Financial Accounting Theory, Third Edition

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9780130655776: Financial Accounting Theory, Third Edition
From the Back Cover:

As you head into your professional career in Accounting, it will be important for you to understand both the relevant theories and their importance for financial reporting. This book aims to provide a critical evaluation of financial reporting practice and the social roles of financial reporting. You will also learn how to evaluate financial reporting from the standpoints of both financial accountants and management.

Written in a very friendly style with clear explanations, the text provides a thorough presentation of financial accounting theories, illustrated with plenty of examples that will place the theories in context. The supporting problem material reinforces the theories and will let you practise the application of these theories.

You will also find research articles referenced, described, and explained to support the text discussion. These provide a great source of additional readings for those who wish to dig more deeply into certain topics.

William Scott has updated the new edition of this best-selling text throughout in response to the recommendations of many in the field. Some of the revisions included in this edition are:

  • updated coverage of relevant research articles
  • addition of new relevant problem material
  • addition of some historical perspective on financial accounting
  • new coverage of behavioural finance from an accounting perspective
  • new coverage of accounting for intangibles
  • expanded coverage of earnings management

Excerpt. © Reprinted by permission. All rights reserved.:

This book began as a series of lesson notes for a financial accounting theory course of the Certified General Accountants' Association of Canada. The lesson notes grew out of a conviction that we have learned a great deal about the role of financial accounting and reporting in our society from securities markets and information economics-based research conducted over many years, and that financial accounting theory comes into its own when we formally recognize the information asymmetries that pervade business relationships.

The challenge was to organize this large body of research into a unifying framework and to explain it in such a manner that professionally oriented students would both understand and accept it as relevant to the financial accounting environment and ultimately to their own professional careers.

This book seems to have achieved its goals. In addition to being part of the CGA program of professional studies for a number of years, it has been extensively class-tested in financial accounting theory courses at the University of Waterloo, Queen's University, and several other universities, both at the senior undergraduate and professional Master's levels. I am encouraged by the fact that, by and large, the students comprehend the material and, indeed, are likely to object if the instructor follows it too closely in class. This frees up class time to expand coverage of areas of interest to individual instructors and/or to motivate particular topics by means of articles from the financial press and professional and academic literature.

Despite its theoretical orientation, the book does not ignore the institutional structure of financial accounting and standard setting. It features considerable coverage of financial accounting standards. Many important standards, such as reserve .recognition accounting, management discussion and analysis, employee stock options, post-retirement benefits, financial instruments, marking-to-market and ceiling tests, and hedge accounting are described and critically evaluated. The structure of standard-setting bodies is also described, and the role of structure in helping to engineer the consent necessary for a successful standard is evaluated. While the text discussion concentrates on relating standards to the theoretical framework of the book, the coverage provides students with the occasion to learn the contents of the standards themselves.

I have also used this material in Ph.D. seminars. Here, I concentrate on the research articles that underlie the text discussion. Nevertheless, the students appreciate the framework of the book as a way of putting specific research papers into perspective. Indeed, the book proceeds in large part by selecting important research papers for description and commentary, and provides extensive references to other research papers underlying the text discussion. Assignment of the research papers themselves could be especially useful for instructors who wish to dig into methodological issues that, with some exceptions, are downplayed in the book itself.

In this third Canadian edition, I have added references and discussion of recent research articles, updated the coverage of financial accounting standards of Canada and the United States, and generally revised the exposition as a result of experience in teaching from earlier editions. Major changes include a brief outline of the historical development of financial accounting in Chapter 1, an expanded discussion of the possibility of securities market inefficiency in Chapter 6 including behavioural underpinnings and recent analytical modelling, further expansion of the discussion of clean surplus accounting in Chapter 6, and updating of the structure of international accounting standard setting in Chapter 13. In addition, I have changed the tone somewhat of the coverage of earnings management in Chapter 11. In previous editions, it was argued that earnings management is primarily "good," since it can reveal management's inside information about fixture earning power. This point of view is retained, but modified to give greater recognition to the possibility that earnings management can be "bad," that is, intended to manipulate investors' perceptions of the firm so as to possibly increase share price. This latter possibility becomes of greater concern once it is recognized that securities markets may not be as fully efficient as previously believed.

Despite these changes, the book largely retains the structure, organization and markets-oriented outlook of the earlier editions. In particular, it retains the view that investor rationality and efficient securities market theory are still the most useful theories to guide accountants in their disclosure decisions, and that the motivation of responsible managerial performance is an equally important role of financial reporting as the providing of useful information to investors.


The Instructor's Manual includes suggested solutions to the end-of-chapter Questions and Problems, including a number of new problems added in this edition. It also discusses the Learning Objectives for each chapter and suggests teaching approaches that could be used. In addition, it comments on other issues for consideration, suggests supplementary references, and contains some additional problem material. In addition to this material, the third edition Instructor's Manual adds PowerPoint slides to the Instructor's Manual.

The Instructor's Manual for the third edition is available in hard copy with all the solutions and PowerPoint Presentations also included on a CD ROM. electronic format. I intend to use this flexibility to add discussions of relevant new topics and interesting new problem material as they arise.

For students who wish to explore the Internet as a dynamic source for up-to-the-minute information, Pearson Education Canada is proud to present Accounting Central. This site contains numerous features designed to help students and instructors with all their accounting courses. You will find Accounting Central at The features on the site include links to Pearson Education Canada's accounting catalogue, drop-down menus for all Canadian accounting, Companion Websites and text-resource sites where you can find text-specific information, the Accountant's Toolbox containing descriptions of and links to resource sites for accounting, Virtual Tours of new and revised titles in accounting and much more!

We are constantly updating and adding to this site, so check back often!

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Scott, William R.
ISBN 10: 0130655775 ISBN 13: 9780130655776
New Quantity Available: 1
Castle Rock
(Pittsford, NY, U.S.A.)

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