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This book grew out of a series of lecture notes on financial accounting theory for the Certified General Accountants' Association of Canada. Financial Accounting Theory is designed for upperlevel undergraduate accounting majors or graduate business students who already have a thorough grounding in accounting practice and basic economic and financial theory. It serves this purpose well.

While containing much information on accounting theory, the book is not designed as a "cookbook" that instructors should rigidly follow. Rather, it should be used as a starting point from which the instructor can emphasize particular points. As such, the book will accommodate a wide variety of research interests and teaching styles.

According to Scott, the accounting system is meant to control two distinct types of information asymmetry: adverse selection and moral hazard. Controlling adverse selection requires a decision usefulness approach that emphasizes fair value accounting numbers that often fluctuate. Unfortunately, controlling moral hazard requires that income figures be highly correlated with management effort, which argues for the use of "hard numbers." Understanding how the accounting system addresses these somewhat conflicting objectives is the goal of Scott's book.

The book contains four basic sections. Scott first outlines what accounting would look like under ideal circumstances (i.e., if neither adverse selection nor moral hazard problems existed). He then introduces adverse selection and the means to address it, where he discusses the decisionusefulness approach, efficient financial mark...