PROBLEM 14-6. Analyzing Financial Ratios and Cash Flows [LO 5, 6, 7] Venture Aut
ID: 2467893 • Letter: P
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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. 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 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?
Explanation / Answer
On the basis of ratios, current ratio increased from last year but quick ratio decreased, which is an indicator of company's short-term liquidity. It measures the ability to use its quick assets (cash and cash equivalents, marketable securities and accounts receivable) to pay its current liabilities, then inventory turnover also decreased, as it measures company's efficiency in turning its inventory into sales. Its purpose is to measure the liquidity of the inventory.
Debt to equity increased which means we have more debt than equity, even intrest earned ratio is also decreased by 1.32% from last year, overall operations of Venture become more ineffecient in 2015 than 2014.
if we talk about cash flow statment
Account receivable and accounts payable both increased from last year, that means neither Venture collecting payments not it is paying payment to parties, and continuosulsy borrowing money and incraesing debt equity ratio.
AS PER MY SUGGESTION UI WOULD NOT RECOMMEND DANNY TO PURSUE DEAL WITH VENTURE. DUE TO ITS INEFFECIENT PEFORMANCE FROM LAST YEAR.
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