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FAT Topics for Midterm.docx

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Keith Whelan

Conservative accounting  Key idea is that losses are recognized as they happen (losses from impairment, lower of cost and market value, ect.) but gains are only recognized when they are realized (only when assent is sold ect) Rules Based vs Principles Accounting Standards  Idea is that rules are easy to circumvent and justify to the person whereas a concept that the financial statements must not be misleading can not be circumvented as easily. Complexity of Info  Not everyone will react to the same to information presented in the same format  Should reflect real underlying values of securities and managers  Be aware of impact of financial reporting has on investors decisions Role of Accounting Research  Improves understanding on how reporting affects investor decisions  Creates theories to better predict the market’s behaviour  Understand managers interests and corp governance issues Importance of Information Asymmetry  Adverse Selection o When one party in a transaction has an info advantage over the other  Moral Hazard o Fundamental Problem of FAT Regulation as a Reaction Relevance of FAT Present Value Model Under Certainty Present Value Model Under Uncertainty Reserve Recognition Accounting Historical Cost Accounting Non-Existence of True Net Income Decision Usefulness Approach Single Person Decision Theory Risk Adverse Investor Rational Principle of Portfolio Diversification The Optimal Investment Decision Portfolio Risk Efficient Se
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