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f.Explain whether you believe the information in requirement d or e provides the most useful data for evaluating the potential for misstatements. Explain why.

g.Analyze the account balances for accounts receivable, inventory, and short/current long-term debt. Describe any observations about those accounts and discuss additional information you want to consider during the current year audit.

h. Based on your calculations, assess the likelihood (high, medium, or low) that Pinnacle is likely to fail financially in the next 12 months. (Arens 247)
Arens, Alvin A, Randal J Elder, and Mark Beasley. Auditing and Assurance Services, VitalSource for DeVry University, 14th Edition. Pearson Learning Solutions, 12/2012.
acct 444.xlsx

Pinnacle Manufacturing Company
Income Statement
For the Year ended December 31
2011
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Other revenues and gains
Other expenses and losses
Income before income tax
Income tax
Net income for the year
Earnings per share

$150,737,628
109,284,780
41,452,848
37,177,738
4,275,110

2,181,948
2,093,162
883,437
1,209,725
$1.21

% Change
101.45%
102.85%
97.93%
97.49%
101.87%
94.90%
110.32%
102.85%
116.50%
116.50%

2010
$148,586,037
106,255,499
42,330,538
38,133,969
4,196,569

2,299,217
1,897,352
858,941
1,038,411
$1.04

% Change
102.70%
104.18%
99.14%
102.40%
76.90%
95.88%
62.02%
64.03%
60.46%
60.46%

2009
$144,686,413
101,988,165
42,698,248
37,241,108
5,457,140

2,397,953
3,059,187
1,341,536
1,717,651
$1.72

Pinnacle Manufacturing Company
Balance Sheet
As of December 31
Assets
Current assets
Cash and cash equivalents
Net receivables
Inventory
Other current assets
Total current assets
Property, plant and equipment
Total assets

$7,721,279
13,042,165
32,236,021
172,278
53,171,743
62,263,047
$115,434,790

105.41%
151.30%
126.23%
120.30%
127.74%
101.02%
111.79%

$7,324,846
8,619,857
25,537,198
143,206
41,625,107
61,635,530
$103,260,637

90.81%
108.61%
101.05%
108.70%
100.53%
105.78%
103.60%

$8,066,545
7,936,409
25,271,503
131,742
41,406,199
58,268,732
$99,674,931

Liabilities
Current liabilities
Accounts payable
Short/current long-term debt
Other current liabilities
Total current liabilities
Long-term debt
Total liabilities

$12,969,686
15,375,819
2,067,643
30,413,148
24,420,090
54,833,238

137.09%
149.30%
116.99%
141.28%
109.30%
124.99%

$9,460,776
10,298,668
1,767,360
21,526,804
22,342,006
43,868,810

124.71%
106.47%
105.04%
113.65%
99.83%
106.16%

$7,586,374
9,672,670
1,682,551
18,941,595
22,379,920
41,321,515

1,000,000
15,717,645
43,883,907
60,601,552
$115,434,790

100.00%
100.00%
102.83%
102.04%
111.79%

1,000,000
15,717,645
42,674,182
59,391,827
$103,260,637

100.00%
100.00%
102.49%
101.78%
103.60%

1,000,000
15,717,645
41,635,771
58,353,416
$99,674,931

Stockholders equity
Common stock
Additional paid-in capital
Retained earnings
Total stockholders equity
Total liabilities & stockholders equity

A)
Account Balance
Net Sales
Cost of Goods Sold
Gross Profit
Accounts Payable
Total Assets

B)
Ratio
Current Ratio
Gross Profit Ratio
Net Income Ratio
Quick Ratio
Asset Turnover

2011

% Change

% Change
2010-2011
101.45%
102.85%
97.93%
137.09%
111.79%

2011
174.8%
27.5%
0.8%
68.8%
130.6%

2010

% Change
2009-2010
102.70%
104.18%
99.14%
124.71%
103.60%

2010
193.4%
28.5%
0.7%
74.7%
143.9%

2009
218.6%
29.5%
1.2%
85.2%
145.2%

% Change

2009

Pinnacle Manufacturing Company
Balance Sheet - All Divisions
As of December 31

ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable: Trade
Less: Allowance for bad debts
Inventory
Prepaid expenses
Deposits
Total current assets
PROPERTY, PLANT, AND EQUIPMENT
Land
Automobiles
Accum. depreciation: Automobiles
Office equipment
Accum.depreciation: Office equipment
Manufacturing equipment
Accum. depreciation: Manufacturing equipment
Manufacturing building
Accum. depreciation: Manufacturing building
Office building
Accum.depreciation: Office building
Total property, plant, and equipment
TOTAL ASSETS

