INSTRUCTOR’S SOLUTIONS MANUAL P P
for
FinancialAccounting T p p
heory
Seventh Edition p
William R. Scott p p
University of Waterloo
p p
Toronto
Copyrightp©p2015pPearsonpCanadapInc.,pToronto,pOntario.pAllprightspreserved.pThispworkpispprotectedpbypCanadianpcopyr
ightplawspandpispprovidedpsolelypforpthepusepofpinstructorspinpteachingptheirpcoursespandpassessingpstudentplearning.pDisse
minationporpsalepofpanyppartpofpthispworkp(includingponpthepInternet)pwillpdestroypthepintegritypofpthepworkpandpispnotpper
mitted.pThepcopyrightpholderpgrantsppermissionptopinstructorspwhophavepadoptedpFinancialpAccountingpTheory,pSeventhpE
dition,pbypWilliampR.pScottptoppostpthispmaterialponlineponlypifpthepusepofpthepwebsitepisprestrictedpbypaccesspcodesptopstud
entspinpthepinstructor’spclasspthatpispusingptheptextbookpandpprovidedpthepreproducedpmaterialpbearspthispcopyrightpnotice.
, Contents
Chapterp1 Introduction .................................................................................................. 1
Chapterp2 AccountingpUnderpIdealpConditions ........................................................... 7
Chapterp3 ThepDecisionpUsefulnesspApproachptopFinancialpReporting ....................... 68
Chapterp4 EfficientpSecuritiespMarkets ....................................................................... 129
Chapterp5 ThepValuepRelevancepofpAccountingpInformation ...................................... 153
Chapterp6 ThepMeasurementpApproachptopDecisionpUsefulness ................................. 194
Chapterp7 MeasurementpApplications ......................................................................... 237
Chapterp8 ThepEfficientpContractingpApproachptopDecisionpUsefulness ..................... 285
Chapterp9 AnpAnalysispofpConflict ............................................................................ 321
Chapterp10p ExecutivepCompensation .......................................................................... 371
Chapterp11p EarningspManagement .............................................................................. 425
Chapterp12p StandardpSetting:pEconomicpIssues ........................................................... 487
Chapterp13p StandardpSetting:pPoliticalpIssues .............................................................. 527
Copyrightp©p2015pPearsonpCanadapInc.
,Scott,pFinancialpAccountingpTheory,p7thpEdition Instructor’spSolutionspManualpChapterp1
CHAPTER 1 INTROD
P P
UCTION
1.1 ThepObjectivepofpThispBook
1.2 Somep HistoricalpPerspective
1.3 Thep2007-2008pMarketpMeltdowns
1.4 EfficientpContracting
1.5 ApNoteponpEthicalpBehaviour
1.6 Rules-Basedp v.p Principles-Basedp Accountingp Standards
1.7 ThepComplexitypofpInformationpinpFinancialpAccountingpandpReporting
1.8 ThepRolepofpAccountingpResearch
1.9 ThepImportancepofpInformationpAsymmetry
1.10 ThepFundamentalpProblempofpFinancialpAccountingpTheory
1.11 RegulationpaspapReactionptopthepFundamentalpProblem
1.12 ThepOrganizationpofpThispBook
1.12.1 IdealpConditions
1.12.2 Adversep Selection
1.12.3 MoralpHazard
1.12.4 StandardpSetting
1.12.5 ThepProcesspofp StandardpSetting
1.13 RelevancepofpFinancialpAccountingpTheoryptopAccountingpPractice
1
Copyrightp©p2015pPearsonpCanadapInc.
, Scott,pFinancialpAccountingpTheory,p7thpEdition Instructor’spSolutionspManualpChapterp1
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
P P P P P
1. ThepBroadpOutlinepofpthepBook
IpusepFigurep1.1paspaptemplateptopdescribepthepbroadpoutlinepofpthepbook.pSincepthep
studentsptypicallyphavepnotphadpapchanceptopreadpChapterp1pinpthepfirstpcoursepsession
,pIpstickpfairlypcloselyptopthepchapterpmaterial.
