Cash Ratio: cash and marketable securities/ current liabilities: 6,714,156/25,926,158 =0.03 (2009)
6,369,431/17,605,301 = 0.36 (2008)
7,014,387/16,340,517 = 0.43 (2007)
Current Ratio: cash +marketable securities+ net account receivables/ current liabilities: 6,714,156+9,601,883/25,926,158 = 0.63 (2009)
6,369,431+7,495,528/17,605,301 = 0.79 (2008)
7,014,387+6,901,225/16,340,517 =0.85 (2007)
Current Ratio: current assets/ current liabilities:
44,497,169/25,926,158 = 1.72 (2009)
36,195,745/17,605,301 = 2.06 (2008)
36,005,390/16,340,517 = 2.20 (2007)
Accounts receivable turnover: net sales/ average gross receivables: (9,601,883 + 866,330) + (7,495,528+948,679) + (6,901,225 +862,690) = 26,676,335/3 = 8,892,111.7: average gross receivables 149,245,176/8,892,111.7 = 16.79 (2009)
137,579,664/8,892,111.7 = 15.47 (2008)
125,814,272/8,892,111.7 = 14.15 (2007)
Days to collect receivables: 365/accounts receivable turnover 365/16.79 = 21.74 days (2009)
365/15.47 = 23.59 days (2008)
365/14.15 = 25.80 days (2007)
Inventory turnover: cost of goods sold/average inventory
(28,031,323 +22,206,259 + 21,975,220) = 72,212,802 / 3 = 24,070,934: average inventory 104,807,966/24,070,934 = 4.35 (2009)
96,595,908/24,070,934 = 4.01 (2008)
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88,685,361/24,070,934 = 3.68 (2007)
Days to sell inventory: 365/inventory turnover
365/4.35 = 83.91 days (2009)
365/4.01 = 91.02 days (2008)
365/3.68 = 99.18 days (2007)
Debt to equity: total liabilities/total equity
25,926,158/55,825,756 = 0.46 (2009)
17,605,301/52,758,726 = 0.33 (2008)
16,340,517/50,872,536 = 0.32 (2007)
Times interest earned: operating income/interest expense
6,171,502/1,897,346 = 3.25 (2009)
5,998,463/2,128,905 = 2.82 (2008)
4,745,339/2,085,177 = 2.28 (2007)
Earning per share: net income/average common shares outstanding 3,260,411/1,000,000 = 3.26 (2009)
2,470,557/1,000,000 = 2.47 (2008)
1,493,609/1,000,000 = .1.49 (2007)
Gross profit percent: net sales –cost of goods sold/net sales (149,245,176- 104,807,966)/149,245,176 =29.77%
(137,579,664 – 96,595,908)/137,579,664 =29.79%
(125,814,272 – 88,685,361)/125,814,272 =29.51%
Profit Margin: operating income/net sales
6,171,502/149,245,176 =0.04
5,998,463/137,579,664 =0.04
4,745,339/125,814,272 =0.04
Return on assets: income before taxes/average total assets
(102,968,775 + 89,791,858 + 86,673,853)=279374486/3 =93,124,828.7: average total assets 4,274,156/93,124,828.7= 0.05
3,869,558/93,124,828.7=0.04
2,660,162/93,124,828.7=0.03
Return on common equity: income before taxes- preferred dividends/average stock holder equity (55,825,756+52,758,726+50,872,536)=189,457,018/3 =63,152,339.3: average stock holder equity (4,274,156-0)/63,152,339.3 =0.07
(3,869,558 -0)/63,152,339.3 =0.06
(2,660,162 -0) / 63,152,339.3 =0.04
B) Based on your calculations, assess the likelihood (high, medium, or low) that Pinnacle is likely to fail financially in the next 12 months. When reviewing the ratio calculations, it is apparent that the company’s likelihood of failing financially in the next 12 months is low. This is because it is apparent that the short-term debt paying ratios are down from the previous years. For example, the current ratio has decreased from the preceding year concluding that the current assets can cover the current liabilities successfully. Also looking at days to collect receivables is also lowered which presents that it takes less days for the company to collect their receivables implying that the monies owed to them are coming in more quickly. Lastly, in order for a company to succeed they need to have a good turnover rate for the inventory which is just what Pinnacle company has. The inventory turnover ratio is low indicating that it is taking fewer days than before to sell inventory. C and D) are on the Excel Spreadsheet labeled Pinnacle Case Study Common-Size Income Statement C)
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Account Balance Estimate of $ of Potential Misstatement Training37,621
Miscellaneous expenses74,791
Rent125,115
Legal Fees232,798
Miscellaneous office expenses211,874
D)
Account BalanceEstimate of $ of Potential Misstatement
Welburn Division:
Training26,928
Depreciation880,286
Executive salaries174,362
Solar-Electro Division:
Legal fees234,669
Miscellaneous office expense202,331
Machine-Tech Division:
Depreciation66,596
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. I believe that the information in requirement d provides the most useful data for evaluating the potential for misstatements because you can see exactly what each division is claiming in each sub-category. When using the information in requirement c, you are getting an overview of what all the divisions have done and cannot tell which division each misstatement is coming from. Also, by using information from requirement d, the auditor has a better chance of depicting the misstatements because you are focused on one specific division instead of trying to figure out which division the misstatement might have been from. Requirement d is more informative than using requirement c.
