Marty Monk Fisher owns the largest motorcycle dealership in southern Ohio. Recently, he was approached by Bob Sherman, founder of Mandrake Motorcycles, and offered the

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Marty “Monk” Fisher owns the largest motorcycle dealership in southern Ohio. Recently, he was approached by Bob Sherman, founder of Mandrake Motorcycles, and offered the opportunity to be the sole distributor of Mandrake bikes in the state. Acceptance of the offer will require Monk to open a dedicated Mandrake showroom and repair facility and, obviously, stock Mandrake cycles and parts. Monk is quite impressed by the Mandrake product, but before making a major investment, he wants to be confident that the company will be around for the long haul. Accordingly, he has asked you to analyze the audited financial statements of Mandrake for the previous two years.

Required

a. Prepare a horizontal and a vertical analysis of the 2012 and 2011 financial statements.

b. Calculate the following ratios for 2012 and 2011: return on assets, gross margin percentage, receivables turnover, days’ sales in receivables, inventory turnover, days’ sales in inventory, debt to equity, and times interest earned.

c. Based on your analysis in parts a and b, comment on any matters that Monk should probe in an upcoming meeting with Bob Sherman from Mandrake.

d. Based on the limited information available, do you think Monk should open a Mandrake showroom?

Mandrake Motorcycles was started three years ago. The company manufactures and sells “classic” cycles similar in style to Harley-Davidson and Indian motorcycles made in the late 1940s.The following financial information for thecompany.

Mandrake Motorcycles Balance Sheets December 31 2012 December 31, 2011 Assets Current assets: Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets 240,000 185,000 850,000 200,000 1475,000 1,075,000 $2,550,000 S 425,000 200,000 630,000 210,000 1465,000 1,175,000 $2,640,000 Property,plant, and equipment, net Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Short-term debt payable Other current liabilities Total current liabilities 260,000 370,000 285,000 915,000 195,000 1,110,000 205,000 320,000 280,000 805,000 410,000 1,215,000 Long-term debt Total liabilities Stockholders' equity: Common stock Retained earnings Total stockholders' equity 1,325,000 115,000 1440,000 $2,550,000 1,325,000 100,000 1425,000 $2,640,000 Total liabilities and stockholders' equity Mandrake Motorcycles Income Statements Year Ended Year Ended December 31 2012 December 31, 2011 $1,690,000 Net sales Cost of goods sold Gross margin Operating expenses: $1,590,000 980,000 610,000 1,175,000 515,000 Selling expenses 300,000 210,000 510,000 100,000 48,000 52,000 18,200 33,800 210,000 200,000 410,000 105,000 72,000 33,000 11,550 21450 General and administrative expenses Total operating expenses Operating income Interest expense Income before taxes Income taxes Net income