Problem:
Reed's Clothiers Income Statement (in 000s)
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|
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Common Size
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Reed's
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Industry
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|
Net Sales
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$2,035
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100%
|
100%
|
|
Cost of goods
|
1,428
|
70.2
|
67.0
|
|
Gross profit
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$607
|
29.8
|
33.0
|
|
General & administrative expenses
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374
|
18.4
|
18.2
|
|
Depreciation & amortization
|
32
|
1.6
|
0.9
|
|
Interest expense
|
63
|
3.1
|
1.2
|
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Earnings before taxes
|
138
|
6.7
|
12.7
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Income Taxes
|
53
|
2.6
|
4.9
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Net income
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$85
|
4.1%
|
7.8%
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Reed's Clothiers Balance Sheet (in 000s)
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Common Size
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Reed's
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Industry
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Cash
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$17
|
1.0%
|
1.5%
|
|
Inventories
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491
|
30.9
|
20.0
|
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Accounts receivable
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413
|
26.0
|
20.1
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Total current assets
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$921
|
57.9
|
41.6
|
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Fixed assets
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670
|
42.1
|
58.4
|
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Total assets
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$1,591
|
100.0%
|
100.0%
|
|
Accounts payable
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$205
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12.9%
|
9.3%
|
|
Notes payable
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234
|
14.7
|
6.4
|
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Other current liabilities
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18
|
1.1
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0.2
|
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Total current liabilities
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$457
|
28.7
|
15.9
|
|
Long-term debt
|
604
|
38.0
|
30.4
|
|
Total liabilities
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$1,061
|
66.7
|
46.3
|
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Stockholders' equity
|
530
|
33.3
|
53.7
|
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Total liabilities and stockholders' equity
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$1,591
|
100.0%
|
100.0%
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1. Reed's Clothiers Selected Ratios
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Liquidity Ratios
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Industry
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Current ratio
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2.7
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Quick ratio
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1.6
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Receivables turnover
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7.7
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Average collection period
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47.4
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Efficiency Ratios
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Total asset turnover
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1.9
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Inventory turnover
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7.0
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Payable turnover
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15.1
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Profitability Ratios
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|
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Gross profit margin
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33.0
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Net profit margin
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7.8
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Return on common equity
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25.9
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Since many ratios may have different meanings the following definitions were used in the above calculations: Receivable turnover = sales/accounts receivable Average collection period = 365/receivable turnover Total asset tumover = cost of sales/total assets Inventory turnover = cost of sales/inventories Payable turnover = cost of sales/accounts payable
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.