RED FLAGS AT L.A. GEAR
In reviewing the Balance Sheet of L.A. Gear, it appears that the cash on hand was not sufficient, although it had increased from the prior year. The accounts receivable had increased suggesting that it was extending credit but not receiving payments due to them in a timely manner. This situation had most definitely left them without their much needed cash flow. The fact that inventory continued to decline and the net property and equipment more than doubled indicates a red flag. L.A. Gear’s current liabilities had also increased significantly. The line of credit had almost doubled even though the accounts payable had decreased. No long term debt is noticeable, possibly due to paying their debts within a twelve month period with the line of credit they had established. By increasing their debt and using their line of credit to pay for those debts, they were adding even more risk of ensuing failure.
The income statement presents the facts that while the cost of sales had increased in each of the past two years; the gross profit had significantly decreased. With material costs increasing by 8%, the evidence is clear that L.A. Gear was not controlling its cost of sales, including the selling, general and administrative expenses. The income taxes had decreased, but that was most likely due to the decline in sales. By reviewing the net earnings, which had decreased by over 250%, the possibility that the company was in trouble was evident. With its sales growth decreasing three times over and the operating expense growth being more than its sales, L.A. Gear’s future was not on stable grounds. The possibility of its decline in sales could have been due to the market changing. New shoes were styles were becoming more sought after and L.A. Gear was apparently not up to the challenge to remain competitive in the market.
The deterioration of L.A. Gear’s profit margins was evident in the Statement of Cash Flows. While tax benefits...
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