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SOLUTIONS MANUAL For Financial Accounting Theory Seventh Edition A+
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INSTRUCTOR’S SOLUTIONS MANUAL For Financial Accounting Theory Seventh Edition A+
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INSTRUCTOR’S SOLUTIONSMANUAL
For
Financial Accounting Theory
Seventh Edition
A+
, Contents
Chapter 1 Introduction 1
Chapter 2 Accounting Under Ideal Conditions 7
Chapter 3 The Decision Usefulness Approach to Financial Reporting 68
Chapter 4 Efficient Securities Markets 129
Chapter 5 The Value Relevance of Accounting Information 153
Chapter 6 The Measurement Approach to Decision Usefulness 194
Chapter 7 Measurement Applications 237
Chapter 8 The Efficient Contracting Approach to Decision Usefulness 285
Chapter 9 An Analysis of Conflict 321
Chapter 10 Executive Compensation 371
Chapter 11 Earnings Management 425
Chapter 12 Standard Setting: Economic Issues 487
Chapter 13 Standard Setting: Political Issues 527
, LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
Suggested Solutions to Questions and Problems
1.
P.V. Ltd.
Income Statement for Year 2
Accretion of discount (10% × 286.36) $28.64
P.V. Ltd.
Balance Sheet
As at Time 2
Financial Asset Shareholders’ Equity
Cash $315.00 Opening balance $286.36
Net income 28.64
Capital Asset
Present value 0.00
$315.00 $315.00
Note that cash includes interest at 10% on opening cash balance of $150.
2. Suppose that P.V. Ltd. paid a dividend of $10 at the end of year 1 (any portion of
year 1 net income would do). Then, its year 2 opening net assets are $276.36,
and net income would be:
P.V. Ltd.
, Income Statement
For Year 2
Accretion of discount (10% × 276.36) $27.64
P.V.’s balance sheet at time 2 would be:
P.V. Ltd.
Balance Sheet
As at Time 2
Financial Asset Shareholders’ Equity
Cash: (140 + 14 + 150) $304.00 Opening balance: $276.36
(286.36 - 10.00 dividend)
Capital Asset, at Net income 27.64
Present value 0.00
$304.00 $304.00
Thus, at time 2 the shareholders have:
Cash from dividend $10.00
Interest at 10% on cash dividend, for year 2 1.00
Value of firm per balance sheet 304.00 $315.00
This is the same value as that of the firm at time 2, assuming P.V. Ltd. paid no
dividends (see Question 1). Consequently, the firm’s dividend policy does not
matter to the shareholders under ideal conditions. Note that a crucial requirement
here, following from ideal conditions, is that the investors and the firm both earn
interest on financial assets, including reinvested dividends, at the same rate of
return.
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