Case 13-6

Prepared by

LaShonda R. Unseld

for Professor C. E. Reese

in partial fulfillment of the Requirements for

ACC 770 – Managerial Accounting

School of Business/Graduate Studies

St. Thomas University

Miami Gardens, FL

Term A3/ Summer 2011

June 2, 2011

Table of Contents

Issues................................................................................................................
.......................1

Facts..................................................................................................................
.......................1

Analysis.............................................................................................................
........................1

Conclusions/Solutions/Recommendations.........................................................
......................3
I Issues:

1. What do you think is happening at Lloyd’s and The Emporium?

2. What financial ratios and questions raised in your analysis of the two
companies’ financial statements support your opinions?

II Facts:

1. In March 2002, Richard Allen, an assistant credit analyst for the quality
Furniture Company, was concerned about changes in two of the Quality’s
accounts in Minnesota – Lloyd’s, Inc., of Minneapolis and The Emporium
department store in St. Paul.

2. Lloyd’s had been a customer of Quality Furniture for over 30 years and
had previously handled it’s affairs in a most satisfactory manner. The
Emporium was a comparatively new customer of Quality’s, having
established an account in 1993.

3. Both accounts were sold on terms of 2%, 10, net 30, and although was
not discounting, had been paying invoices promptly until December 2001.
Ralphson had previously established a 50,000 limit on Lloyd’s and an
$85,000 limit on The Emporium.

4. In early March 2002, Richard Allen received the annual reports of Lloyd’s
and The Emporium. After reviewing these statements and checking the
accounts receivable ledger for both customers, Allen felt that the accounts
should be reviewed by Ralphson. Accordingly, he furnished Ralphson with
the information found in Exhibits 1 through 5.

5. Throughout the country at this time, orders of shipment in March were

down about 30% from February. February had shown a 10% drop since
January.

1. Analysis: Three Month Operation

 Based on the attached above, for the past three years, Lloyd's has been
performing with increasing lower sales volumes, which is having a negative
effect on other aspects of its operations. While the company has been very
effective at managing its cost of goods sold and operating costs, the loss of
sales volume has resulted in a decreased profit margin. The company has
also been assuming more debt, both current and long-term, which are
reflected in the company's debt and long-term debt ratios.

Lloyd's is also suffering from inefficiencies at collecting overdue revenue.

The company is falling behind
in its ability to repay its creditors, as highlighted in its increasing day's
payable ratio. The attached ratio analysis also reveals that the company is
becoming increasingly ineffective at managing its inventory, which reduced
to 2.79 for the end of the year (2002).

Suffering from a net profit loss for the past two years, with no dividends paid
to shareholders for the year that had just ended is dangerous. Lloyd's is a
company in trouble it must strive to increase its sales volume and address its
inventory and debt control. The company’s repayment problems result as a
viable entity.

2. What financial ratios and questions raised in your analysis of the

two companies’ financial statements support your opinions?

The fact that credit terms and financing of dealers became equally important
and the Quality Furniture Company in Ralphson’s words was “backed into the
position of supporting numerous customers’ in order to maintain adequate
distribution for its products” was a red flag from the beginning. A successful
company should always have flexibility and never feel “backed” into
anything.

Throughout the country at this time, orders for shipment in March were down
about 30% from February. February even showed a 10% drop of about 10%
from January. Credit managers among furniture manufacturing concerns
were placed in a rocky position trying to please sales managers who wanted
to maintain volume, while they were aware that the shipment of furniture to
customers who had already overextended their financial positions was
potentially dangerous at this time.
The inventory turnover went from 3.54 in 2000, to 2.82 in 2001, to 2.79 in
2002.

Conclusions

It was seen early that beginning in 2001 that retail stores were on a decline.
Stores such as the Emporium, carrying low-priced furniture lines, were the
first to suffer the declines. This situation was followed by signs of a relaxing
demand for furniture of higher quality and higher priced toward the end of
2001. This should have been a major warning sign. In retail, it’s always
important to try to stay ahead because styles and prices are always
changing which contributes to more diverse and new customers.