In answering these questions assume that you are the credit

In answering these questions, assume that you are the credit manager of a medium-size toy manufacturer. (Your company’s annual sales are about $2 billion per year.) Toys “R” Us wants to make credit purchases from your company of approximately $15 million per month, with payment due in 60 days.

4. Comment upon the company’s current ratio and quick ratio in relation to any “rules of thumb”.

5. Other than the ability of Toys “R” Us to pay for its purchases, do you see any major considerations which should enter into your company’s decision? Explain

6. Your company assigns each customer one of the four credit ratings listed below. Assign a credit rating to Toys “R” Us and write a memorandum explaining your decision. (In your memorandum, you may refer to any of your computations or observations in part 1 through 4, and to any information contained in the annual report.)

Possible Credit Ratings:

- Outstanding Little or no risk of inability to pay. For customers in this category, we fill any reasonable order without imposing a credit limit. The customer’s credit is reevaluated annually.

- Good Customer has good debt paying ability, but is assigned a credit limit which is reviewed every 90 days. Orders above the credit limit are accepted only on a cash basis.

- Marginal Customer appears sound, but credit should be extended only on a 30-day basis with a relatively low credit limit. Credit worthiness and credit limit are reevaluated every 90 days.

- Unacceptable Customer does not quality for credit.

Answer each of the following questions and briefly explain where in the statements, notes, or other sections of the annual report you located the information used in your answer.

ANNUAL REPORT OF TOYS \"R\" US Intended for Uise after Chapter 8. In this appendix we present the 1995 annual report of Toys \"R\" Us, a publicly held corporation. This report was selected to illustrate many of the financial reporting concepts discussed in this textbook. But not all of the terminology and accounting policies appearing in this report are consistent with our text discussions. This illustrates some of the diversity that exists in financial reporting. TOSUs ANNUAL REPORT YEAR END ED JANUARY 28. 1 99s

Solution

Part 4 - General rule of thumb of current rario is it should be atleast 2:1 but here it is only 1.18 in year 1995 and 1.31 in year 1994

Rule of thumb for Quick ratio is it should be 1:1 but here it less than 1:1 in both the years.

Hence Company maintain low current and quick ratio and also current rartio is decreasing

Part 5 - Company is able to pay its customers in time since it has very good average payment period which is 27.67 days. But besides this other factors like solvency, liquidity, ratio analysis should be done to decide on whether to extend credit or not

Part 6 - Proposed credit of 60 days is not accepted as company maintain very low current ratio and quick and also has low trend of working capital, current ratio and quick ratio.

But company has exceptionally average payment period of 27.67 days. Hence it can be seen that company is able to pay its customers in time.

Looking at the scenario, as a credit manager of medium size company, My rating will be \'Unacceptable customer does not qualify for credit\' since its liquidity and current ratio are highly suffered.

Working Notes

a) Current ratio - Current Assets/Current Liabilities

b) Quick Ratio - (Current Ratio - Inventory - Prepaid expenses)/Current Liabilities

C) Working Capital - (Current assets - Current Liabilities)

d) % Change in working capital from prior year

e) % Change in cash and cash equivalents from prior year

Part 2 - Calculation of annual merchandise purchases

Average Purchases (assume to be credit) - ($6229537/365) = $17067.22

Average accounts payable :- ($472653 + $471782)/2 = $472217.5

Average Payment period - ($472217.5/$17067.22) = 27.67 Days

Part 3 - Company\'s liquidity is Decreased during the most recent fiscal year. It can be seen from the current ratio, quick ratio and working capital changes.

Although Cash and cash equivalents have been increased but overall company\'s liquidity is decreased due to decrease in working capital decrease.

Decision on credit purchases

As a credit manager of a medium size company, it would not be apt to supply the $15 Million goods to Toy \'R\' us on credit period of 60 days. Since the liquidity of company is decreasing very heavily. Although average payment period of 27.67 days is lower than proposed credit period of 60 days but still liquidity of company is highly negative.

Particulars (Information from consolidated balance sheet)	Year 1995	Year 1994
Current Assets (A)	$2530713	$2708396
Current Liabilities (B)	$2136943	$2075051
Current Ratio (A/B)	1.18	1.31