Part 1 for Auditing Project

Part

8-40

PINNACLE MANUFACTURING―PART I

a. % Change % Change

Account Balance 2010–2011 2009–2010

Net sales 1.45% 2.70%

Cost of goods sold 2.85% 4.18%

Operating expenses -2.51% 2.40%

Income from operations 1.87% -23.10%

Net receivables 51.30% 8.61%

Inventory 26.23% 1.05%

Accounts payable 37.09% 24.71%

Long-term debt 9.30% - 0.17%

b.

Amounts (in thousands)

Ratios 2011 2010 2009

Current assets 53,172 41,625 41,406

Current ratio: Current liab. 30,413 21,527 18,942

1.75 1.93 2.19

Debt to equity Debt 54,833 43,868 41,322

Equity 60,602 59,392 58,353

90.5% 73.9% 70.8%

Net income b/t 2,093 1,897 3,059

Net income bt/sales Sales 150,738 148,586 144,686

1.4% 1.3% 2.1%

Gross margin % Gross profit 41,453 42,331 42,698

Sales 150,738 148,586 144,686

27.5% 28.5% 29.5%

Inventory turnover COGS 109,285 106,255 101,988

Ave. inventory 28,887 25,404 25,272

8. 4.2 4.0

c. Although Pinnacle continues to experience some growth in net sales in 2011 over 2010, that growth is less than the growth in 2010 over 2009. Unfortunately, cost of goods sold continues to increase at higher rates than increases in sales, resulting in lower gross margin percentages in

8-40 (continued)

2011, although the increase in cost of goods sold in 2011 over 2010 was not as significant as the increase in 2010 over 2009.

Apparently, Pinnacle management made changes that have reduced overall operating expenses given the 2.51% decline in operating expenses in 2011 over 2010. Those changes resulted in an increase in income...