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Unformatted text preview: use of inherent risk. 4,520,902 100000 Large TM because account is large and requires extensive sampling to audit. Prepaid expenses Total current assets Property, plant and equipment, at cost 29,500 5000 Easy to audit at low cost. 8,218,100 12,945,255 100000 Small TM as a percent of account balance because most of balance is unchanged from prior year & audit of additions is relatively low cost. Less: accumulated depreciation (4,382,990) 50000 8,562,265 Goodwill Total assets Accounts payable 1,200,000 misstatement. See 9-36B. 20000 $17,980,365 $2,141,552 Fairly tight TM due to possible risk of Fairly tight TM due to possible risk of misstatement. See 9-36B. 70000 LargeTM because account is large and requires extensive sampling to audit. Bank loan payable 150,000 0 Easy to audit at low cost. Accrued liabilities 723,600 20000 Easy to audit at low cost. 1,200,000 40000 Fairly tight TM due to possible risk of Federal income taxes payable misstatement. See 9-35B. Current portion of long-term 0 Easy to audit at low cost. 960,000 0 Easy to audit at low cost. Common stock 1,250,000 0 Easy to audit at low cost. Additional paid-in capital 2,469,921 0 Easy to audit at low cost. Total current liabilities Long-term debt 240,000 4,455,152 Stockholders' equity: Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 8,845,292 NA 12,565,213 $17,980,365 $510,000 9-74 (1.5 x $340,000) 9-36 (continued) Stanton Enterprises Worksheet 9-36B Analysis of Financial Statements and Audit Planning Worksheet 12/31/2009 BALANCE SHEET Preliminary 12/31/09 % Audited 12/31/08 % % Change Cash $243,689 1.4 $133,981 1.1 81.9 Trade accounts receivable 3,544,009 19.7 2,224,921 17.7 59.3 (120,000) -0.7 (215,000) -1.7 -44.2 4,520,902 25.1 3,888,400 31.0 16.3 Allowance for uncollectible accounts Inventories Prepaid expenses Total current assets 29,500 0.2 24,700 0.2 19.4 8,218,100 45.7 6,057,002 48.3 35.7 Property, plant and equipment: At cost 12,945,255 72.0 9,922,534 79.1 30.5 Less, accumulated depreciation (4,382,990) -24.4 (3,775,911) -30.1 16.1 8,562,265 47.6 6,146,623 49.0 39.3 1,200,000 6.7 345,000 2.7 247.8 $17,980,365 100.0 $12,548,625 100.0 43.3 $2,141,552 11.9 $2,526,789 20.1 -15.2 150,000 0.8 0 0.0 -- Goodwill Accounts payable Bank loan payable Accrued liabilities Federal income taxes payable Current portion of long-term debt Total current liabilities Long-term debt 723,600 4.0 598,020 4.8 21.0 1,200,000 6.7 1,759,000 14.0 -31.8 240,000 1.3 240,000 1.9 0.0 4,455,152 24.8 5,123,809 40.8 -13.0 960,000 5.3 1,200,000 9.6 -20.0 Stockholder's equity: Common stock 1,250,000 7.0 1,000,000 8.0 25.0 Additional paid-in capital 2,469,921 13.7 1,333,801 10.6 85.2 8,845,292 12,565,213 49.2 69.9 3,891,015 6,224,816 31.0 49.6 127.3 101.9 $17,980,365 100.0 $12,548,625 100.0 43.3 Retained earnings 9-75 9-36 (continued) Stanton Enterprises Worksheet 9-36B, cont. COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS Preliminary 12/31/09 Sales % Audited 12/31/08 % % Change $43,994,931 100.0 $32,258,015 100.0 36.4 Cost of goods sold 24,197,212 55.0 19,032,229 59.0 27.1 Gross profit 19,797,719 45.0 13,225,786 41.0 49.7 10,592,221 24.1 8,900,432 27.6 19.0 Pension cost 1,117,845 2.5 865,030 2.7 29.2 Interest cost 83,376 0.2 104,220 0.3 -20.0 11,793,442 26.8 9,869,682 30.6 19.5 8,004,277 18.2 3,356,104 10.4 138.5 1,800,000 4.1 1,141,000 3.5 57.8 6,204,277 14.1 2,215,104 6.9 180.1 Selling, general and administrative expenses Income before taxes Income tax expense Net income Beginning retained earnings 3,891,015 10,095,292 2,675,911 4,891,015 Dividends declared (1,250,000) (1,000,000) Ending retained earnings $8,845,292 $3,891,015 SIGNIFICANT RATIOS Current ratio 1.84 1.18 Quick ratio 0.82 0.42 Cash ratio 0.05 0.03 Accounts receivable turnover 12.41 14.50 Days to collect 29.40 25.18 5.35 4.89 Days to sell 68.20 74.57 Days to convert to cash 97.60 99.75 Debt to equity ratio 0.43 1.02 Tangible net assets to equity 1.34 1.96 Inventory turnover Times interest earned 97.00 33.20 Efficiency ratio 2.62 2.64 Profit margin ratio 0.18 0.11 Profitability ratio 0.48 0.28 Return on total assets 0.45 0.27 Return on equity 0.64 0.54 Note: Some ratios are based on year-end balances, as 12-31-03 balances are not provided. 9-76 Integrated Case Application 9-37 PINNACLE MANUFACTURING―PART II a. Acceptable Audit Risk and Engagement Risk Issues: External users’ reliance on financial statements: 1. 2. The company is privately held, but there is a large amount of debt, therefore the financial statements will be used fairly extensively. Also, management is considering selling the Machine-Tech division, which has the potential to result in extensive use of the statements by the buyers. Item 4 in the planning phase indicates plans for additional debt financing. Likelihood of financial difficulties: 1. 2. 3. The solar power engine business revolves around constantly changing technology, thus making it inherently more risky than other businesses, with a better chance of subsequent bankruptcy....
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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