Reid's Clothier Essay

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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
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Reed’s current and quick ratios are below the industry average. However, major concerns are raised by the receivables turnover and the average collection period that are considerably below the industry average. The liquidity ratios tell that Reed’s Clothier has high inventory. Furthermore the ratios bring up Reed’s Clothier’s inability to collect from its past due customers and to fulfill the short-term debt.

Efficiency Ratios:

Total Asset Turnover = Cost of Sales = 2,035 = 1.3 Total Assets 1,591

Inventory Turnover = Cost of Sales = 1,428 = 2.9 Inventory 491

Payable Turnover = Cost of Sales = 1,428 = 7.0 Accounts Payable 205

|Ratios |Reed’s Clothier |Industry |
|Total Asset Turnover

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