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# Ratios/Pro-forma income

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Calculate a few ratios and compare Reed's results with industry averages. What do these ratios indicate?

Assuming that Reed's can improve its operations to be in line with the industry averages, construct a 1995 pro forma income statement. Assume that net sales will be reduced 5 percent to \$1,938,000 but that depreciation and amortization will not change but remain at \$32,000.

#### Solution Preview

Reed's Clothiers Income Statement (in 000s)
Common Size
Reed's Industry
Net Sales \$2,035 100% 100%
Cost of goods 1,428 70.2 67.0
Gross profit \$607 29.8 33.0
General & administrative expenses 374 18.4 18.2
Depreciation & amortization 32 1.6 0.9
Interest expense 63 3.1 1.2
Earnings before taxes 138 6.7 12.7
Income Taxes 53 2.6 4.9
Net income \$85 4.1% 7.8%

Reed's Clothiers Balance Sheet (in 000s)
Common Size
Reed's Industry
Cash \$17 1.0% 1.5%
Inventories 491 30.9 20.0
Accounts receivable 413 26.0 20.1
Total current assets \$921 57.9 41.6
Fixed assets 670 42.1 58.4
Total assets \$1,591 100.0% 100.0%
Accounts payable \$205 12.9% 9.3%
Notes payable 234 14.7 6.4
Other current liabilities 18 1.1 0.2
Total current liabilities \$457 28.7 15.9
Long-term debt 604 38.0 30.4
Total liabilities \$1,061 66.7 46.3
Stockholders' equity 530 33.3 53.7
Total liabilities and stockholders' equity \$1,591 100.0% 100.0%

1. Reed's Clothiers Selected Ratios*
Liquidity Ratios Industry
Current ratio 2.7
Quick ratio 1.6
Receivables turnover 7.7
Average collection period 47.4
Efficiency Ratios
Total asset turnover 1.9
Inventory turnover 7.0
Payable turnover 15.1
Profitability Ratios
Gross profit margin 33.0
Net profit margin 7.8
Return on common ...

#### Solution Summary

This solution is comprised of a detailed explanation to calculate a few ratios and compare Reed's results with industry averages.

\$2.49