Judgment Case 8.1 free essay sample

Judgment Case 8-1 Riding the Merry-Go-Round Requirement Merry-Go-Round Enterprises was a clothing retailer that sold clothes to young men and women. Some mistakes were made and ultimately the company had to file for bankruptcy protection in 1994. A quick look at the portion of the balance sheet given in the question, there are a couple of indicators that the company was having some problems. Even though the company reported a 15% growth in sales, a quick look at the merchandise inventory is one red flag of problems ahead. On February 1, 1992, Merry-Go-Round reported merchandise inventory of 59,971,000 and on January 30, 1993 reported inventory of 82,197,000. The growth in the inventories is a good indication that company was beginning to have problems in getting rid of merchandise. By having a bloated inventory that becomes old and stale, sales and profits will ultimately decline. As noted in an article by Stephanie Strom in the New York Time from 1994, â€Å"Merchandising mistakes, made by executives whom Mr. We will write a custom essay sample on Judgment Case 8.1 or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Weinglass has already sacked, largely precipitated Merry-Go-Rounds swift plunge into bankruptcy in January. Last year, when it seemed as if every teen-ager in America was sporting the lumber-jack look heavy lug boots, flannel shirts, thick socks Merry-Go-Round, which made its name gauging notoriously fickle adolescent tastes for a quarter-century, was trying to sell the hip-hop look baggy pants and hooded sweatshirts and bell-bottoms. The misjudgment bloated inventories, causing sales and operating profits to decline far enough to violate the companys loan agreements. That produced a credit crunch† (After 12 years, Boogie is Back on the Merry-Go-Round). With the profits falling and a credit crunch in tow, it would seem plausible that it would become more difficult for the company to pay debt. The second indicator that seems to jump out is the growth in receivables. In 1992, receivables totaled 6,195 in relation to the receivables total in 1993 of 6,466,000. This is a huge percentage increase in relation to the percentage increase of sales. As company’s sales grow, receivables can grow. However, in this case, the percentage of growth in receivables compared to sales is much more dramatic and â€Å"this could indicate customer dissatisfaction with the product or that the company has extended too generous payment terms in order to attract new customers, which in turn, could increase sales and bad debts† (Spiceland, Sepe, Nelson, Tomassini, 2009, p350). Merry-Go-Round Enterprises certainly was a very strong company for some time. By looking at the balance sheets from 1992 and 1993, you can see some red flags that indicated potential trouble. As problems occurred in the stores, inventories grew and became old and stale. To combat this, the company appears to have tried some special incentives, causing receivables to grow at a much quicker percentage than sales. These two red flags are just a couple; of what I’m sure were several indicators of trouble. References After 12 Years, Boogie is Back on the Merry-Go-Round, 1994, February 6. The New York Times Spiceland, J. D. , Sepe, J. F. , Nelson, M. W. , Tomassini, L. A. (2009). Intermediate Accounting (5th ed. ). New York, NY: McGraw-Hill/Irwin.