Auditing

PINNACLE MANUFACTURING: PART VI

Integrated Case Application 16 – 35

A.) Relationships, Ratios, and Trends.

a. RELATIONSHIPS.

i. We have provided an unqualified opinion of those relationships that were found provide useful information for the overall reasonableness of accounts payable. This can be done by comparing the current accounts payable against a previous list, noting any significant changes in unusual amounts, non-vendor payables, and unusual interest bearing payables.

b. RATIOS.

ii. Accounts Payable Ratio: Accounts Payable/Purchases. Ration is used to determine the time required to pay accounts payable invoices.

iii. Accounts Payable Turnover: Cost of Goods Sold/Accounts Payable. Measures the rate at which Accounts Payable is being paid on an annual basis.

iv. Current Ratio: Current Assets/Current Liabilities. Measures whether or not a firm has enough resources to pay its debts over the next 12 months.

v. Quick Ratio: Current Assets – Liabilities – Accounts Receivables/Current Liabilities. Measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately.

vi. Debt Ratio. Current Liabilities/ Current Assets. Measures total debt to total assets. Used to gain a general understanding of the amount of money borrowed or owed to others.

vii. Inventory Ratio. Sales/ Inventory. Measures how many times a company's inventory is sold and replaced over a period.

viii. Cost of Credit. %Discount/100 - %Discount x 360/Credit Period – Discount Period. Measures the cost of not taking credit terms extended to business transactions. It can be substantial to current liabilities if a business chooses not to take the credit terms.

ix. Operating Cycle. Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding. Measures how well a business is utilizing its...