Required where there is an increased likelihood of misstatements PART The purpose of Part 1 is to perform preliminary analytical procedures as part of the bytical procedures: obtaining an understanding about the client's business and Indi planning process. You have been asked to focus your attention on two purposes d a. Go to the Pinnacle link on the textbook website (www.pearsonhighered.com/ams open the Pinnacle Financials Excel file. The financial statement data is also show Figure 8-9. Using the Excel file, compute percent changes in all Pinnacle Income Semes b. The Excel file also includes a tab with the common ratios shown in Chapter 1. and Pinnacle Balance Sheet account balances from 2017-2018 and 2018-2019 Pages 206-208. Selected ratios for prior years have already been calculated. Calodas FIGURE 8-9 Pinnacle Manufacturing Financial Statements Pinnacle Manufacturing Company Income Statement For the Year Ended December 31 2019 2018 2017 $151,137428 $148.586.037 Nale Cost of goods sold Grees profe 109284.780 106,255,499 41.852.848 42.330,538 37.397.738 38,133.969 Operating expenses 4455,110 4.196.569 Income from operations 3724 5457340 Other revenues and pins 2,181,948 2,299.217 Other expenses and losses 23979 2.273,162 1,897,352 1059 Income before incom 703.432 858.941 3415 Income tax 1,569,725 1,038.411 Net income for the year 1717 51.57 $1.04 Earnings per share $10 Asses Current assets Cash and cash equivalents Net receivables Inventory Other current assets Total current assets Property, plant, and equipment 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 Pinnacle Manufacturing Company Balance Sheet As of December 31 2019 2018 2017 7.721.279 $ 7.324,846 $ 8066545 12.742.165 0.619.857 7336409 31,936,021 25.537,198 25.271501 172.278 143.206 131742 52,571,743 41.625,107 41.406.199 62.863.047 $115.434.790 61.635,530 $103,260,637 58.268.732 $99674931 $ 12,969,686 15,375,819 $ 9.460.776 $ 7.586.374 10,298,668 2.067643 1.767.360 30,413,148 21,526,804 9.672.670 1,680 55 18941395 24.060.090 22.342,006 22.379.920 54,473,238 43,868.810 41.321,515 Common stock 1,000,000 Addicional paid-in capital 1,000,000 1.000.000 15,717,645 Retained earnings 15,717,645 15.717645 44.243.907 Total stockholders' equity 42.674.182 41,635.771 Tocal abilities & stockholders' equity 60961,552 59.391,827 58.353.416 $115 434.790 $103.260.637 $99 674.931 THE AUDIT PROCESS at least five common ratios described in Chapter 7, including at least one ratio from cach category. Document the ratios in a format similar to the following: Ratio Current ratio 2019 2018 2017 Based on the analytical procedures calculated in parts a. and b., summarize your obser- vations about Pinnacle's business, including your assessment of the client's business risk. d. Open the Pinnacle income statement worksheet of the Pinnacle Financials Excel file. for all three years. See Figure 8-4 (p. 243) for an example. Use the information to iden- Use the income statement information to prepare a common-size income statement tify accounts for which you believe there is a concern about material misstatements. Use a format similar to the following: Account Balance Estimate of $ Amount of Potential Misstatement Use the three divisional income statements in the Pinnacle Financials Excel file on the website 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. Use a format similar to the one in requirement d. f. Explain whether you believe the information in requirement d. or e. provides the most useful data for evaluating the potential for misstatements. Explain why. & Analyze the account balances for accounts receivable, inventory, and short/current long-term debt. Describe any observations about those accounts and discuss addi- tional information you want to consider during the current-year audit. h. Based on your calculations, assess the likelihood (high, medium, or low) that Pinnacle is likely to fail financially in the next 12 months. FIGURE 8-9 Pinnacle Manufacturing Compall Income Statement For the Year Ended December 31 2019 2018 2017 $151,137,628 109,284,780 $ 148,586,037 106,255,499 Net sales Cost of goods sold Gross profit 41,852,848 42,330,538 $144,686,413 101.988,165 37,397,738 38,133,969 4,455,110 4,196,569 37.241,108 42.698.248 Operating expenses 5,457,140 - Other revenues and gains Income from operations 2,181,948 2,299,217 Income before income tax Other expenses and losses 2,273,162 1,897,352 2,397.953 3,059,187 703.437 858,941 Income tax 1,569,725 1,038,411 1.341.536 Net income for the year $1.57 $1.04 1,717,651 $1.72 Earnings per share Assets Current assets Cash and cash equivalents Net receivables Inventory Other current assets Total current assets Property, plant, and equipment Total assets Liabilities Current liabilities Accounts payable Short/current long-term debt Pinnacle Manufacturing Company Balance Sheet As of December 31 2019 2018 2017 7,721,279 7,324,846 $ 8,066,545 12,742,165 8,619,857 31,936,021 25,537,198 172,278 143,206 52,571,743 41,625,107 62,863,047 61.635,530 7,936,409 25,271,503 131,742 41,406.199 58,268,732 $115,434,790 $103,260,637 $ 99.674.931 $ 12,969,686 $ 9.460.776 $ 7,586,374 15,375,819 10,298,668 9,672,670 Other current liabilities Total current liabilities Long-term debt Total liabilities 2,067,643 1767,360 1,682.551 30,413,148 21,526,804 18,941,595 24,060,090 22,342,006 22,379,920 54,473,238 43,868,810 41,321,515 Stockholders' equity Common stock Additional paid-in capital 1,000,000 1,000,000 1,000,000 Retained earnings 15,717,645 15,717,645 15,717,645 Total stockholders' equity 44,243,907 42,674,182 41,635,771 Total liabilities & stockholders' equity 60,961,552 59,391,827 58,353,416 $115,434,790 $103,260,637 $ 99,674,931