PROBLEM 14-6. Analyzing Financial Ratios and Cash Flows [LO 5, 6, 7] 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. Dannys Brake and Muffler has over 90 stores in the cities serviced by Venture. Recently, Danny Morton, the founder of Dannys Brake and Muffler, was approached by Venture with an interesting offer.Venture wants to be the sole supplier of mufflers and brake parts to Dannys. In exchange,Venture will invest in technology to monitor Dannys 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 Dannys.

Prior to the final phase of negotiation, Dannys 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 Ventures statement of cash flow for fiscal 2015.

Fiscal 2015 Fiscal 2014

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, 2015

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

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