2011
Dollar Value

2010
Dollar Value

2009
Dollar Value

$7,721,279
14,008,633
(966,468)
32,236,021
119,081
53,197
53,171,743

$7,324,846
9,586,325
(966,468)
25,537,198
106,353
36,853
41,625,107

$8,066,545
8,879,352
(942,943)
25,271,503
102,650
29,092
41,406,199

11,490,036
266,071
(198,218)
5,494,707
(2,962,472)
13,918,820
(3,319,983)
41,106,800
(11,098,836)
13,262,479
(5,696,357)
62,263,047
$115,434,790

11,490,036
220,313
(166,835)
5,238,368
(2,136,395)
11,543,824
(2,796,754)
38,056,625
(8,410,681)
13,025,447
(4,428,418)
61,635,530
$103,260,637

4,159,580
220,313
(122,769)
4,924,055
(1,417,025)
11,179,813
(2,429,272)
38,056,625
(7,074,110)
13,025,447
(2,253,925)
58,268,732
$99,674,931

LIABILITIES AND STOCKHOLDERS' EQUITY
-

-

CURRENT LIABILITIES
Note payable: Bank
Accounts payable: Trade
Current portion of long-term debt
Accrued payroll and withholding taxes
Accrued interest
Federal income taxes payable
Total current liabilities

$11,459,080
12,969,686
3,916,739
1,593,276
229,575
244,792
30,413,148

$10,257,598
9,460,776
41,070
1,263,461
196,545
307,354
21,526,804

$9,631,600
7,586,374
41,070
1,238,454
178,478
265,619
18,941,595

LONG-TERM DEBT

24,420,090

22,342,006

22,379,920

STOCKHOLDERS' EQUITY
Common stock: $1 par value
Authorized: 1,500,000 shares
Issued and outstanding: 1,000,000 shares
Additional paid-in capital
Retained earnings
Total stockholders' equity

1,000,000
15,717,645
43,883,907
60,601,552

1,000,000
15,717,645
42,674,182
59,391,827
$103,260,637

1,000,000
15,717,645
41,635,771
58,353,416
$99,674,931

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$115,434,790

Pinnacle Manufacturing Company
Income Statement - All Divisions
For the Year Ended December 31
2011
Dollar Value
Sales
Sales Returns and Allowances
Cost of Sales*
Gross Profit
OPERATING EXPENSES-Allocated
Salaries-Management
Salaries-Office
Licensing and certification fees
Security
Insurance
Medical benefits
Advertising
Business publications
Property taxes
Bad debts
Depreciation expense
Accounting fees
Total operating expenses-Allocated
OPERATING EXPENSES-Direct
Salaries-Sales
Wages Rental
Wages-Mechanics
Wages-Warehouse
Garbage collection
Payroll benefits
Rent- Warehouse
Telephone
Utilities
Postage
Linen service
Repairs and maintenance
Cleaning service
Legal service
Fuel
Travel and entertainment
Pension expense
Office supplies
Miscellaneous
Total operating expenses-Direct
Total Operating Expenses
Operating Income
Other Expense-Interest
Income Before Taxes
Federal Income Taxes
Net Income
* Details of manufacturing expenses are not
included in this schedule.

