1. The relationship between accounting information and investment (15 points): a. Define information asymmetry and the two main consequences.

b. Describe the role of accounting information in the capital markets framework, and how it can reduce information asymmetry. Lastly, describe why it cannot completely eliminate the primary problems of information asymmetry.

c. Identify information intermediaries, describe their role in the capital markets, and how they fulfill their role.

d. Why do information intermediaries sometimes fail to fulfill their role in the capital markets?

2.Transparency (15 points):

a. Define noise and distortion, as related to accounting information. Identify and briefly describe the potential sources of noise and distortion in accounting information.

b. Is GAAP obsolete? Why or why not? What can accountants/managers in organizations do if they feel GAAP does not allow them to provide adequate, transparent information? What are the pitfalls or problems managers must remember when dealing with situations where GAAP does not represent their business?