1. External users' reliance on financial statements
External users rely heavily on the financial statement of Pinnacle Manufacturing. Although,
Pinnacle manufacturing is a privately held company it incurs a large amount of debt. As a result
potential users rely heavily on financial statements.
Pinnacle is selling the machine tech division to focus on engine manufacturing, the company's
core operations. This causes buyers to also rely heavily on financial statements.
In No. 6 the board chooses to finance the construction project mentioned in No. 4 by raising
more debt. Again bringing focus to the Financial statements.
Likelihood of financial difficulties
The
Solar Power
engine business is focused on habitual transformation of technology, which
makes the business riskier than other business and brings about a greater chance of
bankruptcy. In No. 1, concerns are expressed about Pinnacle's Solar-Electro Division.
No. 9 identifies restrictive covenants. The requirements are to keep the current ratio above 2.0
and the debt-to-equity below 1.0. In Part I, the calculation of the current ratio fell below the
requirement and thus the need for the loan.
Management Integrity
In No. 8 there is a significant turnover amongst higher-level positions. This turnover is possibly
intentional and thus a greater chance for fraudulent activities.