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. 

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

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