Case Study Part 1 Pinnacle

Topics: Balance sheet, Generally Accepted Accounting Principles, Financial ratios Pages: 5 (602 words) Published: April 16, 2014
A) ­­­­­­­­­­­­­­­­­­­­­­­­­­Calculate at least five ratios that are useful for access going concern using Pinnacle’s financial statements, which are included in Figure 8-9. Document the ratios in a format similar to the following: Ratio 2009 2008 2007­­­­ 1.Cash Ratio

0.03
0.36
0.43
2.Current Ration
0.63
0.79
0.85
3.Quick Ratio
1.72
2.06
2.20
4.Accounts receivable turnover
16.79
15.47
14.15
5.Days to collect receivables
21.74 days
23.59 days
25.80 days
6. Inventory turnover
4.35
4.01
3.68
7.Days to sell inventory
83.91 days
91.02 days
99.18 days
8.Debt to equity
0.46
0.33
0.32
9.Times interest earned
3.25
2.82
2.28
10. Earning per share
3.26
2.47
1.49
11. Gross profit percent
29.77%
29.79%
29.51%
12.Profit Margin
0.04
0.04
0.04
13.Return on assets
0.05
0.04
0.03
14.Return on common equity
0.07
0.06
0.04

Cash Ratio: cash and marketable securities/ current liabilities: 6,714,156/25,926,158 =0.03 (2009)
6,369,431/17,605,301 = 0.36 (2008)
7,014,387/16,340,517 = 0.43 (2007)
Current Ratio: cash +marketable securities+ net account receivables/ current liabilities: 6,714,156+9,601,883/25,926,158 = 0.63 (2009)
6,369,431+7,495,528/17,605,301 = 0.79 (2008)
7,014,387+6,901,225/16,340,517 =0.85 (2007)
Current Ratio: current assets/ current liabilities:
44,497,169/25,926,158 = 1.72 (2009)
36,195,745/17,605,301 = 2.06 (2008)
36,005,390/16,340,517 = 2.20 (2007)
Accounts receivable turnover: net sales/ average gross receivables: (9,601,883 + 866,330) + (7,495,528+948,679) + (6,901,225 +862,690) = 26,676,335/3 = 8,892,111.7: average gross receivables 149,245,176/8,892,111.7 = 16.79 (2009)

137,579,664/8,892,111.7 = 15.47 (2008)
125,814,272/8,892,111.7 = 14.15 (2007)
Days to collect receivables: 365/accounts receivable turnover 365/16.79 = 21.74 days (2009)
365/15.47 = 23.59 days (2008)
365/14.15 = 25.80 days (2007)
Inventory turnover: cost of goods sold/average inventory
(28,031,323 +22,206,259 + 21,975,220) = 72,212,802 / 3 = 24,070,934: average inventory 104,807,966/24,070,934 = 4.35 (2009)
96,595,908/24,070,934 = 4.01 (2008)
88,685,361/24,070,934 = 3.68 (2007)

Days to sell inventory: 365/inventory turnover
365/4.35 = 83.91 days (2009)
365/4.01 = 91.02 days (2008)
365/3.68 = 99.18 days (2007)
Debt to equity: total liabilities/total equity
25,926,158/55,825,756 = 0.46 (2009)
17,605,301/52,758,726 = 0.33 (2008)
16,340,517/50,872,536 = 0.32 (2007)
Times interest earned: operating income/interest expense
6,171,502/1,897,346 = 3.25 (2009)
5,998,463/2,128,905 = 2.82 (2008)
4,745,339/2,085,177 = 2.28 (2007)
Earning per share: net income/average common shares outstanding 3,260,411/1,000,000 = 3.26 (2009)
2,470,557/1,000,000 = 2.47 (2008)
1,493,609/1,000,000 = .1.49 (2007)
Gross profit percent: net sales –cost of goods sold/net sales (149,245,176- 104,807,966)/149,245,176 =29.77%
(137,579,664 – 96,595,908)/137,579,664 =29.79%
(125,814,272 – 88,685,361)/125,814,272 =29.51%

Profit Margin: operating income/net sales
6,171,502/149,245,176 =0.04
5,998,463/137,579,664 =0.04
4,745,339/125,814,272 =0.04
Return on assets: income before taxes/average total assets
(102,968,775 + 89,791,858 + 86,673,853)=279374486/3 =93,124,828.7: average total assets 4,274,156/93,124,828.7= 0.05
3,869,558/93,124,828.7=0.04
2,660,162/93,124,828.7=0.03
Return on common equity: income before taxes- preferred dividends/average stock holder equity (55,825,756+52,758,726+50,872,536)=189,457,018/3 =63,152,339.3: average stock holder equity (4,274,156-0)/63,152,339.3 =0.07

(3,869,558 -0)/63,152,339.3 =0.06
(2,660,162 -0) / 63,152,339.3 =0.04
B) Based on your calculations, assess the likelihood (high, medium, or low) that Pinnacle is likely to fail financially in the next 12 months. When reviewing the ratio calculations, it is apparent that the company’s likelihood of failing financially in the next 12 months is...
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