Judgment Case 8-1 Riding the Merry-Go-Round
Merry-Go-Round Enterprises was a clothing retailer that sold clothes to young men and women. Some mistakes were made and ultimately the company had to file for bankruptcy protection in 1994. A quick look at the portion of the balance sheet given in the question, there are a couple of indicators that the company was having some problems.
Even though the company reported a 15% growth in sales, a quick look at the merchandise inventory is one red flag of problems ahead. On February 1, 1992, Merry-Go-Round reported merchandise inventory of 59,971,000 and on January 30, 1993 reported inventory of 82,197,000. The growth in the inventories is a good indication that company was beginning to have problems in getting rid of merchandise. By having a bloated inventory that becomes old and stale, sales and profits will ultimately decline. As noted in an article by Stephanie Strom in the New York Time from 1994, “Merchandising mistakes, made by executives whom Mr. Weinglass has already sacked, largely precipitated Merry-Go-Round's swift plunge into bankruptcy in January. Last year, when it seemed as if every teen-ager in America was sporting the lumber-jack look -- heavy lug boots, flannel shirts, thick socks -- Merry-Go-Round, which made its name gauging notoriously fickle adolescent tastes for a quarter-century, was trying to sell the hip-hop look -- baggy pants and hooded sweatshirts -- and bell-bottoms. The misjudgment bloated inventories, causing sales and operating profits to decline far enough to violate the company's loan agreements. That produced a credit crunch” (After 12 years, Boogie is Back on the Merry-Go-Round). With the profits falling and a credit crunch in tow, it would seem plausible that it would become more difficult for the company to pay debt.
The second indicator that seems to jump out is the growth in receivables. In 1992, receivables totaled 6,195 in relation to...
References: After 12 Years, Boogie is Back on the Merry-Go-Round, 1994, February 6. The New York Times
Spiceland, J.D., Sepe, J.F., Nelson, M.W., & Tomassini, L.A. (2009). Intermediate Accounting
(5th ed.). New York, NY: McGraw-Hill/Irwin.
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