Chapter 2 questions
(1) Why is Manulife’s share price ($13.96) less than its embedded value per share ($20.02)?
(2) Critically analyze Husky Energy Inc.’s reserve recognition accounting (RRA). Is it relevant?
Is it reliable?
As a manager, do you like to report such information?
As an investor, do you like oil and gas companies to provide such information? Why do regulators require RRA to be reported as supplementary information?
(3) The author states that “under the real-world conditions in which accounting operates, net income does not exist as a well-defined economic construct.” How do you understand this?
Chapter 3 questions
(1) Referring to Table 3.2 in the textbook, prepare a similar table for a perfect, or fully informative information system, that is, an information system which perfectly reveals the true state of nature. Do the same for a non-informative information system, that is, one that reveals nothing about the true state. Use the probabilities from the two tables you have prepared to revise state probabilities by means of Bayes’ theorem, using the prior probabilities and GN message given in textbook Example 3.1. Comment on the results.
(2) Explain the meaning of the main diagonal probabilities in an information system.
(3) Do professional accounting bodies accept the rational decision theory? Explain
Chapter 4 questions
(1) What does securities market efficiency (semi-strong form) mean? What are the characteristics of securities market efficiency?
(2) What are the implications of securities market efficiency for financial reporting according to Beaver (1973)?
(3) What is the role of financial reporting in an efficient market? Use Figure 4.2 to guide your argument/analysis.
Chapter 5 questions
(1) Refer to the separation of market-wide and firm-specific security returns as shown in Figure 5.2. What factors could reduce the accuracy of the estimate of abnormal returns?
(2) Why is Ball and Brown (1968) an important accounting study? What is their main conclusion?
(3) Why is earnings response coefficient (ERC) an important factor for standard setters to consider? Can standard setters determine the “best” accounting policy completely based on ERC? Why?
Chapter 6 questions
(1) Why are accounting standards setters moving towards a measurement approach to decision usefulness which suggests more value-relevant information in the financial statements proper, when efficient securities market theory implies that financial statement notes or other disclosure would be just as useful?
The post-announcement drift and accruals anomaly are among the strongest evidence questioning investor rationality and market efficiency. (2) Explain in your own words what “post-announcement drift” is.
(3) Explain in your own words why the market response to accruals, as documented by Sloan (1996), is an anomaly for securities market efficiency.
Chapter 7 questions
(1) List four long standing measurement examples and explain why they reflect the measurement approach.
(2) How are financial assets accounted for under IFRS vs. US GAAP? What are the similarities and differences?
(3) Hedge accounting divides hedges into two basic groups. What are the two groups and what are the basic principles of hedge accounting for them
Chapter 8 questions
(1) According to the efficient contracting theory, lenders demand conservative accounting information because they face payoff asymmetry. How to understand this?
(2) Textbook Problem 10 regarding expensing employee stock options. (Skip question a.)
(3) In Table 8.1 showing utility payoffs in a single-period non-cooperative game, what is the cooperative solution? What is the Nash equilibrium (most likely outcome) for a single-period game? How about in a multi-period game? Why?
Chapter 9 questions
(1) Firm owners (shareholders) hire managers to manage...
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