Cutrite Shears Case Study

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The collection period becomes a major issue period starting in Nov ’69 raising well over 45 days, the assumption built into the proforma statements. In Oct ’69 receivables are becoming in an increasing proportion of sales, creating a significant cash problem. Inventory turnover raised significantly over the forecasted amounts resulting in inventory sitting on the selves far longer than anticipated, tying up cash. As a result of these increases in net working capital, liquidity starts to become an issue. Both the current ratio and the acid-test ratio illustrate that Schultz will have difficulty paying off its short term liabilities. Moreover, Schultz will also start to have issues paying off his long term as the debt to net worth ratio rises and net income to net worth falls.

3. (30 points). Has Cutrite’s financial condition worsened sufficiently to make the repayment of the loan doubtful by December 31, 1970? Prepare a pro-forma balance sheet for the quarters ending 6/30/70 – 12/31/70, in preparing your answer. Assume operations are at the same level in fiscal 1971 as forecast for 1970. Assume no tax payments in June 1970 because of overpayment in relation to pretax earnings.

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Yes, the loan payment is doubtful if Schultz will continue to produce like he has in the past. In turn, money will be tied up in assets such as inventories and accounts receivable leading to an inability to make short term payments. Even if the economy turns around in fiscal year 1971 and performs as it did in early fiscal year 1970 (as assumed in this proforma balance sheet), he will struggle to offload the excess inventory creating a further need for funds.