Crazy Eddie

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Crazy Eddie, Inc.
Common Size Balance Sheets
March 1, 1987March 1, 1986March 1, 1985May 31, 1984
Cash3.17%10.47%33.99%3.76%
Short-term investments41.36%21.14%0.00%0.00%
Receivables3.68%1.77%4.18%7.12%
Merchandise inventories36.99%47.16%40.51%63.83%
Prepaid expenses3.61%1.86%0.98%1.41%
Total current assets88.81%82.40%79.66%76.12%

Restricted cash0.00%2.64%10.77%0.00%
Due from affiliates0.00%0.00%0.00%15.69%
Property, plant and equipment8.95%5.65%5.64%5.05%
Construction in process0.00%4.93%1.76%0.00%
Other assets2.24%4.38%2.17%3.14%
Total assets100.00%100.00%100.00%100.00%

Crazy Eddie, Inc.
Common Size Income Statements
Year Ended
March 1, 1987Year Ended
March 1, 1987Year Ended
March 1, 1987Year Ended
March 1, 1987
Net Sales100.00%100.00%100.00%100.00%
Cost of Goods sold77.23%74.11%75.87%77.89%
Gross profit22.77%25.89%24.13%22.11%

Selling, general and admin expense17.68%16.39%15.04%16.43% Interest and other income2.10%1.22%0.89%0.51%
Interest expense1.48%0.31%0.32%0.38%
Income before taxes5.70%10.41%9.66%5.81%

Pension contribution0.14%0.31%0.44%0.00%
Income taxes2.84%5.06%4.94%3.06%
Net income2.72%5.05%4.28%2.75%
Net income per share0.000096%0.000183%0.000176%0.000131%

Crazy Eddie, Inc.
Key Ratios
1987198619851984
Liquidity Ratios:
Current Ratio2.40621.39851.56260.9287
Quick Ratio1.40440.59820.76800.1499

Solvency Ratios:
Debt to Assets Ratio0.68370.66430.63590.8298
Times Interest Earned3.616930.392728.287714.9253
Long-Term Debt to Equity2.16171.97861.74624.8755

Activity Ratios:
Inventory Turnover3.23204.38115.13585.8812
Accounts Receivable Turnover32.5026116.771149.751552.7208 Collection of Accounts Receivables in Days331175053

Profitability Ratios:
Gross Margin0.22770.25890.24130.2211
Net Income Margin3.00585.04984.27602.7483
Return on Total Assets0.03590.10430.8900.0758
Return on Equity0.11360.31070.24430.6062

Upon analysis of Crazy Eddie’s ratios and financial statements there were several red flags that suggested the firm posed a higher-than-normal level of audit risk. Analysis of the financial statements raises several red flags. The first red flag was the shift in the balance of the cash and short-term investment accounts. In 1985 cash represented 33.99% of total assets and in 1986 cash represented only 10.47% of total assets. This shift in the cash balance is most attributable to the shift in short-term investments which were 0% and 21.14% respectively. The drop in cash shows that Crazy Eddie was beginning to experience financial issues and liquidating their cash. Crazy Eddie continued to expand in this toughening market which furthermore liquidated cash. Another red flag is the drop in value of the merchandise inventory account. In 1984 the value of the inventory was 63.83% and in 1987 had dropped to 36.99% which shows that they were liquidating their inventory and replacing it with short-term investments. The retail industry is composed largely of merchandise inventory and this downward trend should have been a huge red flag. These red flags show a company who is losing market share because of the expansion of the electronics market in the late 1980’s. Analysis of key ratios continues the trend of red flags for an auditor. The first ratio that looks a bit suspicious to me is the current ratio which increased from .93 in 1984 to 2.41 in 1987. A current ratio over 1 generally suggest that if all of the current liabilities came due at one then the company would be able to pay the debt but in this situation for it to increase 150% over a 4 year span. The next red flag concerning ratios is the long-term debt to equity ratio which decreased from 4.88 to 2.16. The ratio show how aggressive...
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