Baseline Corporation Was Formed Two Years Ago to Manufacture Fitness

question 100

Essay

Baseline Corporation was formed two years ago to manufacture fitness equipment.It has been profitable and is growing rapidly.It currently has 150 stockholders and 90 employees; most of the employees own at least a few shares of Baseline's stock.The company has received financing from two banks.It will sell additional shares of stock within the next three months and will also seek additional loans and hire new employees to support its continued growth.
Requirements:
1.Explain who relies on the information in financial statements prepared by Baseline Corporation.
2.Why is compliance with generally accepted accounting principles and accuracy in accounting important for Baseline?
A new accountant who tried to prepare Baseline's financial statements at the end of the current year made several errors.For each of the following items,indicate how the income statement and balance sheet are affected by the error and the nature of the effect.(For example,an error might cause revenues and net income on the income statement and retained earnings and assets on the balance sheet to be overstated).Ignore the effects of income taxes.
The company had sales for cash of $3,000,000.It also had sales on account of $1,800,000 that had been collected by the end of the year,and sales on account of $200,000 that are expected to be collected early the following year.The accountant reported total sales revenue of $4,800,000.
3.The company had total inventories of $600,000 at the end of the year.Of this amount,inventory reported at $30,000 was obsolete and will have to be scrapped.The balance sheet prepared by the accountant showed total inventories of $600,000.
The company has a bank loan for which interest expense during the year of $10,000 will be paid early in January of the next year.The accountant recorded neither the interest expense nor the interest payable.
An insurance policy was listed as an asset of $6,000 at the beginning of the year.The entire amount of the policy was for the current year and the policy has expired.The accountant took no action to recognize the expiration of the policy.

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