Question: Calculate a few ratios and compare Reed's results with industry averages. What do these ratios indicate?
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 equity
|
25.9
|
Q1. Why does Holmes want Reed's to have an inventory reduction sale, and what does he think will be accomplished by it?
Q2. 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 affect his sales?
Q3. 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.
Q4. What type of inventory control system would you suggest to Jim Reed?
Q5. What type of accounts receivable control would you suggest to Jim Reed?
Q6. Is the increase in sales related to the increase in inventory? (See table below)
Reed's Clothiers
|
Year
|
Inventories
|
Net Sales
|
|
1991
|
$378
|
1,812
|
|
1992
|
411
|
1,886
|
|
1993
|
452
|
1,954
|
|
1994
|
491
|
2,035
|
Q7. What is Reed's cost of not taking the suppliers' discounts?