Reference no: EM132975698

Analyzing Financial Ratios and Cash Flows Venture Auto Parts is a chain of 40 stores offering a full line of auto parts and supplies to consumers and independent auto repair shops. Danny's Brake and Muffler has over 90 stores in the cities serviced by Venture. Recently, Danny Morton, the founder of Danny's Brake and Muffler, was approached by Venture with an interesting offer. Venture wants to be the sole supplier of mufflers and brake parts to Danny's. In exchange, Venture will invest in technology to monitor Danny's inventory levels and make timely deliveries to all locations. Venture asserts that the deal will lead to lower part prices and greater inventory turnover for Danny's.

Prior to the final phase of negotiation, Danny's chief accountant, Sarah Wilson, was assigned the task of analyzing the confidential audited financial statements of Venture. As part of her work, Sarah calculated the following ratios and obtained Venture's statement of cash flows for fiscal 2021.

                                       Fiscal 2021                    Fiscal 2020
Current ratio                        1.65                         1.55
Quick ratio                              0.70                       0.90
Inventory turnover                     4.20                    5.63
Debt to equity                           3.00                      2.30
Times interest earned                    1.10                       2.42

Venture Auto Parts

Statement of Cash Flows Year Ended December 31, 2021

Cash Provided from Operations

Net earnings $ 9,000,000
Reconciliation of net earnings to net cash provided by operations:
Depreciation and amortization 900,000
Increase in receivables (3,500,000)
Increase in merchandise inventories (1,100,000)
Increase in accounts payable 700,000
Increase in income taxes payable     100,000
Net cash provided by operations 6,100,000
Cash flows from investing activities
Purchase of Dundee Stores (5,000,000)
Purchase of property  (7,000,000)
Net cash used in investing activities (12,000,000)
Cash flows from financing activities
Proceeds from long-term borrowings   6,200,000
Net cash provided by financing activities   6,200,000
Increase in cash and cash equivalents 300,000
Cash and cash equivalents at beginning of year     250,000
Cash and cash equivalents at end of year $   550,000

Problem 1: Based on this limited information, would you recommend that Danny pursue the deal with Venture?