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:
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 (www.prenhall.com/arens) 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:
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.
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