1. 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.

2.Use the three divisional income statements in the Pinnacle Financials Excel file on the Web site to prepare a common-size income statement for each of the three divisions for all three years. Each division?s income statement is in a separate worksheet in the Excel file. Use the information to identify accounts for which you believe there is a concern about material misstatements.

Figure 8-9 Pinnacle Manufacturing Financial Statements 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 2010 2009 $148,586,037 $144,686,413 106,255,499 101,988,165 42,330,538 42,698,248 38,133,969 37,241,108 4,196,569 5,457,140 2,299,217 2,397,953 1,897,352 3,059,187 858,941 1,341,536 1,038,411 1,717,651 $1.04 $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 2011 $7,721,279 13,042,165 32,236,021 172,278 53,171,743 62,263,047 2010 $7,324,846 8,619,857 25,537,198 143,206 41,625,107 61,635,530 2009 $8,066,545 7,936,409 25,271,503 131,742 41,406,199 58,268,732 Total assets Liabilities Current liabilities Accounts payable Short/current long-term debt Other current liabilities Total current liabilities Long-term debt Total liabilities Stockholders' equity Common stock Additional paid-in capital Retained earnings Total stockholders' equity Total liabilities & stockholders' equity $ 115,434,790 $ $ 12,969,686 $ 15,375,819 2,067,643 30,413,148 24,420,090 54,833,238 1,000,000 15,717,645 43,883,907 60,601,552 $115,434,790 103,260,637 $ 99,674,931 9,460,776 $ 7,586,374 10,298,668 9,672,670 1,767,360 1,682,551 21,526,804 18,941,595 22,342,006 22,379,920 43,868,810 41,321,515 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 Pinnacle Manufacturing Company Balance Sheet - All Divisions As of December 31 2011 Dollar Value 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 $ $ 7,721,279 14,008,633 (966,468) 32,236,021 119,081 53,197 53,171,743 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 2010 Dollar Value $ $ 2009 Dollar Value 7,324,846 9,586,325 (966,468) 25,537,198 106,353 36,853 41,625,107 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 $ $ 8,066,545 8,879,352 (942,943) 25,271,503 102,650 29,092 41,406,199 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 Sales 2011 2010 2009 Dollar Value Dollar Value Dollar Value 150,918,731 148,764,555 144,860,245 181,103 178,518 173,832 109,284,780 106,255,499 101,988,165 41,452,848 42,330,538 42,698,248 2,281,266 2,387,993 2,295,081 Salaries-Office 315,169 296,681 306,856 Licensing and certification fees 190,650 172,883 162,279 Security 550,603 637,580 630,353 Insurance 93,197 103,842 108,491 Medical benefits 23,721 29,453 28,810 162,512 178,009 165,678 Sales Returns and Allowances Cost of Sales* Gross Profit OPERATING EXPENSES-Allocated Salaries-Management Advertising Business publications Property taxes Bad debts Depreciation expense Accounting fees Total operating expenses-Allocated 6,989 5,555 774 22,585 178,009 175,692 841,699 1,034,060 992,094 5,336,783 4,641,982 4,367,565 273,956 297,777 299,789 10,099,130 9,963,824 9,533,462 14,970,669 15,327,777 14,904,392 OPERATING EXPENSES-Direct Salaries-Sales Wages Rental 491,794 595,389 575,725 Wages-Mechanics 1,113,539 1,339,626 1,333,411 Wages-Warehouse 4,891,065 5,340,271 5,473,249 Garbage collection 27,649 29,771 37,969 2,657,889 2,937,730 2,894,300 802,855 764,346 758,345 32,402 45,173 57,867 Utilities 262,393 267,005 274,365 Postage 89,763 133,518 151,278 Linen service 17,282 12,350 16,083 166,985 168,405 178,213 Payroll benefits Rent- Warehouse Telephone Repairs and maintenance Cleaning service 89,800 81,589 78,088 Legal service 396,016 190,540 152,238 Fuel 286,547 341,192 279,512 Travel and entertainment 103,389 103,842 100,479 Pension expense 228,555 237,350 127,011 Office supplies 149,828 148,340 171,109 Miscellaneous 300,188 105,931 144,012 27,078,608 28,170,145 27,707,646 Total operating expenses-Direct Total Operating Expenses 37,177,738 38,133,969 37,241,108 Operating Income 4,275,110 4,196,569 5,457,140 Other Expense-Interest 2,181,948 2,299,217 2,397,953 Income Before Taxes 2,093,162 1,897,352 3,059,187 Federal Income Taxes 883,437 858,941 1,341,536 1,209,725 1,038,411 1,717,651 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 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 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 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 Total operating expenses-Direct Total operating expenses OPERATING INCOME * Details of manufacturing expenses are not included in this schedule. 20,578,730 28,640,218 3,443,913 21,439,294 29,488,860 3,311,168 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 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 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 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 Total operating expenses-Direct Total operating expenses OPERATING INCOME * Details of manufacturing expenses are not included in this schedule. 4,226,097 5,806,895 -253,366 4,061,832 5,526,987 -41,967 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 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 4,928 230,922 595,389 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 4,420 224,543 575,724 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 Pension expense Office supplies Miscellaneous Total operating expenses-Direct Total operating expenses OPERATING INCOME * Details of manufacturing expenses are not included in this schedule. 6,368 6,012 8,141 2,273,781 2,730,625 1,084,563 11,121 6,312 5,035 2,669,019 3,118,122 927,368 5,951 7,281 6,856 2,643,122 3,070,962 903,507