3.6.3 An Example of MD&A
Disclosure 89
3.6.4 Is MD&A Decision
Useful 99
3.6.5 Conclusion 101
3.7The Reaction of Professional
Accounting Bodies to
the Decision Usefulness
Approach102
3.7.1 The Conceptual
Framework 102
3.7.2 Summary 107
3.8Conclusions on Decision
Usefulness107
4Efficient Securities
Markets 120
4.1Overview120
4.2Efficient Securities Markets 121
4.2.1 The Meaning of
Efficiency 121
4.2.2 How Do Market Prices
Fully Reflect All Available
Information 124
4.2.3 Summary 126
4.3Implications of Efficient
Securities Markets for Financial
Reporting127
4.3.1 Implications 127
4.3.2 Summary 128
4.4The Informativeness of
Price129
4.4.1 A Logical Inconsistency 129
4.4.2 Summary 132
4.5A Model of Cost of Capital 132
4.5.1 A Capital Asset Pricing
Model 132
4.5.2 Critique of the Capital Asset
Pricing Model 135
4.5.3 Summary 137
4.6Information Asymmetry 137
4.6.1 A Closer Look at Information
Asymmetry 137
4.6.2 Fundamental Value 140
4.6.3 Summary 142
4.7The Social Significance of
Securities Markets that Work
Well143
4.8Conclusions on Efficient
Securities Markets 145
5The Value Relevance of
Accounting Information 153
5.1Overview153
5.2Outline of the Research
Problem154
5.2.1 Reasons for Market
Response 154
5.2.2 Finding the Market
Response 156
5.2.3 Separating Market-Wide
and Firm-Specific
Factors 156
5.2.4 Comparing Returns and
Income 157。