ACCT 455 Lecture Notes - Lecture 3: Decision Theory, Decision Problem, Optimal Decision

• School: McGill University
• Department: Accounting
• Course: ACCT 455
• Professor: Ralph Cecere

Document Summary

Learning objectives: how risk-averse investors make rational investment decisions, how major accounting bodies have adopted this theory as a guide to prepare useful financial accounting information. Reduce discretionary expenditures such as research and advertising: use these posterior probabilities to calculate payoff and make decision (cid:4666)(cid:4667)(cid:4666)(cid:1833)|(cid:1834)(cid:4667) + (cid:4666)(cid:4667)(cid:4666)(cid:1833)|(cid:4667, understate bad debt expense accounting standards do not generate complete relevance and reliability (cid:4666)(cid:4667)(cid:4666)(cid:1833)|(cid:1834)(cid:4667) The role of information: information: evidence that has the potential to affect an individual"s decision, example: help decision maker to update subjective state probabilities and predict investment returns. Information exists because conditions are not ideal: one source of information: financial reporting, other sources press release. How is an information system informative: enable user to update prior probabilities. Information is of high quality, precise or transparent. Relate decision theory to the conceptual frameworks of standard-setting. Ethical issues related to the usefulness criterion: accountant/auditor: caught between demands of management and responsibility to investors (e. g. lenders)