2010
Dollar Value

2009
Dollar Value

150,918,731
181,103
109,284,780
41,452,848

148,764,555
178,518
106,255,499
42,330,538

144,860,245
173,832
101,988,165
42,698,248

2,281,266
315,169
190,650
550,603
93,197
23,721
162,512
6,989
22,585
841,699
5,336,783
273,956
10,099,130

2,387,993
296,681
172,883
637,580
103,842
29,453
178,009
5,555
178,009
1,034,060
4,641,982
297,777
9,963,824

2,295,081
306,856
162,279
630,353
108,491
28,810
165,678
774
175,692
992,094
4,367,565
299,789
9,533,462

14,970,669
491,794
1,113,539
4,891,065
27,649
2,657,889
802,855
32,402
262,393
89,763
17,282
166,985
89,800
396,016
286,547
103,389
228,555
149,828
300,188
27,078,608
37,177,738
4,275,110
2,181,948
2,093,162
883,437
1,209,725

15,327,777
595,389
1,339,626
5,340,271
29,771
2,937,730
764,346
45,173
267,005
133,518
12,350
168,405
81,589
190,540
341,192
103,842
237,350
148,340
105,931
28,170,145
38,133,969
4,196,569
2,299,217
1,897,352
858,941
1,038,411

14,904,392
575,725
1,333,411
5,473,249
37,969
2,894,300
758,345
57,867
274,365
151,278
16,083
178,213
78,088
152,238
279,512
100,479
127,011
171,109
144,012
27,707,646
37,241,108
5,457,140
2,397,953
3,059,187
1,341,536
1,717,651

Pinnacle Manufacturing Company
Common-Size Income Statement - All Divisions
For the Year Ended December 31
2011

2010

(000)
Preliminary

(000) Audited

2009

% of Net Sales

(000) Audited

% of Net
Sales

Sales
Less: Sales Returns and Allowances

% of Net Sales
150,918,731
100.12%
181,103
0.12%

148,764,555
178,518

100.12%
0.12%

144,860,245
173,832

100.12%
0.12%

Net Sales
Cost of Sales*
Gross Profit

150,737,628
109,284,780
41,452,848

100.00%
72.50%
27.50%

148,586,037
106,255,499
42,330,538

100.00%
71.51%
28.49%

144,686,413
101,988,165
42,698,248

100.00%
70.49%
29.51%

2,281,266
315,169
190,650
550,603
93,197
23,721
162,512
6,989
22,585
841,699
5,336,783
273,956
10,099,130

1.51%
0.21%
0.13%
0.37%
0.06%
0.02%
0.11%
0.00%
0.01%
0.56%
3.54%
0.18%
6.70%

2,387,993
296,681
172,883
637,580
103,842
29,453
178,009
5,555
178,009
1,034,060
4,641,982
297,777
9,963,824

1.61%
0.20%
0.12%
0.43%
0.07%
0.02%
0.12%
0.00%
0.12%
0.70%
3.12%
0.20%
6.71%

2,295,081
306,856
162,279
630,353
108,491
28,810
165,678
774
175,692
992,094
4,367,565
299,789
9,533,462

1.59%
0.21%
0.11%
0.44%
0.07%
0.02%
0.11%
0.00%
0.12%
0.69%
3.02%
0.21%
6.59%

14,970,669
491,794
1,113,539
4,891,065
27,649
2,657,889
802,855
32,402
262,393
89,763
17,282
166,985
89,800
396,016
286,547
103,389
228,555
149,828
300,188
27,078,608
37,177,738
4,275,110
2,181,948
2,093,162
883,437
1,209,725

9.93%
0.33%
0.74%
3.24%
0.02%
1.76%
0.53%
0.02%
0.17%
0.06%
0.01%
0.11%
0.06%
0.26%
0.19%
0.07%
0.15%
0.10%
0.20%
17.96%
24.66%
2.84%
44.61%
1.39%
0.59%
0.80%

15,327,777
595,389
1,339,626
5,340,271
29,771
2,937,730
764,346
45,173
267,005
133,518
12,350
168,405
81,589
190,540
341,192
103,842
237,350
148,340
105,931
28,170,145
38,133,969
4,196,569
2,299,217
1,897,352
858,941
1,038,411

10.32%
12.83%
0.90%
3.59%
0.02%
1.98%
0.51%
0.03%
0.18%
0.09%
0.01%
0.11%
0.05%
0.13%
0.23%
0.07%
0.16%
0.10%
0.07%
18.96%
25.66%
2.82%
1.55%
1.28%
0.58%
0.70%

