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Jeff, Financial Accounting Theory, seventh Edition

Instructor's Solutions Manual

Chapter almost 8

CHAPTER almost eight


8. 1


almost eight. 2

Precisely what is Efficient Deal Theory?

almost 8. 3

Causes of Efficient Contracting Demand for Economic Accounting Information

8. 5

8. three or more. 1


8. three or more. 2


Accounting Guidelines for Successful Contracting

almost 8. 4. you


almost 8. 4. 2


almost eight. 5

Deal Rigidity

almost 8. 6

Employee Stock Options

8. 7

Dialogue and Brief summary of ASI Expensing

eight. 8

Specific Efficiency and Opportunism in Accounting

8. 9

Overview of Successful Contracting intended for Debt and Stewardship

eight. 10

Implied Contracts

8. 10. you Definition and Empirical Facts

8. 12. 2 A Single-Period noncooperative Game

almost eight. 10. several A Trust-Based Non-Cooperative Game*

8. 15. 4 Synopsis of Acted Contracting

8. 11

Overview of Effective Contracting


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Scott, Monetary Accounting Theory, 7th Edition

Instructor's Solutions Manual


Copyright В©.

Chapter eight

Scott, Economic Accounting Theory, 7th Edition

Instructor's Alternatives Manual

Part 8


1 .

To Understand what Contract Theory is, and What it Really wants to Accomplish

This chapter starts the second significant component of the text, namely to consider management's role economic reporting, and exactly how managers may be motivated to manage in the hobbies of company investors.

Suggested points to consider;


Managers, just like investors, are assumed to get rational, that is, to act inside their own needs.


The moral threat problem. Inside our context, this kind of arises since manager hard work in running the organization cannot be noticed by exterior investors. Therefore, the passions of rational managers discord with the hobbies of traders, since the director may avoid on hard work at investors' expense. The question then is, how are these claims conflict solved so that shareholders have affordable trust that the manager is working away at their part.


A manager who have shirks in effort may possibly cover up by managing revenue so as to hide or wait the effects of his or her shirking about firm success This illegally increases the manager's reputation and compensation beyond what he deserves. Notion of an efficient agreement. Firms get into many deals, in particular, personal debt contracts with lenders and compensation contracts with managers. By basing these agreements on accounting information, the manager's attraction to act simply in his/her own hobbies can be manipulated. However , legal agreements can be expensive to the company (covenants indebted contracts, reimbursement paid to managers). A powerful contract motivates the manager to act upon investors' best interests at lowest cost to the firm.


Business governance. Efficient contracting is an important component of corporate governance.


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Scott, Economical Accounting Theory, 7th Model

2 .

Instructor's Solutions Manual

Chapter 8

What Accounting Policies Support Efficient Contracting?

Contract theory gives considerable attention to lenders to the organization, since they are important sources of capital, and since financial debt contracts usually depend for some reason on accounting variables. To understand accounting policies desired by simply debtholders, the real key to realize is definitely their compensation asymmetry. Debtholders do not discuss directly if firm earnings increases, but stand to lose if success decreases. From this, it follows naturally that debtholders prefer accounting guidelines that are trustworthy and (conditionally) conservative. That they reward organizations using this kind of policies with lower rates of interest. The most efficient debt agreement balances the low interest rate while using expected costs imposed by the debt covenants.

With respect to investors, reliable and conservative accounting policies help to make it harder for the manager to record...