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FIN370 Reed's Clothier Case Study

FIN370 Reed's Clothier Case Study - Reeds Clothier Case...

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Reed’s Clothier Case Study 1 Reed’s Clothier Case Study FIN/370 Reed’s Clothier Case Questions: 1. Write a brief summary of the case, explaining the situation facing Reed’s Clothier, and what has caused the situation. Reed’s Clothier is facing an increase in purchases as well as the interest and principal payments on the mortgage has caused the company’s positive cash flow to deteriorate in the past three years. In the last year, the owner, Jim Reed II decided not to take the cash discounts offered with purchases by the suppliers and now accounts were almost 40 days past due. Jim decided to see
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Reed’s Clothier Case Study 2 his banker for an increase of $100,000 on his line of credit to keep suppliers from ceasing deliveries until payment was made. Unfortunately Jim was denied the increase by his new banker Holmes, however, the present line of credit would continue if Jim could make the payment for the overdue note payable within 30 days. Jim usually dealt with his old Virginia Military Institute friend Bob Roberts who did not consider looking at Reed’s financial statements before awarding the increase in credit. Jim is in this situation because he believes that keeping a large inventory will allow the store to have items on hand at all times so no customer would be turned away. In addition, because Jim believes his customers are loyal he had developed passive collection policies for accounts receivables that are severely past-due. 2. Exhibit 4 presents the industry average for ten financial ratios. Calculate these ratios for Reed’s Clothier. Show all your calculations and provide a detailed explanation of what each ratio indicates about Reed’s financial performance as compared to the industry. Reed's Clothiers Selected Ratios In d us tr y Liquidity Ratios Current Ratio = current assets = 1386 = 2.0 2. 7 current liabilities 687 Quick Ratio = current assets - inventories = 1386 - 738 = 648 = 0.94 1. 6 current liabilities 687 687 Receivables Turnover = credit sales = 3054 = 4.9 7. 7 accounts receivable 621 Average Collection Period = accounts receivable = 621 = 621 = 74.2 47 .4 (daily credit) sales / 365 3054 / 365 8.367 Efficiency Ratios Total Asset Turnover = sales = 3054 = 1.3 1.
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