1. The history of Financial Accounting Theory. Accounting has a long history. The first description of the double entry bookkeeping system appeared in 1494, authored by Luca Paciolo, an Italian Mathematician. Following 1494, the double entry system spread throughout Europe, and Paciolo’s work was translated into English in 1543. In the twentieth century, major developments in financial accounting shifted to the U.S. the introduction of a corporate income tax in the U.S. in 1909. The most noteworthy was the creation of the Securities and Exchange Commission (SEC) by the Securities Act of 1934, and so on.
2. Ethical behavior. By ethical behavior, we mean that accountants and auditors should “do the right thing.” There is a time dimension to ethical behavior. An accountant can act in his/her own self-interest and still behave ethically. This is accomplished by taking a longer-run view of the consequences of one’s actions.
3. The complexity of information in Financial Accounting and Reporting. One reason is that individuals are not unanimous in their reaction to it. Another reason is that it does more than affect individual decisions.
4. The role of accounting research. First, it’s to consider its effects on accounting practice. Second, it’s to improve our understanding of the accounting environment.
5. The importance of information asymmetry. There are two main types. The first type is adverse selection. The second type is moral hazard.
6. The fundamental problem of financial accounting theory is how to reconcile the different roles for accounting information.
7. Relevance of financial accounting theory to accounting practice. There are two main ways. First, the various theories and research underlying financial accounting are described and explained in plain language, and their relevance is demonstrated by means of numerous references to accounting practice. Second, to demonstrating relevance is through assignment problems.