Auditing & Assurance Services 15th Edition - P.243 Pinnacle Case a. Refer to the financial statement data for the current year and prior two years. Analyze the year-to-year change in account for at least five financial statement line items. Document the trend analysis in a format similar to following. Account Balance %Change %Change $ Change $ Change Ex) Net sales 2012-2013 2011-2012 b. Calculate at least five common ratios and document them similar to following. EX) Ratio 2013 2012 2011 Current Ratio Earnings per share Profit margin Return on assets Account receivable turnover ... c. Based on the analytical procedures calculated in part a, b summarize yours observations about pinnacle's business, including your assessment of the client's business risk. d. Use the income statement information to prepare a common-size income statement for all three years. Use the information to identify accounts for which you believe there is a concern about material misstatements like following. EX) Account Balance Estimate of $ Amount of potential misstatement

Figure 8-9 Pinnacle Manufacturing Financial Statements Pinnacle Manufacturing Company Income Statement For the Year ended December 31 2013 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 2012 $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 2011 $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 $7,324,846 8,619,857 25,537,198 143,206 41,625,107 61,635,530 $103,260,637 $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 $9,460,776 10,298,668 1,767,360 21,526,804 22,342,006 43,868,810 $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 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 Stockholders' equity Common stock Additional paid-in capital Retained earnings Total stockholders' equity Total liabilities & stockholders' equity 2013 2012 2011 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 2013 Dollar Value 2012 Dollar Value 2011 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 2013 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. 2012 Dollar Value 2011 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 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. 2013 $ Value 122,585,513 127,673 90,373,709 32,084,131 2012 $ Value 120,830,903 124,975 87,905,900 32,800,028 2011 $ 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. 2013 $ Value 22,605,731 43,825 17,008,377 5,553,529 2012 $ Value 21,680,289 38,773 16,156,496 5,485,020 2011 $ 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. 2013 $ Value 5,727,487 9,605 1,902,694 3,815,188 2012 $ Value 6,253,363 14,770 2,193,103 4,045,490 2011 $ 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