Reed's Clothiers Essay

782 words - 4 pages

Running head: REED'S CLOTHIER - WEEK 4

Reed's Clothier - Week 4
Eric Ochoa
University of Phoenix
Finance for Business
Carlos Chavez
Nov 18, 2009

Reed's Clothier - Week 4
# 1
| | | | |Reed's |Industry |
| |Liquidity Ratios | | | |
| |Current Ratio | | |2.02 |2.7 |
|(Current Assets/Current Liaibilities) |($921,000/$457,000) | | |
| |Quick Ratio ...view middle of the document...

91 |7 |
|(cost of sales/inventories) |(1,428,000/491,000) | | |
| |Payable Turnover | |6.97 |15.1 |
|(cost of sales/accounts payable) |(1,428,000/205,000) | | |
| |Profitability Ratios | | | |
| |Gross projfit margin | |29.82 |33 |
|(Gross profit/net sales) |(607,000/2,035,000 | | |
| |Net Profit Margin | |4.18 |7.8 |
|(Net income/sales) | |(85,000/2,035,000) | | |
| |Return on Common Equity | |16.04 |25.9 |
|(net income/common equity) |(85,000/530,000) | | |

2. Why does Holmes want Reed’s to have an inventory reduction sales, and what does he think will be accomplished by it?
Reducing inventory will increase sales, quick ratio, and improve on inventory turnover. This will allow for more money to repay current liabilities.
3. Jim Reed adopted a very loose working capital policy with higher current assets than industry averages. If he merely tights his working capital policy to the averages should this affect his sales?
Tightening the working capital will not improve sales.
4. 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.
|Reed's Clothers Income Statements (in 000's) | |
|Sales |1,938 | | |
|Cost of goods sold |1357 |(X / 1938 = .70) |
|Gross profit |581 |Sales- cost of goods sold |
|Operating Expenses |353 |(X / 1938 = 18.2%) |
|Depreciation Expense |-32 | ...

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