Accounting: The Language of Business- Discussion Questions

Question

1: What types of people or organizations are interested in financial information about a firm, and why are they interested in this information?

2: What is the function of the Securities and Exchange Commission?

3: What are the three types of business entities, and how do they differ?

4: What groups consistently offer opinions about the proposed FASB statement?

5: What led to the passage of the Public Company Accounting Reform and Investor Protection Act of 2002?

Answer 1

1. What types of people or organizations are interested in financial information about a firm, and why are they interested in this information?

1. Investors – to evaluate profitability and make informed investment decisions.
2. Creditors/Lenders – to assess the firm’s ability to repay loans.
3. Management – to plan, control, and make strategic business decisions.
4. Government Agencies – to ensure tax compliance and regulatory reporting.
5. Employees and Unions – to gauge company stability and future prospects.
6. Customers and Suppliers – to evaluate long-term business relationships.
7. Analysts – to provide insight and recommendations to stakeholders.

2. What is the function of the Securities and Exchange Commission (SEC)?

The SEC is a U.S. government agency responsible for regulating the securities markets and protecting investors. Its main functions include:

1. Enforcing securities laws
2. Overseeing public company disclosures
3. Regulating stock exchanges and brokerage firms
4. Ensuring transparency and fairness in the financial markets

3. What are the three types of business entities, and how do they differ?

1. Sole Proprietorship – One owner; easy to form; owner has unlimited liability.
2. Partnership – Two or more owners; shared profits and liability; more complex than a sole proprietorship.
3. Corporation – Separate legal entity; owned by shareholders; limited liability; subject to more regulations and taxes.

4. What groups consistently offer opinions about the proposed FASB statement?

1. Accounting firms
2. Public companies and industry groups
3. Academics and educators
4. Government agencies (like the SEC)
5. Investors and analysts
6. Professional organizations (e.g., AICPA)

These groups provide feedback during public comment periods to help the FASB (Financial Accounting Standards Board) improve proposed accounting standards.

5. What led to the passage of the Public Company Accounting Reform and Investor Protection Act of 2002?

Commonly known as the Sarbanes-Oxley Act (SOX), it was passed in response to major corporate accounting scandals (e.g., Enron, WorldCom). These scandals revealed widespread fraudulent financial reporting, eroding public trust. SOX aimed to restore investor confidence by:

1. Increasing corporate accountability
2. Enhancing internal controls
3. Requiring greater transparency in financial reporting
4. Establishing the PCAOB (Public Company Accounting Oversight Board)