Part II Assume that you are the credit manager of a mediumsi

Part II. 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.

1. As general background, read the letter addressed To Our Stockholders and Management’s Discussion – Results of Operations and Financial Condition. Next, compute the following for the fiscal years ending January 28, 1995 and January 29, 1994 (round dollar amounts to the nearest million, percentages to the nearest tenth of one percent, and other computations to one decimal place):

a. Current ratio

b. Quick ratio

c. Amount of working capital

d. Percentage change in working capital from the prior year

e. Percentage change in cash (and cash equivalents) from the prior year.

Note: Please show solution.

2. Based upon the most recent year, compute the approximate percentage of the annual merchandise purchases of Toys “R” Us that your company would be supplying.

3. Based upon your analysis in number 1, does the company’s liquidity appear to have increased or decreased during the most recent fiscal year? Explain.

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.

Other Notes:

- Toys “R” Us ends its fiscal years on unusual dates. Before answering questions about this company’s financial statements, read the note Fiscal Year on page D-11 of the annual report.

- Annual reports include not only comparative financial statements, but also the following sources of information:

a. Financial highlights, a summary of key statistics for the past 5 or 10 years.

b. A letter from management addressed To Our Stockholders.

c. A discussion by management of the results of operations and the company’s financial condition.

d. Several pages of Notes that accompany the financial statements.

e. Reports by management and by the independent auditors in which they express their respective responsibilities for the financial statements.

- 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

1.

a. Current Ratio

=Current Assets / Current Liabilities

= 2530713 / 2136943

            1.2

b. Quick Ratio

=Quick Assets (Current Assets - Inventories) / Current Liabilities

= (2530713 - 1999148) / 2136943

            0.2

c. Amount of Working Capital

= Current Assets - Current Liabilities

= 2530713 - 2136943

393770

d. Percentage change in working capital from last year

Working Capital of 1995

393770

Working Capital of 1994

633345

= (393770 - 633345) / 633345

-37.8%

e. Percentage change in cash (and cash equivalents) from last year

Cash and Cash Equivalents of 1995

369833

Cash and Cash Equivalents of 1994

791893

= (369833 - 791893) / 791893

-53.3%

a. Current Ratio
=Current Assets / Current Liabilities
= 2530713 / 2136943
1.2
b. Quick Ratio
=Quick Assets (Current Assets - Inventories) / Current Liabilities
= (2530713 - 1999148) / 2136943
0.2
c. Amount of Working Capital
= Current Assets - Current Liabilities
= 2530713 - 2136943
393770
d. Percentage change in working capital from last year
Working Capital of 1995	393770
Working Capital of 1994	633345
= (393770 - 633345) / 633345
-37.8%
e. Percentage change in cash (and cash equivalents) from last year
Cash and Cash Equivalents of 1995	369833
Cash and Cash Equivalents of 1994	791893
= (369833 - 791893) / 791893
-53.3%