- Idenitify 3 accounts of concern of misstatement. Include an estimate of potent

Question

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Idenitify 3 accounts of concern of misstatement. Include an estimate of potential mistatement for each acct. identified.

Pinnacle Manufacturing Company Pinnacle Manufacturing Company Income Statement - All Divisions Common - Size Income Statement - All Divisions For the Year Ended December 31 For the Year Ended December 31 2013 2012 2011 2013 2012 2011 Dollar Value Dollar Value Dollar Value Percentage Value Percentage Value Percentage Value Sales 150,918,731 148,764,555 144,860,245 Sales 100.00% 100.00% 100.00% Sales Returns and Allowances 181,103 178,518 173,832 Sales Returns and Allowances 0.12% 0.12% 0.12% Cost of Sales* 109,284,780 106,255,499 101,988,165 Cost of Sales* 72.41% 71.43% 70.40% Gross Profit 41,452,848 42,330,538 42,698,248 Gross Profit 27.47% 28.45% 29.48% OPERATING EXPENSES-Allocated OPERATING EXPENSES-Allocated Salaries-Management 2,281,266 2,387,993 2,295,081 Salaries-Management 1.51% 1.61% 1.58% Salaries-Office 315,169 296,681 306,856 Salaries-Office 0.21% 0.20% 0.21% Licensing and certification fees 190,650 172,883 162,279 Licensing and certification fees 0.13% 0.12% 0.11% Security 550,603 637,580 630,353 Security 0.36% 0.43% 0.44% Insurance 93,197 103,842 108,491 Insurance 0.06% 0.07% 0.07% Medical benefits 23,721 29,453 28,810 Medical benefits 0.02% 0.02% 0.02% Advertising 162,512 178,009 165,678 Advertising 0.11% 0.12% 0.11% Business publications 6,989 5,555 774 Business publications 0.00% 0.00% 0.00% Property taxes 22,585 178,009 175,692 Property taxes 0.01% 0.12% 0.12% Bad debts 841,699 1,034,060 992,094 Bad debts 0.56% 0.70% 0.68% Depreciation expense 5,336,783 4,641,982 4,367,565 Depreciation expense 3.54% 3.12% 3.02% Accounting fees 273,956 297,777 299,789 Accounting fees 0.18% 0.20% 0.21% Total operating expenses-Allocated 10,099,130 9,963,824 9,533,462 Total operating expenses-Allocated 6.69% 6.70% 6.58% OPERATING EXPENSES-Direct OPERATING EXPENSES-Direct Salaries-Sales 14,970,669 15,327,777 14,904,392 Salaries-Sales 9.92% 10.30% 10.29% Wages Rental 491,794 595,389 575,725 Wages Rental 0.33% 0.40% 0.40% Wages-Mechanics 1,113,539 1,339,626 1,333,411 Wages-Mechanics 0.74% 0.90% 0.92% Wages-Warehouse 4,891,065 5,340,271 5,473,249 Wages-Warehouse 3.24% 3.59% 3.78% Garbage collection 27,649 29,771 37,969 Garbage collection 0.02% 0.02% 0.03% Payroll benefits 2,657,889 2,937,730 2,894,300 Payroll benefits 1.76% 1.97% 2.00% Rent- Warehouse 802,855 764,346 758,345 Rent- Warehouse 0.53% 0.51% 0.52% Telephone 32,402 45,173 57,867 Telephone 0.02% 0.03% 0.04% Utilities 262,393 267,005 274,365 Utilities 0.17% 0.18% 0.19% Postage 89,763 133,518 151,278 Postage 0.06% 0.09% 0.10% Linen service 17,282 12,350 16,083 Linen service 0.01% 0.01% 0.01% Repairs and maintenance 166,985 168,405 178,213 Repairs and maintenance 0.11% 0.11% 0.12% Cleaning service 89,800 81,589 78,088 Cleaning service 0.06% 0.05% 0.05% Legal service 396,016 190,540 152,238 Legal service 0.26% 0.13% 0.11% Fuel 286,547 341,192 279,512 Fuel 0.19% 0.23% 0.19% Travel and entertainment 103,389 103,842 100,479 Travel and entertainment 0.07% 0.07% 0.07% Pension expense 228,555 237,350 127,011 Pension expense 0.15% 0.16% 0.09% Office supplies 149,828 148,340 171,109 Office supplies 0.10% 0.10% 0.12% Miscellaneous 300,188 105,931 144,012 Miscellaneous 0.20% 0.07% 0.10% Total operating expenses-Direct 27,078,608 28,170,145 27,707,646 Total operating expenses-Direct 17.94% 18.94% 19.13% Total Operating Expenses 37,177,738 38,133,969 37,241,108 Total Operating Expenses 24.63% 25.63% 25.71% Operating Income 4,275,110 4,196,569 5,457,140 Operating Income 2.83% 2.82% 3.77% Other Expense-Interest 2,181,948 2,299,217 2,397,953 Other Expense-Interest 1.45% 1.55% 1.66% Income Before Taxes 2,093,162 1,897,352 3,059,187 Income Before Taxes 1.39% 1.28% 2.11% Federal Income Taxes 883,437 858,941 1,341,536 Federal Income Taxes 0.59% 0.58% 0.93% Net Income 1,209,725 1,038,411 1,717,651 Net Income 0.80% 0.70% 1.19%

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Idenitify 3 accounts of concern of misstatement. Include an estimate of potential mistatement for each acct. identified.

Explanation / Answer

1) Property taxes => Property taxes been reduced thyough depreciationincreased , which shows there is an increase in property, so why not a increase in Property tax

2) Legal Service => A huge increase in legal expenses may be indicative of other issues affecting disclosures and asset or liability valuation.

3) Payroll Benefits => Payroll benefits Decreased almost $280000 without a similar sized decrease in salary and wages.

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