Audit Chapter 8

When analyzing the Pinnacle Manufacturing Financial Statements there multiple concerns that should be further investigated that I will explain in this memo. When identifying the year to year change and using financial ratios found on A6, there are a couple of concerns that need to be identified. The fact that the operating expense from fluctuated from an increase $892,861 from 2009 to 2010 and then decreased by $956,231 from 2010 to 2011 should be raised in question. At the same time Operating expenses income from operations decreased from 2009-2010 by $1,260,571 and increased from 2010-2011 by $78,541. The -23.10% from 2009-2010 is concerning in their ability realized from profit on their business operation. On the balance sheet there was a substantial increase by $6,698,823 from 2010-2011. When examining this with the inventory turnover ratio from 2010 to 2011 there was a decrease in inventory. This is very concerning from Pinnacle, in respects to their industry, that there is excess inventory and that the inventory is at the end of its product life cycle and has not seen any sales. The account receivable turnover ratio measures how efficiently a company uses it assets. In this case Pinnacle has a declining at turnover ratio that indicates that Pinnacle should re-evaluate its credit policies to ensure timely receivable collection. The high debt/equity ratio means that Pinnacle has been aggressive in financing it growth with debt. Usually if a lot of debt is used to finance increased operations could lead to bankruptcy, however given the industry in which Pinnacle operates is capital - intensive (manufacturing) tends to have a debt/equity ratio around 2. (A6)

The gross profit percent shows the portion of sales available to cover all expenses and profit after deducting the cost of the product. From the results from parts a and b, we can see that Pinnacle has the ability to generate cash for payment of obligations, expansions and dividends, however the gross