Case #16

Topics: Revenue, Financial ratios, Generally Accepted Accounting Principles Pages: 3 (812 words) Published: August 7, 2011
Case #16 Reed’s Case Study and Questions
1.)
Liquidity Ratios| Reed| Industry|
Current Ration| 2.0| 2.7|
Quick Ratio| 0.94| 1.6|
Receivables turnover| 4.93| 47.4|
Avg. Collection Period| 74.08| 47.4|
Efficiency Ratios| Reed| Industry|
Total Asset Turnover| 1.28| 1.9|
Inventory Turnover| 2.91| 7|
Payable Turnover| 6.97| 15.1|
Profitability Ratios| Reed| Industry|
Gross Profit Margin| 29.8%| 33|
Net profit Margin| 4.2%| 7.8|
Return on Common Equity| 16.0%| 25.9|
When you take a look at the ratios, the Reed Company is poor on the parameters. In the company their current and quick ratio seems to be less than what the industry is and their liquidity is poor. Reed used to use more assets than what the industry did where in the long run the efficiency with the assets became low. They seem to keep more inventory as well as they collect more cash slowly. This makes the payable turnovers low. This is because they pay over a longer time to their creditors. The profitability in the company is low with a low gross margin and net margin. Also what is less than the industry average is the return on equity.| 2.) They want to have a inventory reduction sale so that they can be able to generate cash. If they do the inventory reduction sale then they will be able to generate enough cash to pay back the note. The note that they are trying to repay back is $130,000. The total inventory for the company is $491,000. The sales will be at reduced prices, which will be able to have more cash to repay the note. 3.) If the working capital policy is tightened up then, the averages then this could possibly affect the sales of the company. What should be done is to look at the inventories and the account receivables. Looking at the inventory there is a decrease in the inventory which would mean that at some point there would be the wrong type of inventory that they would possibly need for the sales. The stock out would...
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