September 13, 2010

We went through the following topics today:

• introduction to the course and its logistics, the assessment structure, criteria for the grading of the presentation, and the nature of the final examination for this course,
• reviewed chapter 1 of the textbok for an introduction to this course,
• adverse selection problem on the information to use,
• moral hazard problem exists because the efforts cannot be seen.

September 20, 2010

We worked on the following topics today:

• a quick guide on how to read and understand research papers,
• review of Chapter 1 material from last week,
• introduction to the ideal certain and ideal uncertain concepts,
• prepared financial statements for a company in ideal certain condition with dividend payments,
• discussed financial statements changes if under ideal uncertain condition,
• compared the difference in profit recognition under current value and historical cost based accounting, and
• discussed why some industry have a propensity to use current value accounting for their assets than others.

September 27, 2010

We did the following topics today:

• review of chapters 1 and 2,
• review of current value accounting using two practice questions (one question from last week and Chapter 2 Question 15),
• introduced prior and posterior prob from chapter 3,
• decision making using prior probabilities and the utility function,
• decision making using posterior probabilities and the utility function,
• practice of calculating posterior probabilities and utility (Chapter 3 Question 11), and
• assignment of our Writing Assignment #1 due October 11, 2010.

October 11, 2010

The following topics were discussed today:

• review of Chapter 2 Question and Chapter 3 Question which we went through last week,
• in Chapter 2 Question 10, the $10 difference in net income calculated throught 10% of equity and net income minus expenses is due to the amortization of the bonds issued,
• went through the calculation of the homework assignment Chapter 2 Question and Chapter 3 Question ,
• two casual examples on updating of subjective probabilities after new information is received, and
• Chapter 4 efficient securities market.

• review of Chapter 2 Question 18 and Chapter 3 Question 16 from last week,
• did Chapter 3 Question 15 in class,
• went through what the research papers are trying to find out and how they narrow down the answer and exclude other possible explanations,
• went through the first three research papers that we will go through in class briefly on what the researcher is trying to find out,
• information approach in Chapter 5,
• decision theory model in Chapter 5,
• the effects of classifying expenses as unusual or extraordinary and their effects on current and future profits,
• information as public goods and the cost involved, and
• went through two written questions Chapter 2 Question 15 Part (b) and (c) and Chapter 3 Question 14.

• presentation #1 by the Group Bravehearts on the Ball & Brown paper with Q&A session,
• more detailed review of the writing of the content of the Ball & Brown paper,
• the research finding of the Ball & Brown paper, and
• findings of subsequent research based on ERC in Chapter 5.

• written questions on ERC as writing practice,
• presentation #1.5 on the information asymmetry research paper,
• the reason for the use of measurement approach for financial reporting,
• the market inefficiency reason,
• the behavior finance reason,
• prospect theory,
• some details of some research finding of market inefficiencies.

• a review of our materials so far,
• presentation #2 on the prediction of stock price using accounting and other information,
• review of CAPM, cost of capital, dividend discount model,
• clean surplus theory,
• unbiased versus biased accounting and the implication on the value of goodwill,
• use of clean surplus theory to estmate firm value,
• legal liabilities reasons for using current values, and
• conditional versus unconditional convervatism.

• presentation 3 and 4 on positive accounting theory, and
• discussion of ESO on accounting policy decisions.

• positive accounting theory,
• its assumptions,
• the three PAT hypotheses being tested,
• the opportunistic and the efficient contracting versions of PAT,
• introduction to prisoner's dilemma and game theory, and
• the nature of the agency contract between manager and shareholders and manager and debtholders.

• presentation 5 on the effectiveness of incentive plan on performance,
• the calculation of utilities and returns to managers and shareholders,
• the various ways shareholders can set up the incentive system from straight salary to rental to managers to performance based compensation,
• the calculation of the optimal level of performance based compensation so that managers have incentive to perform, and
• the managers' information advantage and the revelation principle.

