AVERAGE JOE'S GYM

Background

You are an Analyst for the professional service firm, BUSI 1043 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. After 4 months on the job, you walk into the partner's office to provide him with your two-week notice. Given your excellent performance over the past few months, rival professional service firm, BUSI 2083 LLP has provided you with an offer you cannot refuse by providing you with a promotion to Consultant and a significant raise. Although sad to see you go, lead partner Justin Medakiewicz requested assistance on one last engagement: Average Joe's Gym.

Additional Information

Average Joe's caters to families and gives a substantial discount for families to work out together. Families that workout together reach their goals together. Members receive 2 free training sessions with enrollment so that they may start reaching their goals as soon as they sign up. The exercise specialists that provide the training to the members hold the highest certification credentials and come from accredited universities with a specific degree focus in Exercise Science and or Health Education.

The company has experienced significant growth in the past five years due to an increase in the popularity of health and fitness among social trends. As a result, Average Joe's has applied to TD Bank for a $1 million long term loan in order to finance further expansion plans. Specifically, the funds would be used to purchase additional gym equipment.

Average Joe's application and financial statements have been provided by Lisa Jennings, a credit analyst with TD Bank. She would like BUSI 1043 to conduct a preliminary review of Average Joe's financial statements and determine whether Average Joe's should proceed further into a more detailed analysis. Lisa would like BUSI 1043 to document the recommendations and supporting analysis in a report that will be maintained by the bank.

Lisa: "Average Joe's has provided us with a copy of their most recent Balance Sheet and Income Statement (Exhibit I). I know this may not be enough to make the final decision, but it should be more than enough for you to get started."

You: "Yes, I can obtain much information from these two statements".

Lisa: "Okay, that's great. I took a quick look at the Balance Sheet and am wondering what has caused the change in cash. Cash is needed to pay back the loan. Although I haven't done any rigorous analysis, it is a bit concerning to see the cash decline by such a large amount."

You: "I can definitely look into the decrease in cash."

Lisa: "It may also be useful to give some thought to what the Balance Sheet may look like of the loan is approved. Historical statements are fine, but they will not be able to provide you with this information. Additional information on the use of the loan is provided in Exhibit II."

You: "That is a great point. I will take this into consideration." WWW.YORKVILLEU.CA

BUSI 1043: INTRODUCTION TO FINANCIAL ACCOUNTING 2

Lisa: "Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend proceeding with further due diligence, can you prepare list of additional information that would be useful in making our final decision?"

You: "Yes, I can most certainly do that. I will get started right away."

You are excited with this last assignment and want to leave BUSI 1043 with a good impression. You begin to conduct some preliminary research by requesting industry comparable from the bank. You have located various industry ratios that can be used as a benchmark (Exhibit III).

Exhibit I: Financial Statements Average Joe's Gym Statement of Financial Position As at Dec 31 Current Assets 2014 2013 Cash 235.359 134,550 Marketable Securities 145.780 457.206 Accounts Receivable 223.450 174,930 Inventory 425,770 355,790 Prepaid Expenses 17,500 19 500 TOTAL 1,047.859 1,141,976 Capital 2014 2013 Property and Equipment, 2,756,950 2.492,655 net TOTAL ASSETS 3.804.809 3.634,631Liabilities and Shareholder's Equity Current 2014 2013 Accounts Payable 294,305 95,700 Accrued and Other Liabilities 237,595 244.760 Current Portion of Long-Term Debt 375,900 345.900 Total 907 800 686,360 Long Term Debt 1,280,330 1,601,500 Shareholder's Equity Common Shares (50,000 Outstanding) 595.817 595.817 Retained Earnings 1,020,862 750.953 Total Liabilities and Shareholders' Equity 3,804,809 3,634,631Average Joe's Gym Income Statement For the Year Ended December 31st 2014 2013 Sales 2,975,990 2,575,990 Cost of Sales 1,368.955 1,184,955 Gross Profit 1,607,035 1,391,035 Expenses Amortization 155,490 125,490 General and Administrative 134,500 102,800 Marketing and Sales 175,680 155,600 Interest Expense 76,820 96,090 Office Expense 295,980 255,000 Wages and Benefits, Administration 315,000 315,000 Total Operating Expenses 1,153,470 1,049,980 Operating Income 453,565 341,055 Gain (losses) on marketable securities 25,475 9,800 Impairment loss on capital assets 0 Income (loss) before taxes 479,040 350,855 Provision for (benefit from) income taxes 134,131 98,239Net Income 344,909 252,616 Opening Balance - Retained Earnings 750,953 573,338 Net Income 344,909 252,615 Dividends 75,000 75,000 Closing Balance - Retained Earnings 1,020,862 750,953Exhibit III - Industry Benchmarks Industry Ave Ratio on Profitability 2014 Return of Equity 15.00% Return on Assets 8.00% Financial Leverage Percentage 7.00% Earnings per Share $4.40 Quality of Income 75.00% Profit Margin 10.00% Fixed Asset Turnover 2.00 Tests of Liquidity Cash Ratio 7.00% Current Ratio 1.00 Quick Ratio 0.75 Receivable Turnover 13.00 Average Days in Accounts Receivable 28.08 Payable Turnover 19.00 Average Days in Accounts Payable 19.21 Inventory Turnover 6.50 Average Days in Inventory 56.15 Solvency and Equity Position Times Interest Earned 5.40 Cash Coverage 6.30 Debt to Equity Ratio 1.35 Miscellaneous Book Value Per Share $29.00