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?
Reed's Clothiers Income Statement (in 000s)Common SizeReed's IndustryNet Sales $2,035 100% 100%Cost of goods 1,428 70.2 67.0Gross profit $607 29.8 33.0General & administrative expenses 374 18.4 18.2Depreciation & amortization 32 1.6 0.9Interest expense 63 3.1 1.2Earnings before taxes 138 6.7 12.7Income Taxes 53 2.6 4.9Net income $85 4.1% 7.8%Reed's Clothiers Balance Sheet (in 000s)Common SizeReed's IndustryCash $17 1.0% 1.5%Inventories 491 30.9 20.0Accounts receivable 413 26.0 20.1Total current assets $921 57.9 41.6Fixed assets 670 42.1 58.4Total assets $1,591 100.0% 100.0%Accounts payable $205 12.9% 9.3%Notes payable 234 14.7 6.4Other current liabilities 18 1.1 0.2Total current liabilities $457 28.7 15.9Long-term debt 604 38.0 30.4Total liabilities $1,061 66.7 46.3Stockholders' equity 530 33.3 53.7Total liabilities and stockholders' equity $1,591 100.0% 100.0%Reed's Clothiers Aging ScheduleDays Past Due Amount(000s) Percent0-29 132 32.030-59 90 21.860-89 89 21.5Over 90 102 24.7$413 100.0
