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Figure 8-9 Pinnacle Manufacturing Financial Statements Pinnacle Manufacturing Company Income Statement For the Year ended December 31 2009...

One of the partners of the CPA firm you work for has engaged a new audit client, Pinnacle Manufacturing, for the year ended December 31, 2009. Pinnacle is a medium-sized corporation, with its headquarters located in Detroit, Michigan. The company is made up of three divisions. The first division, Welburn, has been in existence for 35 years and creates powerful diesel engines for boats, trucks, and commercial farming equipment. The second division, Solar-Electro, was recently acquired from a high-tech manufacturing firm based out of Dallas, Texas. Solar-Electro produces state-of-the-art, solar-powered engines. The solar-powered engine market is relatively new, and Pinnacle’s top management believes that the Solar-Electro division will be extremely profitable in the future as the focus on global climate change continues and when highly anticipated EPA regulations make solar-powered engines mandatory for certain public transportation vehicles. Finally, the third division, Machine-Tech, engages in a wide variety of machine service and repair operations. This division, also new to Pinnacle, is currently in its second year of operations. Pinnacle’s board of directors has recently considered selling the Machine-Tech division in order to focus more on core operations—engine manufacturing. However, before any sale will be made, the board has agreed to evaluate this year’s operating results. Excellent operating results may have the effect of keeping the division a part of Pinnacle for the next few years. The vice president for Machine-Tech is committed to making it profitable. The purpose of Part I is to perform preliminary analytical procedures. You have been asked to focus your attention on two purposes of analytical procedures: assess going concern and indicate where there is an increased likelihood of misstatements.
a. Calculate at least five ratios that are useful to assess going concern using Pinnacle’s financial statements, which are included in Figure 8-9. Document the ratios in a format similar to the following:





Current ratio

b. Based on your calculations, assess the likelihood (high, medium, or low) that Pinnacle is likely to fail financially in the next 12 months.
c. Go to the Pinnacle link on the textbook Web site ( and open the Pinnacle income statement, which is located in the Pinnacle Income Statement worksheet of the Pinnacle_Financials Excel file. Use the income statement information to prepare a common-size income statement for all three years. See Figure 8-7 (p. 229) for an example. Use the information to identify accounts for which you believe there is a concern about material misstatements. Use a format similar to the following:
Account Balance

