Product Number TCG041

THE CRIMSON PRESS CURRICULUM CENTER

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THE CRIMSON GROUP, INC.

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J. Prep Company (A)
Gunnar Larson, proprietor of Reykjavik’s J. Prep Company stared aghast at the November
bank statement that the store’s bookkeeper had just placed on his desk. Despite the rapid growth

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in the store’s sales over the last two months, and the prospect of brisk sales for the upcoming
holiday season, the company was almost out of cash. He had just begun to hire part-time
employees for the anticipated growth in sales during December, and he realized that, unless
something was done quickly to rectify the cash situation, he would not be able to pay them.

BACKGROUND
J. Prep was an upscale clothing store that catered to college students and young professionals.

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The store carried a wide line of casually elegant sportswear, including sweaters, jeans, socks,
all-weather shoes, tee-shirts, pajamas, and jackets. The name J. Prep was well known throughout
Europe and the United States, and was synonymous with style at reasonable prices. Each J. Prep
store was operated by an independent manager who paid a franchise fee to the parent
organization in exchange for the right to use the J. Prep name and to purchase the company’s
products at wholesale prices for resale. The J. Prep Company did careful background checks on
applicants for franchises, and put its franchisees through a one-week training program to
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acquaint them with the company’s merchandising policies, general operating systems, and other
administrative matters that would assure a customer of receiving similar service in any J. Prep
store regardless of the city.
In May, Mr. Larson had been attracted to the J. Prep Company after reading an advertisement
for a franchise opening in Reykjavik. Several months later, he had signed an agreement with the
company and attended the company’s training program. In September, he raised the funds
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necessary to invest in a store, completed his negotiations with the landlord and signed a rental
agreement. He then acquired the necessary equipment and furnishings, purchased his initial
inventory, and hired a small sales staff. J. Prep Reykjavik opened officially for business in early
October.

The First Two Months

The first two months had gone much better than Mr. Larson had anticipated. Sales were brisk
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and profits were good. Most of his sales were either for cash or on credit. Customers who bought
on credit used a national credit card. The national credit card companies charged four percent of
the sales price as a fee, but they paid the store in cash immediately via electronic transfer. In an
effort to maintain good relations with J Prep’s parent office, Mr. Larson had adopted a policy of
paying the company immediately for the merchandise he received, even though the terms of the
agreement permitted him to defer payment for 30 days. He did the same with his other suppliers,
mainly utility companies, paying immediately upon receipt of a statement. He always paid his
rent on the first of the month. Exhibit 1 contains a summary of the store’s transactions for its first
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three months.

_____________________________________________________________________________________________
This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to
illustrate either effective or ineffective handling of an administrative situation.
Copyright © 2016 by The Crimson Group, Inc. To order copies or request permission to reproduce this document,
contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and
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 TCG041 • J Prep Company (A)
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The December Crisis

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In an effort to better understand the reasons for his cash shortfall, Mr. Larson reviewed the

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company’s balance sheet as of November 30. It confirmed what the bank statement showed—that
cash was dangerously low. It also confirmed that retained earnings had increased over the first
two months of the store’s operations. This latter confirmation was reassuring, but it did little to
resolve the crisis that Mr. Larson found himself in. He wondered what his options were at this
point, and what course of action he should pursue.

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Assignment
1.
Prepare a balance sheet for J. Prep as of November 30. You may ignore taxes.
2.
What is your assessment of the financial performance of J. Prep during its first two months of operations?
What criteria did you use in your assessment?
3.
How well has Mr. Larson managed J. Prep’s operating cycle? What changes, if any, would you recommend to
him?

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J. PREP COMPANY
Exhibit 1. Accounting Activities for the First Three Months
(All amounts are shown in U.S. dollar equivalents of Icelandic Kroners)
Start-Up Activities
September 2
Mr. Larson contributed $150,000 in cash to the entity “J. Prep Reykjavik.”
September 3
Mr. Larson increased the mortgage on his home to obtain $50,000 of the cash he
needed for his contribution to J. Prep Reykjavik.
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September 10
Some of Mr. Larson’s friends and former colleagues invested a total of
$250,000 in the company.
September 25
Contractors completed installation of the store equipment (e.g., clothing racks,
counters, cash registers, dressing rooms). The cost was $180,000, which Mr.
Larson paid in cash immediately. The equipment had an economic life of 10
years with no salvage value.
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September 30
Clothing and other merchandise were received and placed on the shelves ready
for the store’s opening. The total cost was $160,000, which Mr. Larson paid in
cash immediately.

Operating Activities
October 1
Mr. Larson paid October rent of $15,000.
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During
Sales totaled $80,000 for the month, spread evenly over the entire month.
October
The cost of the inventory that was sold was $45,000. Credit card fees were
$3,000, which were paid in cash (and which reduced retained earnings).
October 15
Employees were paid wages of $4,000 for the first half of October.
October 30
Utility bills totaling $2,000 were received and paid.
October 31
Employees were paid wages of $4,000 for the second half of October.
October 31
Mr. Larson replenished the inventory that was sold during October, and
purchased another $35,000 of inventory. He paid for this in cash.
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November 1
Mr. Larson paid November rent of $15,000.

During
Sales totaled $130,000 for the month, spread evenly over the entire month.
November
The cost of the inventory that was sold was $70,000. Credit card fees totaled
$5,000, which were paid in cash.
November 15
Employees were paid wages of $5,000 for the first half of November. The
additional $1,000 over October was because of some additional salespeople.

This document is authorized for educator review use only by Muhammad Siddiqui, HE OTHER until April 2018. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 TCG041 • J Prep Company (A)
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November 30
Utility bills totaling $3,000 were received and paid.

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November 30
Employees were paid wages of $5,000 for the second half of November.

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November 30
Mr. Larson replenished the inventory that was sold in November, and purchased
another $45,000 of inventory, all for cash. He wanted a large inventory in
preparation for the holiday season.
November 30
Mr. Larson was paid a salary of $10,000 for October and November.

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This document is authorized for educator review use only by Muhammad Siddiqui, HE OTHER until April 2018. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860