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# Reeds Clothiers-Case Study

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Briefly summarize the case.

Calculate a few ratios and compare Reed's results with industry averages. (Some industry averages are shown in Exhibit 4.) What do these ratios indicate?

Why does Holmes want Reed's to have an inventory reduction sale, and what does he think will be accomplished by it?

Jim Reed had adopted a very loose working capital policy with higher current assets than industry averages. If he merely tightens his working capital policy to the averages, should this effect his sales?

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.

What type of inventory control system would you suggest to Jim Reed?

What type of accounts receivable control would you suggest to Jim Reed?

Is the increase in sales related to the increase in inventory?

What is Reed's cost of not taking the supplier?

#### Solution Preview

In an effort to increase sales, Reed's Clothiers has tripled its inventory and renovated and expanded its store. However, sales only doubled and the new mortgage has strapped cash flow. Rather than seeking the source of the financial problem, the owner has only reacted to the cash flow symptom by requesting a progressively larger line of credit. This has done little except delay the inevitable. The bank has finally demanded payment bringing the reality to the forefront of the owner's attention.

1. Ratio analysis

Ratio Reeds Industry
Current (current assets/current liabilities) 2.0 2.7
Quick ((current assets-inventory)/current liabilities)) 0.94 1.6
Gross Profit Margin (gross profit/sales) 29.8% 33%
Net Profit Percentage (net profit/sales) 4.2% ...

#### Solution Summary

A case study of a clothier including a pro forma income statement, account receivable controls, and the financial impact of vendir discounts.

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