Estimate of $ Amount of Potential Misstatement

d. Use the three divisional income statements in the Pinnacle_Financials Excel file on the Web site to prepare a common-size income statement for each of the three divisions for all three years. Each division’s income statement is in a separate worksheet in the Excel file. Use the information to identify accounts for which you believe there is a concern about material misstatements. Use a format similar to the one in requirement c.
e. Explain whether you believe the information in requirement c or d provides the most useful data for evaluating the potential for misstatements. Explain why.
f. Your aging analysis of accounts receivable and discussions with management indicate that collections of accounts receivable have been somewhat slower than in the previous year. Evaluate whether or not you believe the allowance for uncollectible accounts is fairly valued. If you believe the account is misstated, calculate the potential misstatement.
Figure 8-9 Pinnacle Manufacturing Financial Statements Pinnacle Manufacturing Company Income Statement For the Year ended December 31 2009 2008 2007 Net Sales $149,245,176 $137,579,664 $125,814,272 Cost of goods sold 104,807,966 96,595,908 88,685,361 Gross Profit 44,437,210 40,983,756 37,128,911 Operating expenses 38,265,708 34,985,293 32,383,572 Income from operations 6,171,502 5,998,463 4,745,339 Other revenues and gains - - - Other expenses and losses 1,897,346 2,128,905 2,085,177 Income before income tax 4,274,156 3,869,558 2,660,162 Income tax 1,013,745 1,399,001 1,166,553 Net income for the year 3,260,411 2,470,557 1,493,609 Earnings per share 3.26 2.47 1.49 Pinnacle Manufacturing Company Balance Sheet As of December 31 Assets 2009 2008 2007 Current Assets Cash and Cash Equivalents $6,714,156 $6,369,431 $7,014,387 Net Receivables 9,601,883 7,495,528 6,901,225 Inventory 28,031,323 22,206,259 21,975,220 Other Current Assets 149,807 124,527 114,558 Total Current Assets 44,497,169 36,195,745 36,005,390 Property, Plant and Equipment 58,489,606 53,596,113 50,668,463 Total Assets $102,986,775 $89,791,858 $86,673,853 Liabilities Current Liabilities Accounts Payable $11,277,988 $8,200,059 $6,466,412 Short/Current Long Term Debt 12,935,495 7,868,407 8,411,017 Other Current Liabilities 1,712,675 1,536,835 1,463,088 Total Current Liabilities 25,926,158 17,605,301 16,340,517 Long Term Debt 21,234,861 19,427,831 19,460,800 Total Liabilities 47,161,019 37,033,132 35,801,317 Stockholders' Equity Common Stock 1,000,000 1,000,000 1,000,000 Additional paid-in capital 13,667,517 13,667,517 13,667,517 Retained Earnings 41,158,239 38,091,209 36,205,019 Total Stockholders' Equity 55,825,756 52,758,726 50,872,536 Total Liabilities & Stockholders' Equity $102,986,775 $89,791,858 $86,673,853
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Pinnacle Manufacturing Company Balance Sheet - All Divisions As of December 31 2009 2008 2007 ASSETS Dollar Value Dollar Value Dollar Value CURRENT ASSETS Cash and cash equivalents $6,714,156 $6,369,431 $7,014,387 Accounts receivable: Trade 10,300,466 8,194,111 7,582,803 Less: Allowance for bad debts (698,583) (698,583) (681,578) Inventory 28,031,323 22,206,259 21,975,220 Prepaid expenses 103,549 92,481 89,261 Deposits 46,258 32,046 25,297 Total current assets 44,497,169 36,195,745 36,005,390 PROPERTY, PLANT, AND EQUIPMENT Land 10,793,681 10,793,681 4,584,363 Automobiles 249,950 206,964 206,964 Accum. depreciation: Automobiles (186,207) (156,726) (115,330) Office equipment 5,161,773 4,920,966 4,659,634 Accum.depreciation: Office equipment (2,782,971) (2,006,947) (1,331,164) Manufacturing equipment 13,075,454 10,278,700 9,563,000 Accum. depreciation: Manufacturing equipment (3,118,820) (2,570,611) (2,232,843) Manufacturing building 38,616,063 32,072,816 32,072,816 Accum. depreciation: Manufacturing building (10,426,337) (8,018,204) (6,949,110) Office building 12,458,224 12,235,566 12,235,566 Accum.depreciation: Office building (5,351,204) (4,160,092) (2,025,433) Total property, plant, and equipment 58,489,606 53,596,113 50,668,463 TOTAL ASSETS $102,986,775 $89,791,858 $86,673,853 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note payable: Bank $9,802,525 $7,835,437 $8,378,047 Accounts payable: Trade 11,277,988 8,200,059 6,466,412 Current portion of long-term debt 3,132,970 32,970 32,970 Accrued payroll and withholding taxes 1,316,757 1,111,541 1,095,991 Accrued interest 189,731 156,545 138,478 Federal income taxes payable 206,187 268,749 228,619 Total current liabilities 25,926,158 17,605,301 16,340,517 LONG-TERM DEBT 21,234,861 19,427,831 19,460,800 STOCKHOLDERS' EQUITY Common stock: $1 par value Authorized: 1,500,000 shares Issued and outstanding: 1,000,000 shares 1,000,000 1,000,000 1,000,000 Additional paid-in capital 13,667,517 13,667,517 13,667,517 Retained earnings 41,158,239 38,091,209 36,205,019 Total stockholders' equity 55,825,756 52,758,726 50,872,536 - - TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $102,986,775 $89,791,858 $86,673,853
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