Term

Definition
Current investors, potential/future investors, management, creditors, govt. 


Term
What depends on the user? 

Definition


Term
Role of financial accounting: 

Definition
supply user with information—accountant’s job is to know what the investor needs 


Term

Definition
Investor supplies the information to the accountant (contrasts the role of financial accounting) 


Term
Rationale Decision Theory 

Definition
Captures the “average” investor’s behavior—not focused on outliers Logically what should happen “reasonable” 


Term
How does understanding rational behavior help an accountant? 

Definition
Helps an accountant to provide the information that investor’s need 


Term
What is the objective of the Single Person Decision Theory? 

Definition
Objective is to maximize the expected utility 


Term
What are the two types of investors? 

Definition
1. Risk Averse Investors 2. Rational Investors 


Term
Under the Single Person Decision Theory, are probabilities objective or subjective? 

Definition


Term
What is Risk Aversion under the Single Person Decision Theory? 

Definition
Risk increases as the stakes increase 


Term
How is risk measured under the Single Person Decision Theory? 

Definition
 Diminishing Returns (utility): As we increase utility, eventually payoff diminishes (plateaus)  Square roots, logs, natural logs 


Term
If there is no risk under the Single Person Decision Theory what happens? 

Definition


Term
Conditional Probability Table: 

Definition
Establishes the probabilities of several outcomes If a probability is below 50%, no bueno. We must use Bayes Theorem to help use combine probabilities to give us the outcome we would like. 


Term
How do we use Bayes Theorem to get the probabilities we "want"? 

Definition
Combine prior probabilities with information systems to get posterior probabilities 


Term
How do we test quality of financial statements? 

Definition
o Ratios o Variances o Actual vs. budgeted o Revisions & Restatements o Stock Price o Accruals – especially those based on estimations 


Term
Issues with Decision Theory 

Definition
Prior probabilities—are they accurate? Specifying payoffs Specifying utilities Information systems Conclusions States of nature 


Term
Easton & Zmijewski investigated what? 

Definition
Investigated the response of stock prices to accounting earnings announcement 


Term
If accounting information is "useful" what would happen? 

Definition
The stock price would react accordingly 


Term
How do we measure accounting information? 

Definition
Focus on earnings announcement & the returns after the announcement releasing information to the market  is the info good/bad? Compare the earnings announcement to analysts forecasts 


Term

Definition
= Abnormal stock price return 


Term

Definition


Term

Definition
discounted PV of expected dividends • Numerator: expected dividends • Denominator: Discount rate • Beta= Systematic risk • Greater firm risk→ greater beta → greater discount rate • Results in lower price & lower returns 


Term
Easton & Zmijewski determined ERC's vary..why is this? 

Definition
Greater ERC, greater revision Greater ERC, greater beta 


Term
Easton & Zmijewski determined that... 

Definition
Information systems are informative 


Term
The conceptual framework is based in part on what theory? 

Definition


Term
Useful information is ___ and ___ 

Definition
relevant and faithful in representation 


Term
How does the financial statement improve decision making? 

Definition
by refining posterior state probabilities 


Term
Does utility increase proportionally with payoffs? 

Definition
No, eventually they plateau/diminish 


Term

Definition
A guaranteed return that someone would accept, rather than taking a chance on a higher, but uncertain, return 

