Observing the financial ratios above, Pinnacle is financially not in a very good performance. Its financial position ratio (highlighted) showing decreasing trend from year to year and it sales receivable is increasing. Its current ratio which measures the liquidity of the company, in particular its ability to meet current obligations with existing liquid assts its declining. Generally, the higher the ratio, the better the company’s ability to meet its current obligation. Some debt covenants specify that the borrower must maintain minimum current ratio such as 2 to 1. However, because the ratio includes both accounts receivable and inventory, an increase in the ratio could also reflect realizability problems with those two assets. A decreasing trend indicates that the company is having a problem in meeting their current payables. The trend may also put Pinnacle in violation of debt covenants; any misstatement that would put the company in violation of its debt covenants would be considered material. The quick ratio also suggest the company may have potential liquidity problems which may affect the company’s ability to carry out its operation in normal manner.
Number of days sales receivable is designed to measure validity and collectability of account receivable. It may also reflect the validity of recorded sales. An increase in this ratio or a trend overtime can indicates that Pinnacle Manufacturing has problems on:
• Less stringent credit statndards
• Warranty problems (the customers may not be paying because of problems with the products).
• Unrecorded returned items or a significant lag in issuing credit memos associated with returned items.
• Potential accounting recording problems, such as recording fictitious sales.
On the operation ...