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
, Scott, Financial Accounting Theory Instructor’s Solutions Manual Chapter 1
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
1. The Broad Outline of the Book
I use Figure 1’1 as a template to describe the broad outline of the book’
Since the students typically have not had a chance to read Chapter 1 in the
first coursesession, I stick fairly closely to the chapter material’
The major points I discuss are:
• Accounting in an ideal setting’ Here, present-value-based
accounting is natural’ I go over the ideal conditions needed
for sucha basis of accounting to be feasible, but do not go
into much detail because this topic is covered in greater
depth in Chapter 2’
• An introduction to the concept of information asymmetry and
resulting problems of adverse selection and moral hazard’
These problems are basic to the book and I feel it is desirable
for the students to have a “first go” at them at this point’ I
concentrate on the intuition underlying the two problems’ For
example, adverse selection can be illustrated by asking who
would be first in line to purchase life insurance if there was
no medical examination, or what quality of used cars are
likely to be brought to market’ For moral hazard I try to pin
them down on how hard they would work inthis course if
there were no exams’
• The environment in which financial accounting and reporting
operates’ My main goal at this point is that the students do not
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