Chapter 1 Reading Guide
Chapter 1 Provides an overview of the course, as well as an outline of the historical events that have significantly affected accounting. Virtually every topic noted below will be explored in more detail as we proceed through the course.
This document provides an outline of key ideas in the chapter you should keep an eye out for, as well as some questions to think about (usually from the chapter). There are no assigned questions for this chapter.
Why this content is important
I think it is very helpful to have some understanding of the events that have led to current accounting standards, as it provides an appreciation that the standards are somewhat arbitrary, and definitely reactive - different events would undoubtedly have lead to different standards. The chapter also introduces some other key themes of the book: the need for tradeoffs in creating standards for a complex environment (we can't please everyone); the idea that accounting is intended to solve information asymmetry (our first theory), and that the things we do to reduce adverse selection may make moral hazard worse, and vice versa (again, we can't serve all needs). Finally, the chapter also introduces an idea we won't explore till late in the course - why do we need regulation of accounting at all? In a market economy, why can't investors simply compel companies to disclose by not buying shares (or paying less for shares) of companies that fail to provide enough information about their performance and resources? This helps us understand the role of voluntary disclosures, and why some companies may be better at providing information than others. Finally, the chapter introduces you to some other key players in financial reporting - you may have thought about the role of the AcSB, but never considered the securities commissions. You need to be aware of this other player, or you will miss a big source of financial reporting regulation.
Please bring any questions or comments you have after reading the chapter to class, and your thoughts about the general questions below (italicized).
Key Concepts You Should Understand After Reading the Chapter
1. Effects of Key Events in the History of Accounting Development
2. Valuation (Measurement) Bases in Accounting (Primacy of B/S vs I/S)
3. The Quest for the Holy Grail: The One Right Way to Do Accounting
4. Why Accounting Academics and Standard Setters Moved to Decision Usefulness rather than “True” Accounting
5. Ethical Behavior
6. Accounting as a means of addressing information asymmetry
7. Juggling the needs of Managers vs Investors in Accounting (The Fundamental Problem which arises as a result of information asymmetry)
8. Regulation as an Answer to the Fundamental Problem; Key Players
1. History of Accounting Development (Key events)
a) What are some of the key events and what effect did they have?
2. Valuation/Measurement Bases in Accounting
Be able to explain the differences between each of the following and provide examples
a) Historical Cost
b) Current Values (what is the difference between a cost and a value?) i) Value in Use (discounted PV of future cash flows) ii) Fair Values (Exit Values)
(c) The following table from Skinner's Accounting Standards in Evolution gives a more systematic organization of a number of possible bases - notice that accounting only uses about half of these (the ones in italics have been used or are being used). The point of the table is to help put the valuation bases in context, by pointing out there are others. Why do you think none of the "Valued in the Future" bases have been used?
Possible Valuation Bases for Assets (From Skinner 1987)
|Valuation Basis |Valued in Past |Valued in Present |Valued in Future |
|Entry Price |Historical Cost |Replacement