14,904,392
575,725
1,333,411
5,473,249
37,969
2,894,300
758,345
57,867
274,365
151,278
16,083
178,213
78,088
152,238
279,512
100,479
127,011
171,109
144,012
27,707,646
37,241,108
5,457,140
2,397,953
3,059,187
1,341,536
1,717,651

10.30%
0.40%
0.92%
3.78%
0.03%
2.00%
0.52%
0.04%
0.19%
0.10%
0.01%
0.12%
0.05%
0.11%
0.19%
0.07%
0.09%
0.12%
0.10%
19.15%
25.74%
3.77%
1.66%
2.11%
0.93%
1.19%

OPERATING EXPENSES-Allocated
Salaries-Management
Salaries-Office
Licensing and certification fees
Security
Insurance
Medical benefits
Advertising
Business publications
Property taxes
Bad debts
Depreciation expense
Accounting fees
Total operating expenses-Allocated
OPERATING EXPENSES-Direct
Salaries-Sales
Wages Rental
Wages-Mechanics
Wages-Warehouse
Garbage collection
Payroll benefits
Rent- Warehouse
Telephone
Utilities
Postage
Linen service
Repairs and maintenance
Cleaning service
Legal service
Fuel
Travel and entertainment
Pension expense
Office supplies
Miscellaneous
Total operating expenses-Direct
Total Operating Expenses
Operating Income
Other Expense-Interest
Income Before Taxes
Federal Income Taxes
Net Income
* Details of manufacturing expenses are not
included in this schedule.

Pinncacle Manufacturing Company
Income Statement - Welburn Division
For the Year Ended December 31

Sales
Sales Returns and Allowances
Cost of Sales*
Gross Profit
OPERATING EXPENSES-Allocated
Salaries-Management
Salaries-Office
Licensing and certification fees
Security
Insurance
Medical benefits
Advertising
Business publications
Property taxes
Bad debts
Depreciation expense
Accounting fees
Total operating expenses-Allocated
OPERATING EXPENSES-Direct
Salaries-Sales
Wages Rental
Wages-Mechanics
Wages-Warehouse
Garbage collection
Payroll benefits
Rent- Warehouse
Telephone
Utilities
Postage
Linen service
Repairs and maintenance
Cleaning service
Legal service
Fuel
Travel and entertainment
Pension expense
Office supplies
Miscellaneous
Total operating expenses-Direct
Total operating expenses
OPERATING INCOME
* Details of manufacturing expenses are not
included in this schedule.

2011
$ Value
122,585,513
127,673
90,373,709
32,084,131

2010
$ Value
120,830,903
124,975
87,905,900
32,800,028

2009
$ Value
117,639,471
121,694
84,375,503
33,142,274

1,851,775
255,833
139,951
446,938
75,647
19,389
131,917
4,213
17,873
687,885
4,206,533
223,534
8,061,488

1,934,168
240,298
127,659
516,406
84,103
24,032
144,181
2,981
144,181
831,572
3,759,789
240,196
8,049,566

1,858,914
248,539
119,829
510,552
87,868
23,507
134,193
415
142,304
797,823
3,537,525
241,817
7,703,286

12,579,213
4,006,809
2,039,389
670,746
25,901
194,700
77,924
14,126
123,450
65,853
115,735
217,964
80,265
187,891
121,617
57,147
20,578,730
28,640,218
3,443,913

12,694,443
4,325,377
2,379,426
623,389
36,045
216,266
108,136
10,510
117,538
66,085
131,334
276,343
84,103
192,240
120,149
57,910
21,439,294
29,488,860
3,311,168

12,343,793
4,433,082
2,344,248
618,494
46,175
222,226
122,519
13,685
124,383
63,250
104,934
226,387
81,380
102,872
138,590
78,729
21,064,747
28,768,033
4,374,241

Pinnacle Manufacturing Company
Income Statement - Solar-Electro Division
For the Year Ended December 31

Sales
Sales Returns and Allowances
Cost of Sales*
Gross Profit
OPERATING EXPENSES-Allocated
Salaries-Management
Salaries-Office
Licensing and certification fees
Security
Insurance
Medical benefits
Advertising
Business publications
Property taxes
Bad debts
Depreciation expense
Accounting fees
Total operating expenses-Allocated
OPERATING EXPENSES-Direct
Salaries-Sales
Wages Rental
Wages-Mechanics
Wages-Warehouse
Garbage collection
Payroll benefits
Rent- Warehouse
Telephone
Utilities
Postage
Linen service
Repairs and maintenance
Cleaning service
Legal service
Fuel
Travel and entertainment
Pension expense
Office supplies
Miscellaneous
Total operating expenses-Direct
Total operating expenses
OPERATING INCOME
* Details of manufacturing expenses are not
included in this schedule.

