Financial Accounting Theory - 11230 Words

Instructor’s Manual—Chapter 5 CHAPTER 5 The Information Approach to Decision Usefulness 5.1 5.2 Overview Outline of the Research Problem 5.2.1 Reasons for Market Response 5.2.2 Finding the Market Response 5.2.3 Separating Market-Wide and Firm-Specific Factors 5.2.4 Comparing Returns and Income 5.3 The Ball and Brown Study 5.3.1 Methodology and Findings 5.3.2 Causation Versus Association 5.3.3 Outcomes of the BB Study 5.4 Earnings Response Coefficients 5.4.1 Reasons for Differential Market Response 5.4.2 Implications of ERC Research 5.4.3 Measuring Investors’ Earnings Expectations 5.4.4 Summary 5.5 5.6 Unusual, Non-recurring and Extraordinary Items A Caveat About the â€Å"Best† Accounting Policy Copyright  © 2009 Pearson Education Canada†¦show more content†¦I end up this discussion by emphasizing that the basic procedure to find a market response is to associate some measure of market return on securities with some measure of the information content of the financial statements. I then review the 1968 Ball and Brown study. Since their methodology takes some getting used to for students who have not seen it before, I stick fairly closely to the coverage in Section 5.3, although the article itself could usefully be assigned as reading by instructors who wish to consider BB’s procedures in greater depth. I concentrate on explaining how BB operationalized the measurements of market return and information content of net income. Figure 5.3 is useful in this regard. The figure also ties nicely back to the efficient securities market theory of Chapter 4, and the discussion in Example 3.3 of the dichotomization of factors affecting share price into market-wide and f irm-specific factors (Example 3.3 is optional reading, however). I go on to review briefly the ERC research outlined in Section 5.4, as an example of an important direction in which the Ball and Brown methodology has developed. I concentrate on persistence as an explanatory variable for the ERC since this concept is Copyright  © 2009 Pearson Education Canada 128 Instructor’s Manual—Chapter 5 useful in understanding and motivating the reporting of unusual, non-recurring, and extraordinary items (Section 5.5), and it appearsShow MoreRelatedHistorical Development Of Financial Accounting Theory1422 Words   |  6 Pagesthe financial reporting statements of the business. The requirement of disclosures exists to communicate important and valid information to the investors concerning the values arrived at on the financial statements. Throughout this research, each inventory valuation method will be examined and discussed in regards to financial accounting theory, Conceptual Framework, Generally Accepted Accounting Principles, and International Financial Reporting Standards. Historical Development of Financial AccountingRead MoreHistorical Development Of Financial Accounting Theory1526 Words   |  7 Pagesfair value accounting concept, an understanding of the foundation of accounting is where it is today is needed. This information provides a guideline of how the first conceptual ideas of accounting first began and changed overtime to accommodate the ever increasing changes with investment options along with lobbying efforts of individuals. The FASB’s Statement of Financial Accounting Concepts (SFAC) No. 8 indicates that the primary purpose of financial reporting is to provide financial informationRead MoreFinancial Accounting Theory2740 Words   |  11 Pagesï » ¿Financial Accounting Theory Introduction The aim of this paper is to consider three theories of regulation, the public interest theory, the capture theory and the economic interest theory. These three theories attempt to explain why a particular phenomena in the regulation process occurs and as such they are positive theories. Initially, in part (a) the theories are explained and then related to a case where the European Union Commission defers accounting standards. Read MoreEssay on Financial Accounting Theory1727 Words   |  7 Pagesï » ¿QUESTION 1 a. Outline the objective and the principles of a theory that prescribes fair value accounting. Fair value accounting is to measure selected assets at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The objective of fair value accounting is linked with the objective of ‘decision usefulness’ of general purpose financial reporting. That is, to provide relevant information thatRead MoreFinancial Accounting Theory Essay1794 Words   |  8 PagesChapter 1 – Financial Accounting Theory 1.1 What is Financial Accounting Theory? Henderiksen (1970) – Theory is defined as: A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry. FASB – a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. Introduction – theories of financial accounting Accounting is a human activity and will consider such thing as people’sRead MoreFinancial Accounting Theory the Reporting Environment1578 Words   |  7 PagesWeek 2: Topic 1: Financial Accounting Theory the Reporting Environment GHTHH Chapter 2 5. Researchers who develop positive theories and researchers who develop normative theories often do not share the same views about the roles of their respective approaches to theory construction. 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According to ContemporaryRead MoreFinancial Accounting Theories And Disclosures Of Financial Information Will Affect Decision Making984 Words   |  4 PagesFinancial Accounting Theory (FAT) provides me an overview of the role of financial accounting in decision making which gives me a deeper insight of how accounting theories and disclosures of financial information will affect decision making. Throughout 12-week seminars, it develops my critical thinking skills which change my view of FAT to a new perspective. From which, it establishes an insightful explanation of the reason behind of every action and logic underlying of particular practice. AndRead MoreFinancial Accounting Theory, Chapter 4 Answers Essay1146 Words   |  5 PagesAssignment 4-2: Week 4 Analysis Write-Up Kylie Keener ACCT715-Q1WW Financial Accounting Theory Michael Miller 13 June 2012 1. Chapter 4:  Problem 8 (GM) The article â€Å"GM to Take Charge of $20.8-Billion† here reproduced from The Globe and Mail (February 2, 1993) describes the potential impact of SFAS 106, â€Å"Accounting for Postretirement Benefits Other Than Pensions,† on General Motors and Ford. For example, it appears that General Motors will be required to record a liability of $20.8 billionRead MoreFinancial Accounting Theory - Ball and Brown Study1674 Words   |  7 Pagesof Research Paper Through the paper and the information provided by the textbook, it is clear that two brief conclusions we can get and explanations will be attached. 1. The financial statement do impact the share price 2. The influence caused by the financial statement is limited. The main reason, that financial statement impact the share price, is the efficient capital market. Namely, the efficient security market will go hand in hand with full disclosure. Once the relevant information provided