Gaijin Corporation was formed two years ago to manufacture tractor parts. It has been profitable and is growing rapidly. It currently has 150 shareholders and 90 employees; most of the employees own at least a few shares of Gaijin'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.
Required:
a) Explain who relies on the information in financial statements prepared by Gaijin Corporation.
b) Why is compliance with generally accepted accounting principles (GAAP) important for Gaijin?
c) A new accountant who tried to prepare Gaijin'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.)
- 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 in the following year. The accountant reported total sales revenue of $4,800,000.
- The company has a bank loan for which interest expense during the year of $250,000 will be paid early in January of the next year. The accountant recorded neither the interest expense nor the related liability.
- An insurance policy was listed as an asset of $60,000 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.