Reed's Clothier

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1. Reed’s clothier owned by Jim Reed II is having financial difficulties. Jim went to First Virginia National Bank to obtain an extended line of credit when he found out the bank could no longer extend Reed’s Clothier line of credit because the company is having cash flow problems as well as the company may be in possible financial distress. Jim is currently forty-five days past due on his recent notes payable of $130,000 and Harold Holmes with First National Bank informs Jim he has thirty days to bring the note current. Jim is faced with a dilemma for bringing his current note current while his company is having financial difficulties. Harold has made a few suggestions to Jim to help with the company. Harold suggests that Jim get’s a consultant to look at the company’s books to help find a solution to the financial problems the company is facing. Jim also needs to reduce the inventory and accounts receivable to the industry averages along with collecting past-due accounts from his customers. 2. Liquidity ratios for Reed’s Clothier compared to the industry ratios: Current ratio for Reed’s 1400/740 = 1.9 and the industry is 2.7. Reed’s clothier is less than the industry ratio so it shows that they cannot meet their current obligations. Quick ratio = (1400-790) / 740 = 610 / 740 = 0.8 for Reed’s and 1.6 for the industry. A quick ratio of 1 or higher is accepted by most creditors and Reed’s only have a quick ratio of 0.8 so creditors will hesitate on the company. Receivables turnover = 2860 / 580 = 4.9 for Reed’s and 7.7 for the industry. Reed’s shows that the accounts receivable turns about 5 times on average over the year. Average collection period = 310 x 580 =179,800 / 2860 = 62.9 days. Reed’s takes an average of 62.9 days to collect from customers where the industry takes 47.4 days to collect. Efficiency Ratios: Total asset turnover = 2860 /

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