• presentation 6 on earnings management research paper,
• Chapter 10 executive compensation, and
• Chapter 11 earnings management.

• presentation 7 on Chinese GAAP versus IAS,
• presentation 8 on effects of adapting IAS,
• final examination review,
• review of what was taught in the course and in each chapter,
• the sample answer to the five practice questions that I have posted above, and
• Chapter 12 and 13 on setting accounting standards.

Lecture 1

Introduction: Overview of financial accounting theory, Reading: Scott Chapter 1

September 13, 2010

[Download: introductory slides, scott chapter 1 slides]

Lecture 2

Accounting under ideal conditions, Reading: Scott Chapter 2

September 20, 2010

[Download: lecture 2 slides, revenue recognition and current value accounting pages]

Lecture 3

The decision usefulness approach to financial reporting, Reading: Scott Chapter 3

September 27, 2010

[Download: lecture 3 slides, Chapter 2 #15, Chapter 3 #11]

Writing Assignment #1: Chapter 2 Question 18, Chapter 3 Question 16, review Chapter 3 Question 12

Lecture 4

Efficient securities markets, Reading: Scott Chapter 4

October 11, 2010

[Download: lecture 4 slides]

Writing Assignment #1 Due [Chapter 2 Question 18 answer key, Chapter 3 Question 16 answer key]

Lecture 5

The information approach to decision usefulness, Reading: Scott Chapter 5

October 18, 2010

[Download: lecture 5 slides]

Lecture 6

The information approach to decision usefulness, Reading: Scott Chapter 5

October 25, 2010

Presentation 1: Ball & Brown (1968) “An Empirical Evaluation of Accounting Income Numbers” by Group Bravehearts.

Lecture 7

The measurement approach to decision usefulness, Reading: Scott Chapter 6

November 1, 2010

Presentation 1.5: Krishnaswami & Subramaniam (1999) “Information Asymmetry, Valuation, and the Corporate Spin-off Decision” by No Name Group #7.

Lecture 8

The measurement approach to decision usefulness, Reading: Scott Chapter 6

November 8, 2010

Presentation 2: Frankel & Lee (1998) “Accounting Valuation, Market Expectation, and Cross-Sectional Stock Returns” by No Name Group #2.

Lecture 9

Economic consequences and positive accounting, Reading: Scott Chapter 8

November 15, 2010

Presentation 3: Healy (1985) “The Effect of Bonus Schemes on Accounting Decisions” by No Name Group #3.

Presentation 4 : Dichev & Skinner (2002) “Large-Sample Evidence on the Debt Covenant Hypothesis” by Group Ares.

Lecture 10

An analysis of conflict, Reading: Scott Chapter 9

November 22, 2010

[Download: lecture 10 slides]

Lecture 11

Executive compensation, Reading: Scott Chapter 10

November 29, 2010

Presentation 5 : Matsumura & Shin (2006) “An Empirical Analysis of an Incentive Plan with Relative Performance Measures: Evidence from a Postal Service” by Group Turnado.

Lecture 12

Earnings management, Reading: Scott Chapter 11

December 6, 2010

Presentation 6 : Burgstahler & Dichev (1997) “Earnings Management to Avoid Earnings Decreases and Losses” by Group Vertex.

Lecture 13

Standard setting, Reading: Scott Chapter 12 and 13

December 13, 2010

Presentation 7 : Chen, Gul, Su (1999) “A Comparison of Reported Earnings under Chinese GAAP vs. IAS: Evidence from the Shanghai Stock Exchange” by Group Coral .

Presentation 8 : Barth, Landsman, Lang (2008) “International Accounting Standards and Accounting Quality” by Group Potato & Tomato.

Lecture 14

Final revision

December 20, 2010

[Download: presentation 1 summary report, presentation 1.5 summary report, presentation 2 summary report, presentation 3 summary report, presentation 4 summary report, presentation 5 summary report, presentation 6 summary report, presentation 7 report, presentation 8 report]

January 3, 2010

Final Examination