ThepmajorppointspIpdiscusspare:
• Accountingpinpanpidealpsetting.pHere,ppresent-value-
basedpaccountingpispnatural.pIpgopoverpthepidealpconditionspneededpforp
suchpapbasispofpaccountingptopbepfeasible,pbutpdopnotpgopintopmuchpde
tailpbecausepthisptopicpispcoveredpinpgreaterpdepthpinpChapterp2.
• Anpintroductionptopthepconceptpofpinformationpasymmetrypandpresulti
ngpproblemspofpadversepselectionpandpmoralphazard.pThesepproblem
sparepbasicptopthepbookpandpIpfeelpitpispdesirablepforpthepstudentsptopha
vepap“firstpgo”patpthempatpthisppoint.pIpconcentrateponpthepintuitionpund
erlyingptheptwopproblems.pForpexample,padversepselectionpcanpbepillu
stratedpbypaskingpwhopwouldpbepfirstpinplineptoppurchaseplifepinsuranc
epifptherepwaspnopmedicalpexamination,porpwhatpqualitypofpusedpcarsp
areplikelyptopbepbroughtptopmarket.pForpmoralphazardpIptryptoppinpthemp
downponphowphardptheypwouldpworkpinpthispcoursepifptherepwerepnopexa
ms.
• Thepenvironmentpinpwhichpfinancialpaccountingpandpreportingpoperat
es.pMypmainpgoalpatpthisppointpispthatpthepstudentspdopnotptakepthispenvi
ronmentpforpgranted.pIpdiscusspthepprocedurespofpstandardpsettingpbr
ieflypandppointpoutpthatpthispispreallypapprocesspofpregulation.pInpthepp
ast,ptherephavepbeenpwell-
knownpcasespofpderegulation,psuchpaspairlines,ptrucking,pfinancialpinsti
tutions,ppowerpgeneration.pHowever,pweparepenteringpwhatpisplikelypt
opbepapperiodpofpincreasingpregulation,patpleastpforpfinancialpinstitutions
2
Copyrightp©p2015pPearsonpCanadapInc.
for
FinancialAccounting T p p
heory
Seventh Edition p
William R. Scott p p
University of Waterloo
p p
Toronto
Copyrightp©p2015pPearsonpCanadapInc.,pToronto,pOntario.pAllprightspreserved.pThispworkpispprotectedpbypCanadianpcopyr
ightplawspandpispprovidedpsolelypforpthepusepofpinstructorspinpteachingptheirpcoursespandpassessingpstudentplearning.pDisse
minationporpsalepofpanyppartpofpthispworkp(includingponpthepInternet)pwillpdestroypthepintegritypofpthepworkpandpispnotpper
mitted.pThepcopyrightpholderpgrantsppermissionptopinstructorspwhophavepadoptedpFinancialpAccountingpTheory,pSeventhpE
dition,pbypWilliampR.pScottptoppostpthispmaterialponlineponlypifpthepusepofpthepwebsitepisprestrictedpbypaccesspcodesptopstud
entspinpthepinstructor’spclasspthatpispusingptheptextbookpandpprovidedpthepreproducedpmaterialpbearspthispcopyrightpnotice.
, Contents
Chapterp1 Introduction .................................................................................................. 1
Chapterp2 AccountingpUnderpIdealpConditions ........................................................... 7
Chapterp3 ThepDecisionpUsefulnesspApproachptopFinancialpReporting ....................... 68
Chapterp4 EfficientpSecuritiespMarkets ....................................................................... 129
Chapterp5 ThepValuepRelevancepofpAccountingpInformation ...................................... 153
Chapterp6 ThepMeasurementpApproachptopDecisionpUsefulness ................................. 194
Chapterp7 MeasurementpApplications ......................................................................... 237
Chapterp8 ThepEfficientpContractingpApproachptopDecisionpUsefulness ..................... 285
Chapterp9 AnpAnalysispofpConflict ............................................................................ 321
Chapterp10p ExecutivepCompensation .......................................................................... 371
Chapterp11p EarningspManagement .............................................................................. 425
Chapterp12p StandardpSetting:pEconomicpIssues ........................................................... 487
Chapterp13p StandardpSetting:pPoliticalpIssues .............................................................. 527
Copyrightp©p2015pPearsonpCanadapInc.