2011
$ Value
22,605,731
43,825
17,008,377
5,553,529

2010
$ Value
21,680,289
38,773
16,156,496
5,485,020

2009
$ Value
21,126,896
37,756
15,507,635
5,581,505

338,015
46,697
19,303
81,580
13,808
3,537
24,078
874
3,264
120,493
889,483
39,666
1,580,798

352,230
43,759
15,287
94,046
15,319
4,376
26,255
542
26,255
157,730
684,667
44,689
1,465,155

338,525
45,259
14,350
92,980
16,005
4,280
24,436
76
25,913
151,328
644,192
44,992
1,402,336

2,192,482
695,918
478,669
103,983
4,730
53,278
7,131
2,578
34,121
20,694
268,954
53,975
18,196
34,297
22,199
234,892
4,226,097
5,806,895
-253,366

2,402,414
787,698
433,321
109,403
6,567
39,383
19,695
1,490
39,383
12,033
45,950
50,326
15,319
33,988
21,880
42,982
4,061,832
5,526,987
-41,967

2,336,053
807,312
426,916
108,544
8,412
40,468
22,315
1,941
41,677
11,516
36,714
41,229
14,822
18,187
25,238
58,433
3,999,777
5,402,113
179,392

Pinnacle Manufacturing Company
Income Statement - Machine-Tech Division
For the Year Ended December 31

Sales
Sales Returns and Allowances
Cost of Sales*
Gross Profit
OPERATING EXPENSES-Allocated
Salaries-Management
Salaries-Office
Licensing and certification fees
Security
Insurance
Medical benefits
Advertising
Business publications
Property taxes
Bad debts
Depreciation expense
Accounting fees
Total operating expenses-Allocated
OPERATING EXPENSES-Direct
Salaries-Sales
Wages Rental
Wages-Mechanics
Wages-Warehouse
Garbage collection
Payroll benefits
Rent- Warehouse
Telephone
Utilities
Postage
Linen service
Repairs and maintenance
Cleaning service
Legal service
Fuel
Travel and entertainment
Pension expense
Office supplies
Miscellaneous
Total operating expenses-Direct
Total operating expenses
OPERATING INCOME
* Details of manufacturing expenses are not
included in this schedule.

2011
$ Value
5,727,487
9,605
1,902,694
3,815,188

2010
$ Value
6,253,363
14,770
2,193,103
4,045,490

2009
$ Value
6,093,878
14,382
2,105,027
3,974,469

91,476
12,638
31,396
22,086
3,742
795
6,517
1,902
1,448
33,321
240,767
10,756
456,844

101,595
12,624
29,937
27,128
4,420
1044
7,573
2,032
7,573
44,759
197,527
12,891
449,103

97,642
13,057
28,100
26,820
4,618
1022
7,048
283
7,475
42,942
185,850
12,983
427,840

198,978
491,794
1,113,539
188,339
27,649
139,832
28,126
1,771
14,415
4,708
579
9,414
3,253
11,327
14,608
4,928
6,368
6,012
8,141
2,273,781
2,730,625
1,084,563

230,922
595,389
1,339,627
227,196
29,771
124,984
31,554
2,560
11,357
5,688
350
11,484
3,472
13,255
14,522
4,420
11,121
6,312
5,035
2,669,019
3,118,122
927,368

224,543
575,724
1,333,411
232,853
37,970
123,136
31,306
3,280
11,670
6,445
457
12,153
3,322
10,590
11,897
4,277
5,951
7,281
6,856
2,643,122
3,070,962
903,507

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