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Case 13-6

Prepared by
LaShonda R. Unseld
for Professor C. E. Reese
in partial fulfillment of the Requirements for
CC !!" # $ana%erial &&ountin%
S&hool of 'usiness()raduate Studies
St. *homas Uni+ersity
$iami )ardens, -L
*erm 3( Summer ."11
/une ., ."11
*able of Contents
0ssues................................................................................................................
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-a&ts..................................................................................................................
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nalysis.............................................................................................................
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Con&lusions(Solutions(Re&ommendations.........................................................
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I Issues:
1. 1hat do you thin2 is happenin% at Lloyd3s and *he Emporium4
.. 1hat finan&ial ratios and questions raised in your analysis of the t5o
&ompanies3 finan&ial statements support your opinions4
II Facts:
1. 0n $ar&h .""., Ri&hard llen, an assistant &redit analyst for the quality
-urniture Company, 5as &on&erned about &han%es in t5o of the 6uality3s
a&&ounts in $innesota # Lloyd3s, 0n&., of $inneapolis and *he Emporium
department store in St. Paul.
.. Lloyd3s had been a &ustomer of 6uality -urniture for o+er 3" years and
had pre+iously handled it3s affairs in a most satisfa&tory manner. *he
Emporium 5as a &omparati+ely ne5 &ustomer of 6uality3s, ha+in%
established an a&&ount in 1773.
3. 'oth a&&ounts 5ere sold on terms of .8, 1", net 3", and althou%h 5as
not dis&ountin%, had been payin% in+oi&es promptly until 9e&ember .""1.
Ralphson had pre+iously established a :",""" limit on Lloyd3s and an
;<:,""" limit on *he Emporium.
=. 0n early $ar&h .""., Ri&hard llen re&ei+ed the annual reports of Lloyd3s
and *he Emporium. fter re+ie5in% these statements and &he&2in% the
a&&ounts re&ei+able led%er for both &ustomers, llen felt that the a&&ounts
should be re+ie5ed by Ralphson. &&ordin%ly, he furnished Ralphson 5ith
the information found in E>hibits 1 throu%h :.
:. *hrou%hout the &ountry at this time, orders of shipment in $ar&h 5ere
do5n about 3"8 from -ebruary. -ebruary had sho5n a 1"8 drop sin&e
/anuary.
1. Analysis: Three Month Operation
'ased on the atta&hed abo+e, for the past three years, Lloyd?s has been
performin% 5ith in&reasin% lo5er sales +olumes, 5hi&h is ha+in% a ne%ati+e
effe&t on other aspe&ts of its operations. 1hile the &ompany has been +ery
effe&ti+e at mana%in% its &ost of %oods sold and operatin% &osts, the loss of
sales +olume has resulted in a de&reased profit mar%in. *he &ompany has
also been assumin% more debt, both &urrent and lon%-term, 5hi&h are
refle&ted in the &ompany?s debt and lon%-term debt ratios.
Lloyd?s is also sufferin% from ineffi&ien&ies at &olle&tin% o+erdue re+enue.
*he &ompany is fallin% behind
in its ability to repay its &reditors, as hi%hli%hted in its in&reasin% day?s
payable ratio. *he atta&hed ratio analysis also re+eals that the &ompany is
be&omin% in&reasin%ly ineffe&ti+e at mana%in% its in+entory, 5hi&h redu&ed
to ..!7 for the end of the year @."".A.
Sufferin% from a net profit loss for the past t5o years, 5ith no di+idends paid
to shareholders for the year that had Bust ended is dan%erous. Lloyd?s is a
&ompany in trouble it must stri+e to in&rease its sales +olume and address its
in+entory and debt &ontrol. *he &ompany3s repayment problems result as a
+iable entity.
2. What financial ratios and questions raised in your analysis of the
two companies financial statements support your opinions?
*he fa&t that &redit terms and finan&in% of dealers be&ame equally important
and the 6uality -urniture Company in Ralphson3s 5ords 5as Cba&2ed into the
position of supportin% numerous &ustomers3 in order to maintain adequate
distribution for its produ&tsD 5as a red fla% from the be%innin%. su&&essful
&ompany should al5ays ha+e fle>ibility and ne+er feel Cba&2edD into
anythin%.
*hrou%hout the &ountry at this time, orders for shipment in $ar&h 5ere do5n
about 3"8 from -ebruary. -ebruary e+en sho5ed a 1"8 drop of about 1"8
from /anuary. Credit mana%ers amon% furniture manufa&turin% &on&erns
5ere pla&ed in a ro&2y position tryin% to please sales mana%ers 5ho 5anted
to maintain +olume, 5hile they 5ere a5are that the shipment of furniture to
&ustomers 5ho had already o+ere>tended their finan&ial positions 5as
potentially dan%erous at this time.
*he in+entory turno+er 5ent from 3.:= in .""", to ..<. in .""1, to ..!7 in
.""..
onclusions
0t 5as seen early that be%innin% in .""1 that retail stores 5ere on a de&line.
Stores su&h as the Emporium, &arryin% lo5-pri&ed furniture lines, 5ere the
first to suffer the de&lines. *his situation 5as follo5ed by si%ns of a rela>in%
demand for furniture of hi%her quality and hi%her pri&ed to5ard the end of
.""1. *his should ha+e been a maBor 5arnin% si%n. 0n retail, it3s al5ays
important to try to stay ahead be&ause styles and pri&es are al5ays
&han%in% 5hi&h &ontributes to more di+erse and ne5 &ustomers.

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