Pinnacle Manufacturing Company Common-Size Income Statement-Machine Tech Divisio
ID: 2388209 • Letter: P
Question
Pinnacle Manufacturing Company
Common-Size Income Statement-Machine Tech Division
Three Years Ending December 31, 2009
2009 2008 2007
Dollar Value % of Div. Sales Dollar Value % of Div. Sales Dollar Value % of Div. Sales
Sales $5,670,915 100.00% $5,790,017 100.00% $5,299,644 100.00%
Sales Returns and Allowances 9,518 0.17% 13,411 0.23% 13,901 0.26%
Cost of Sales* 1,824,751 32.18% 1,993,730 34.43% 1,830,458 34.54%
Gross Profit 3,836,646 67.65% 3,782,876 65.34% 3,455,285 65.20%
OPERATING EXPENSES-Allocated
Salaries-Management 94,153 1.66% 93,206 1.61% 84,906 1.60%
Salaries-Office 13,008 0.23% 11,582 0.20% 11,354 0.21%
Licensing and certification fees 32,315 0.57% 27,465 0.47% 24,435 0.46%
Security 22,732 0.40% 24,888 0.43% 23,322 0.44%
Insurance 3,851 0.07% 4,055 0.07% 4,016 0.08%
Medical benefits 818 0.01% 958 0.02% 889 0.02%
Advertising 6,708 0.12% 6,948 0.12% 6,129 0.12%
Business publications 1,958 0.03% 1,864 0.03% 246 0.00%
Property taxes 1,490 0.03% 6,948 0.12% 6,500 0.12%
Bad debts 34,296 0.60% 41,063 0.71% 37,341 0.70%
Depreciation expense 247,813 4.37% 181,217 3.13% 161,609 3.05%
Accounting fees 11,074 0.20% 11,828 0.20% 11,286 0.21%
Total operating expenses-Allocated 470,216 8.29% 412,022 7.11% 372,033 7.01%
OPERATING EXPENSES-Direct
Salaries-Sales 204,801 3.61% 211,855 3.66% 195,255 3.68%
Wages Rental 506,186 8.93% 546,228 9.43% 500,630 9.45%
Wages-Mechanics 1,146,126 20.21% 1,229,015 21.23% 1,159,488 21.88%
Wages-Warehouse 193,851 3.42% 208,437 3.60% 202,481 3.82%
Garbage collection 28,458 0.50% 27,313 0.47% 33,017 0.62%
Payroll benefits 143,924 2.54% 114,664 1.98% 107,075 2.02%
Rent- Warehouse 28,949 0.51% 28,949 0.50% 27,223 0.51%
Telephone 1,823 0.03% 2,349 0.04% 2,852 0.05%
Utilities 14,837 0.26% 10,419 0.18% 10,148 0.19%
Postage 4,846 0.09% 5,218 0.09% 5,604 0.11%
Linen service 596 0.01% 321 0.01% 397 0.01%
Repairs and maintenance 9,689 0.17% 10,536 0.18% 10,568 0.20%
Cleaning service 3,348 0.06% 3,185 0.06% 2,889 0.05%
Legal service 11,658 0.21% 12,161 0.21% 9,209 0.17%
Fuel 15,036 0.27% 13,323 0.23% 10,345 0.20%
Travel and entertainment 5,072 0.09% 4,055 0.07% 3,719 0.07%
Pension expense 6,554 0.12% 10,203 0.18% 5,175 0.10%
Office supplies 6,188 0.11% 5,791 0.10% 6,331 0.12%
Miscellaneous 8,386 0.15% 4,622 0.08% 5,956 0.11%
Total operating expenses-Direct 2,340,328 41.29% 2,448,644 42.30% 2,298,362 43.36%
Total operating expenses 2,810,544 49.58% 2,860,666 49.41% 2,670,395 50.37%
OPERATING INCOME $1,026,102 18.07% $922,210 15.93% $784,890 14.83%
* Details of manufacturing expenses are not included in this schedule.
Material Mistatements
Account Balance Estimate of Amount of
Potential Mistatements
Property Tax $1,490 $4,000
Depreciation Expense $ 247,813 $40,000
Pension Expense $10,203 $3,000
Miscellaneous $8,386 $2,000
E. Explain whether you believe the information in requirement c or d provides the most useful data for evaluating the potential for misstatements. Explain why.
F. Your aging analysis of accounts receivable and discussions with management indicate that collections of accounts receivable have been somewhat slower than in the previous year. Evaluate whether or not you believe the allowance for uncollectible accounts is fairly valued. If you believe the account is misstated, calculate the potential misstatement.
Explanation / Answer
E. Explain whether you believe the information in requirement c or d provides the most useful data for evaluating the potential for misstatements. Explain why.
answer : Both the companywide and the divisional income statements are useful, but for different purposes. The companywide information is useful for identifying material fluctuations in the financial statements. However, the disaggregated information is more helpful in identifying the source of the fluctuations
F. Your aging analysis of accounts receivable and discussions with management indicate that collections of accounts receivable have been somewhat slower than in the previous year. Evaluate whether or not you believe the allowance for uncollectible accounts is fairly valued. If you believe the account is misstated, calculate the potential misstatement.
Estimate of Potential Understatement in Allowance
2009 2008 2007
A/R Turnover
Sales 149,245 137,580 125,814
Average accounts receivable 9,247 7,888 7,582
Turnover 16.1 17.4 16.6
Days Sales Outstanding
365 365 365 365
Turnover 16.1 17.4 6.6
Days 22.6 20.9 22.0
Allowance as a Percentage of
Gross Receivables
Allowance 699 699 682
Gross Receivables 10,300 8,194 7,582
Percentage 6.8% 8.5% 9.0%
Potential understatement
in Allowance
Suggested percent 9.5% Estimate based on
decrease in turnover
Gross accounts receivable 10,300
Suggested allowance 979
Actual Allowance 699
Potential understatement 280