COMMERCE 4AF3 Chapter 3: Chapter 3 - Decision usefulness Approach to Financial Reporting

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Chapter 3 - decision usefulness approach to financial. Users of financial statements are called constituencies of accounting. Rational investor is the user of the financial information, the rational investor"s decision is improved when financial statement information is tailored to its specific needs. Investor"s buy and sell decision interact to form the market price of a security. The rational decision theory model does not claim to capture the decision process of an individual investor but claims to capture the decision of the average investor. Claims that investor decision are, on average, rational. Rational investor makes decisions to maximize his/her expected utility. Role of the rational decision theory model in financial reporting. Helps us understand how financial statement information helps the average investor make investment decisions the average investor make investment decisions. Thereby, helping accountant provide useful information for investment decisions (usefulness) Devise used to restate probabilities upon receipt of new evidence. What are probabilities of states of nature (prior probabilities)

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