Question

To get average a/r, inventory, etc., take prior year ending + current year ending /(divided) by 2.

Use the Figure 8-9 Pinnacle Manufacturing F/S’s to complete the year-to-year changes in account balances for the following (first one completed for example):

                       Account                             % change 2015 to 2016                      % change 2014 to 2015

Net Sales                               1.45%                                            2.70%

Cost of Goods Sold    

Operating Expenses

Income from Operations

Net Receivables

Inventory

Accounts payable

Long-term debt

Calculate the following ratios (found in chapter 7 on pages 196-199) and document in following format-

Ratio                     2016                            2015                           2014

Current Ratio    

Debt to Equity

Inventory Turnover

Gross Profit %

Think about your conclusions from the analytical procedures calculated in a & b. Jot down a few observations.

Refer to the Pinnacle balance sheet & income statement posted on Blackboard for this problem. Estimate the dollar amount of the potential misstatement in the following accounts. Identify the issue and possible explanation for the variance between 2015 & 2016. Focus on all accounts that are not direct (operating expenses-allocated).

Salaries – management & office

Property taxes (remember to look at b/s to determine if they sold or bought property)

Bad debts (tied to sales)

Depreciation expense

Analyze the account balances for accounts receivable (disregard inventory). Discuss your observations on this analysis and any additional information that you may want to consider during the current year audit. Analyze the a/r turnover, days sales outstanding, and bad debt as % of gross sales for 2016, 2015, & 2014.

Figure 8-9
Pinnacle Manufacturing Financial Statements
	Pinnacle Manufacturing Company
	Income Statement
	For the Year ended December 31
		2016	2015	2014
	Net sales	$150,737,628	$148,586,037	$144,686,413
	Cost of goods sold	109,284,780	106,255,499	101,988,165
	Gross profit	41,452,848	42,330,538	42,698,248
	Operating expenses	37,177,738	38,133,969	37,241,108
	Income from operations	4,275,110	4,196,569	5,457,140
	Other revenues and gains	—	—	—
	Other expenses and losses	2,181,948	2,299,217	2,397,953
	Income before income tax	2,093,162	1,897,352	3,059,187
	Income tax	883,437	858,941	1,341,536
	Net income for the year	1,209,725	1,038,411	1,717,651
	Earnings per share	$1.21	$1.04	$1.72
	Pinnacle Manufacturing Company
	Balance Sheet
	As of December 31
	Assets	2016	2015	2014
	Current assets
	Cash and cash equivalents	$7,721,279	$7,324,846	$8,066,545
	Net receivables	13,042,165	8,619,857	7,936,409
	Inventory	32,236,021	25,537,198	25,271,503
	Other current assets	172,278	143,206	131,742
	Total current assets	53,171,743	41,625,107	41,406,199
	Property, plant and equipment	62,263,047	61,635,530	58,268,732
	Total assets	$115,434,790	$ 103,260,637	$99,674,931
	Liabilities
	Current liabilities
	Accounts payable	$ 12,969,686	$   9,460,776	$ 7,586,374
	Short/current long-term debt	15,375,819	10,298,668	9,672,670
	Other current liabilities	2,067,643	1,767,360	1,682,551
	Total current liabilities	30,413,148	21,526,804	18,941,595
	Long-term debt	24,420,090	22,342,006	22,379,920
	Total liabilities	54,833,238	43,868,810	41,321,515
	Stockholders’ equity
	Common stock	1,000,000	1,000,000	1,000,000
	Additional paid-in capital	15,717,645	15,717,645	15,717,645
	Retained earnings	43,883,907	42,674,182	41,635,771
	Total stockholders’ equity	60,601,552	59,391,827	58,353,416
	Total liabilities & stockholders’ equity	$115,434,790	$103,260,637	$99,674,931

Answer 1

Solution:

% Change 2015 to 2016 and 2014 to 2015

Account	% Change 2015 to 2016 (Refer Note 1)	% Change 2014 to 2015 (Refer Note 2)
Net Sales	1.45%	2.70%
Cost of Goods Sold	2.85%	4.18%
Operating Expenses	-2.51%	2.40%
Income from Operations	1.87%	-23.10%
Net Receivables	51.30%	8.61%
Inventory	26.23%	1.05%
Accounts payable	37.09%	24.71%
Long-term debt	9.30%	-0.17%

Note 1 –

	2016	2015	Dollar Change 2015 to 2016	% Change 2015 to 2016 ($ change / dollar of 2015)
Net sales	$150,737,628	$148,586,037	$2,151,591	1.45%
Cost of goods sold	109,284,780	106,255,499	$3,029,281	2.85%
Operating expenses	37,177,738	38,133,969	($956,231)	-2.51%
Income from operations	4,275,110	4,196,569	$78,541	1.87%
Net Receivables	13,042,165	8,619,857	$4,422,308	51.30%
Inventory	32,236,021	25,537,198	$6,698,823	26.23%
Accounts payable	12,969,686	9,460,776	$3,508,910	37.09%
Long-term debt	24,420,090	22,342,006	$2,078,084	9.30%

Note 2 –

	2015	2014	Dollar Change 2014 to 2015	% Change 2014 to 2015 ($ change / dollar of 2014)
Net sales	$148,586,037	$144,686,413	$3,899,624	2.70%
Cost of goods sold	106,255,499	101,988,165	$4,267,334	4.18%
Operating expenses	38,133,969	37,241,108	$892,861	2.40%
Income from operations	4,196,569	5,457,140	($1,260,571)	-23.10%
Net Receivables	8,619,857	7,936,409	$683,448	8.61%
Inventory	25,537,198	25,271,503	$265,695	1.05%
Accounts payable	9,460,776	$7,586,374	$1,874,402	24.71%
Long-term debt	22,342,006	22,379,920	($37,914)	-0.17%

Part 2 – Ratios

	2016	2015	2014
Current Ratio:
Current Assets (CA)	53,171,743	41,625,107	41,406,199
Current Liabilities (CL)	30,413,148	21,526,804	18,941,595
Current Ratio (CA / CL)	1.75	1.93	2.19
Debt to Equity
Long Term Debt	24,420,090	22,342,006	22,379,920
Equity	60,601,552	59,391,827	58,353,416
Debt to Equity (Debt / Equity)	0.40	0.38	0.38
Inventory Turnover	2016	2015	2014
Cost of Goods Sold	109,284,780	106,255,499	101,988,165
Average Inventory
Beginning Inventory	$25,537,198	$25,271,503	Not available in the question
Ending Inventory	32,236,021	25,537,198	25,271,503
Average Inventory (Beg + End)/2	$28,886,610	$25,404,351
Inventory Turnover Ratio (Cost of Goods Sold / Average Inventory)	3.8	4.2
Gross Profit %:	2016	2015	2014
Gross Profit	41,452,848	42,330,538	42,698,248
Net sales	$150,737,628	$148,586,037	$144,686,413
Gross Profit (GP / Sales x 100)	27.50%	28.49%	29.51%

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