Accounting Theory Review
Module 1: Accounting under ideal conditions
Ideal conditions; certainty and uncertainty (including differences & similarities), dividend irrelevancy, arbitrage, accretion of discount, abnormal earnings
RRA - SFAS69; weaknesses of RRA (relevant but not as reliable)
Historical Accounting Revisited mixed measurement model, (relatively reliable but lacks relevance), revenue recognition, recognition lag
Relevance VS Reliability -> tradeoffs (Without ideal conditions, complete relevance & reliability are not jointly attainable therefore necessary to trade off these two desirable characteristics, NI does not exist as a well-defined economic construct
Module 2: Decision usefulness approach to financial reporting
Decision Usefulness Approach - theory of investor decision making in order to infer the nature and types of information that investors need.
PV Model (doesn’t work well in practice)
Single Person Decision theory (concept of utility, investor maximizing his/her return; prior & posterior probabilities; Bayes Theorem)
Information System (conditional probabilities; main & off main diagonals; progression of GN/BN -> future expected earnings -> future expected returns; positive relationship b/w F/S & payoffs)
Rational Risk Averse Investor (risk averse, chooses highest expected utility)
Principle of Portfolio Diversification (trade-off b/w risk and expected return; firm specific & market wide factors, beta risk)
Optimal Investment decisions (including / ignoring transaction costs)
Beta Risk (covariance calc, portfolio expected value & variance)
Decision Usefulness approach & standard setting bodies (primary user groups, characteristics of information required)
Mod 3 Efficient Securities Market
Efficient Securities Market (semi strong form, relative concept, fair game, random walk)
Market Prices reflecting all available information (Beaver study -consensus forecast, rational expectations)
Beaver’s
Ideal conditions; certainty and uncertainty (including differences & similarities), dividend irrelevancy, arbitrage, accretion of discount, abnormal earnings
RRA - SFAS69; weaknesses of RRA (relevant but not as reliable)
Historical Accounting Revisited mixed measurement model, (relatively reliable but lacks relevance), revenue recognition, recognition lag
Relevance VS Reliability -> tradeoffs (Without ideal conditions, complete relevance & reliability are not jointly attainable therefore necessary to trade off these two desirable characteristics, NI does not exist as a well-defined economic construct
Module 2: Decision usefulness approach to financial reporting
Decision Usefulness Approach - theory of investor decision making in order to infer the nature and types of information that investors need.
PV Model (doesn’t work well in practice)
Single Person Decision theory (concept of utility, investor maximizing his/her return; prior & posterior probabilities; Bayes Theorem)
Information System (conditional probabilities; main & off main diagonals; progression of GN/BN -> future expected earnings -> future expected returns; positive relationship b/w F/S & payoffs)
Rational Risk Averse Investor (risk averse, chooses highest expected utility)
Principle of Portfolio Diversification (trade-off b/w risk and expected return; firm specific & market wide factors, beta risk)
Optimal Investment decisions (including / ignoring transaction costs)
Beta Risk (covariance calc, portfolio expected value & variance)
Decision Usefulness approach & standard setting bodies (primary user groups, characteristics of information required)
Mod 3 Efficient Securities Market
Efficient Securities Market (semi strong form, relative concept, fair game, random walk)
Market Prices reflecting all available information (Beaver study -consensus forecast, rational expectations)
Beaver’s