,Scott,pFinancialpAccountingpTheory,p7thpEdition Instructor’spSolutionspManualpChapterp1
CHAPTER 1 INTROD
P P
UCTION
1.1 ThepObjectivepofpThispBook
1.2 Somep HistoricalpPerspective
1.3 Thep2007-2008pMarketpMeltdowns
1.4 EfficientpContracting
1.5 ApNoteponpEthicalpBehaviour
1.6 Rules-Basedp v.p Principles-Basedp Accountingp Standards
1.7 ThepComplexitypofpInformationpinpFinancialpAccountingpandpReporting
1.8 ThepRolepofpAccountingpResearch
1.9 ThepImportancepofpInformationpAsymmetry
1.10 ThepFundamentalpProblempofpFinancialpAccountingpTheory
1.11 RegulationpaspapReactionptopthepFundamentalpProblem
1.12 ThepOrganizationpofpThispBook
1.12.1 IdealpConditions
1.12.2 Adversep Selection
1.12.3 MoralpHazard
1.12.4 StandardpSetting
1.12.5 ThepProcesspofp StandardpSetting
1.13 RelevancepofpFinancialpAccountingpTheoryptopAccountingpPractice
1
Copyrightp©p2015pPearsonpCanadapInc.
, Scott,pFinancialpAccountingpTheory,p7thpEdition Instructor’spSolutionspManualpChapterp1
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
P P P P P
1. ThepBroadpOutlinepofpthepBook
IpusepFigurep1.1paspaptemplateptopdescribepthepbroadpoutlinepofpthepbook.pSincepthep
studentsptypicallyphavepnotphadpapchanceptopreadpChapterp1pinpthepfirstpcoursepsession
,pIpstickpfairlypcloselyptopthepchapterpmaterial.
ThepmajorppointspIpdiscusspare:
• Accountingpinpanpidealpsetting.pHere,ppresent-value-
basedpaccountingpispnatural.pIpgopoverpthepidealpconditionspneededpforp
suchpapbasispofpaccountingptopbepfeasible,pbutpdopnotpgopintopmuchpde
tailpbecausepthisptopicpispcoveredpinpgreaterpdepthpinpChapterp2.
• Anpintroductionptopthepconceptpofpinformationpasymmetrypandpresulti
ngpproblemspofpadversepselectionpandpmoralphazard.pThesepproblem
sparepbasicptopthepbookpandpIpfeelpitpispdesirablepforpthepstudentsptopha
vepap“firstpgo”patpthempatpthisppoint.pIpconcentrateponpthepintuitionpund
erlyingptheptwopproblems.pForpexample,padversepselectionpcanpbepillu
stratedpbypaskingpwhopwouldpbepfirstpinplineptoppurchaseplifepinsuranc
epifptherepwaspnopmedicalpexamination,porpwhatpqualitypofpusedpcarsp
areplikelyptopbepbroughtptopmarket.pForpmoralphazardpIptryptoppinpthemp
downponphowphardptheypwouldpworkpinpthispcoursepifptherepwerepnopexa
ms.
• Thepenvironmentpinpwhichpfinancialpaccountingpandpreportingpoperat
es.pMypmainpgoalpatpthisppointpispthatpthepstudentspdopnotptakepthispenvi
ronmentpforpgranted.pIpdiscusspthepprocedurespofpstandardpsettingpbr
ieflypandppointpoutpthatpthispispreallypapprocesspofpregulation.pInpthepp
ast,ptherephavepbeenpwell-
knownpcasespofpderegulation,psuchpaspairlines,ptrucking,pfinancialpinsti
tutions,ppowerpgeneration.pHowever,pweparepenteringpwhatpisplikelypt
opbepapperiodpofpincreasingpregulation,patpleastpforpfinancialpinstitutions
2
Copyrightp©p2015pPearsonpCanadapInc.
