Working Capital Case Reeds Clothes Inc.

1. Calculate a few ratios and compare Reeds results with industry average (some industries averages are shown in Exhibit 4.) What do these ratios indicates? (15 points)

2. Calculate the operating cycle. Explain what this result means. (15 points) \

3. Calculate the cash cycle. Explain what this result means. (15 points)

4. Why does Holmes want Reeds to have an inventory reduction sale, and what does he think will be accomplished by it? (20 points)

5. Jim reed had adopted a very loose working capital policy with higher current assets than industry averages. If he merely tightens his working capital policy to the averages, would this affect his sales? (15 points)

6. Assuming that Reeds can improve its operations to be in line with industry averages, construct a 1995 pro forma income statement. Assume that net sales will be reduced 5% to $1,938,000 but that depreciation and amortization will not change but remain at $32,000. (20 points)