Baseline Corporation was formed two years ago to manufacture fitness equipment. It has been profitable and is growing r

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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 common stock. The company has
received financing from two banks. It will sell additional shares of common stock within the next
three months and will also seek additional loans and hire new employees to support its continued
growth.

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?
Answer:
1. Various external decision makers rely on the financial statements of a corporation. For
Baseline, these decision makers include the bankers who have loaned money to the company.
These creditors would monitor the performance of Baseline to estimate the likelihood that
Baseline will be able to repay existing loans when they come due, and to decide whether to make
additional loans to Baseline in the future. Current stockholders would want to review Baseline's
financial statements to decide whether they wanted to continue to own Baseline's stock. Potential
stockholders and creditors would use the information to decide whether they wanted to purchase
Baseline's common stock or loan money to the company in the future. Supply chain managers
analyze the financial statements to determine whether suppliers have resources to meet demand
and to invest in future developments that may be needed by Baseline Corporation. Baseline
anticipates hiring additional workers in the near future; potential employees might use
information in the financial statements to evaluate the company as an employer.
2. Compliance with generally accepted accounting principles and accuracy in accounting are
important to Baseline because they are important to the people in part (1) above who rely on the
information in Baseline's financial statements. To maintain the credibility of its financial
statements, Baseline must comply with GAAP in applying the content and measurement rules for
financial statements and must ensure the accuracy of its accounting records in doing so.
Difficulty: 2 Medium
Topic: Accounting system-Information users
Learning Objective: 01-02 Identify the role of generally accepted accounting principles (GAAP)
in determining financial statement content and how companies ensure the accuracy of their
financial statements.