...“Reed’s Clothier” Case Study and Questions University of Phoenix FIN/370 – Finance for Business DATE “Reed’s Clothier” Case Study and Questions Reed’s Clothier Case Study Analysis Jim Reed, II the owner of Reed’s Clothier, a men’s clothing establishment is facing financial difficulties. Established in 1934, by Jim Reed to cater to the numerous Virginia Military Institute (VMI) graduates, the business struggled for the first several years. By 1976, the business annual sales had grown to $800,000, where Jim Reed decided to retire and hand over the business to his son, Jim Reed II. In 1981, Jim decided to expand retail floor space and acquired an $880,000 long-term mortgage debt. During this time, Jim increased inventories with the belief that higher inventories led to higher sales. In 1994, the business had grown to more than $2 million in sales. The increased inventories, along with the acquired mortgage payments have seriously eroded Reed’s positive cash flow. During the last year, Reed had slowly increased his line of credit at the bank and failed to take advantage of cash discounts offered by suppliers. Now, many of Reed’s accounts are almost 40 days past due, causing suppliers to demand payment. Jim decided to visit his bank in order to further extend his line of credit by an additional $100,000. Harold Holmes of Fist Virginia National Bank has advised Reed that the bank will not extend their line of credit, and that Reed must repay an overdue note of $13,000...
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...Reed’s Clothier” Case Study and Questions Reed’s Clothier Case Study Analysis Jim Reed, II the owner of Reed’s Clothier, a men’s clothing establishment is facing financial difficulties. Established in 1934, by Jim Reed to cater to the numerous Virginia Military Institute (VMI) graduates, the business struggled for the first several years. By 1976, the business annual sales had grown to $800,000, where Jim Reed decided to retire and hand over the business to his son, Jim Reed II. In 1981, Jim decided to expand retail floor space and acquired an $880,000 long-term mortgage debt. During this time, Jim increased inventories with the belief that higher inventories led to higher sales. In 1994, the business had grown to more than $2 million in sales. The increased inventories, along with the acquired mortgage payments have seriously eroded Reed’s positive cash flow. During the last year, Reed had slowly increased his line of credit at the bank and failed to take advantage of cash discounts offered by suppliers. Now, many of Reed’s accounts are almost 40 days past due, causing suppliers to demand payment. Jim decided to visit his bank in order to further extend his line of credit by an additional $100,000. Harold Holmes of Fist Virginia National Bank has advised Reed that the bank will not extend their line of credit, and that Reed must repay an overdue note of $13,000 within 30 days. Holmes suggested the Reed seek assistance from a consultant in order to establish a better inventory...
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...Reed’s Clothier Case Study FIN370 Finance for Business STUDENT University of Phoenix INSTRUCTOR DATE Reed’s Clothier Case Reed’s Clothier Inc. has struggled financially for the past three years. Owner, Jim has requested to his banker Harold Holmes to extend the company’s credit line in order to pay a $130,000 note payable that is going to be due soon. Unfortunately, the banker refused to give any additional credit and recommended to reduce the store’s inventory through an inventory reduction sale. The banker also recommended bringing Clothier’s accounts receivable to the industry averages. Jim argued that that he was going through a temporary cash flow problem and an inventory reduction sale would have a negatively impact on the sales. The eight answers below will help to determine Reed’s Clothier financial health and if its owner, Jim, should follow the recommendation that were provided by his banker. Question #1 Calculate a few ratios and compare Reed’s results with industry average. What do these ratios indicate? Liquidity Ratios: Current Ratio = Current Assets = 1960 = 2.0 Current Liabilities 1030 Quick Ratio = Current Assets - Inventory = 921 - 491 = 0.9 Current Liabilities 457 Receivables Turnover = Sales = 2,035 = 4.9 Accounts Receivable 413 Average Collection Period = ___365 _____...
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...Reed's Clothier, Inc. Case Study L. S. Moore Finance 370 March 30th, 2011 Reed's Clothier, Inc. Case Study Reed’s Clothier, Inc. Working Capital Policy and the background information, followed by the current situation and the Summary. Questions 1 and 4 will have been answered in an excel spreadsheet. Exhibit 16.1 Reed’s Clothiers Income Statement (in 000’s) Common Size Reed’s Industry Net Sales $2,035 100% 100% Cost of Goods 1,428 70.2 67.0 Gross Profit $607 29.8 33.0 General &administrative expenses $374 18.4 18.2 Depreciation & amortization $32 1.6 0.9 Interest expense $63 3.1 1.2 Earnings before taxes $138 6.7 12.7 Income Taxes $53 2.6 4.9 Net Income $85 4.1% 7.8% (Exhibit 16.2) Reed’s Clothiers Balance Sheet (in 000’s) Common Size ...
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...Case 16 Reed’s Clothier Inc James Jackson University of Phoenix Finance for Business FIN 370 Mr. Arnold Harvey July 21, 2010 Case 16 Reed’s Clothier Inc Reed’s Clothiers was founded by Jim Reed in 1934 when Jim retired from the military. Over the years, the business grew, netting over $800,000 by 1976. Jim Reed then decided to retire and handed over the family business to his son, Jim Reed II. The younger Jim then decided to buy a building in a prime area in downtown Lexington, creating a 880,000 mortgage debt. As the years progressed, Reed’s Clothiers success grew along with their inventory stock. Because of the rapid growth in Reed’s Clothiers’ inventory, debt was incurred. As the debt grew out of control and accounts became past due, Jim decided to make a visit to the bank his family did business with. There he learned that he was over extended in his credit and that he now had more debt and past due accounts than he did cash flow. The banker suggested that Jim hire a specialist to help manage his inventory and to get the company back on track. It was then Jim knew Reed’s Clothiers was in financial trouble. Reed’s Clothiers Question 1. 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? Ratio Reeds Industry Current (current assets/current liabilities) ...
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...QUESTIONS 1. 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? 2. Why does Holmes want Reed's to have an inventory reduction sale, and what does he think will be accomplished by it? 3. XXXXX XXXXX 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? 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. 5. What type of inventory control system would you suggest to XXXXX XXXXX? 6. What type of accounts receivable control would you suggest to XXXXX XXXXX? 7. Is the increase in sales related to the increase in inventory? (See Exhibit 5.) 8. What is Reed's cost of not taking the suppliers' discounts? Reed's Clothier Case Study Introductory Case Summary Jim Reed II is facing a dilemma of negative cash flow due to his business being slow. Jim’s decision for an increase of inventory has brought on uncontrollable debts. He was in hopes of increasing his line of credit thru his bank, but is rejected due to delinquency in the payment history and owing the bank $130,000 which needs to be paid within 30 days...
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