• Likelihood of financial difficulties
1. The Solar power engine business uses technology that is constantly changing, making it more risky than other businesses. Item 1 – raises a concern about the viability of the Solar-Electro division but not necessarily the entire company.
2. Item 7 indicates there is a debt covenant requiring a current ratio above 2.0 and a debt to equity ratio below 1.0. the current ratio is 1.72. this could result in the loan being called unless a waiver of the loan covenant is granted.
A)
• External users’ reliance on financial statements.
1. Pinnacle Manufacturing Company is privately owned but the amount of debt makes the financial statements very useful. They also plan on selling their Machine-tech division, the financial statements will be very important to buyers.
2. Item 4 – the financial statements will be important to investors when they decide to raise capital for the construction of the new manufacturing plant for the Solar-Electro division.