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 the company relates to Problems 10 and 11.

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 cycles 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 2009 and 2008 financial statements.
b. Calculate the following ratios for 2009 and 2008: 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 Man¬ drake showroom?

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Mandrake Motor Cycles December 31, 2009 December 31, 2008 Balance Sheets Assets Current assets: Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets 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 Long-term debt Total liabilities Stockholders' equity: Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 208,579 157,450 $ 399,339 162,618 568,880 785,657 175,864 1,327,550 998,547 $2,326,097 187,982 1,318,819 1,099,544 $2,418,363 $ 243,785 $ 189,911 341,680 293,553 255,642 252,971 841,107 736,435 137,579 355,000 978,686 1,091,435 1,250,000 1,250,000 97,411 76,928 1,347,411 1,326,928 $2,326,097 Year Ended Mandrake Motor Cycles December 31, Income Statements 2009 $2,418,363 Year Ended December 31, 2008 Net sales $1,476,941 $1,576,941 Cost of goods sold 912,386 1,103,859 Gross margin 564,555 473,082 Operating expenses: Selling expenses 295,388 201,564 General and administrative expenses 192,002 185,460 Total operating expenses 487,390 387,024 Operating income 77,165 86,058 Interest expense 45,652 70,248 Income before taxes 31,513 15,810 Income taxes 11,030 5,534 Net income 20,483 10,276