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."

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 a 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

Asat Dec 31

Current Assets20142013

Cash235,359134,550

Marketable Securities145,780457,206

Accounts Receivable223,450174,930

Inventory425,770355,790

Prepaid Expenses17,50019,500

TOTAL1,047,8591,141,976

Capital20142013

Property and Equipment, net

2,756,9502,492,655

TOTALASSETS3,804,8093,634,631

Liabilities and Shareholder's Equity

Current

20142013

Accounts Payable294,30595,700

Accrued and Other Liabilities237,595244,760

Current Portion of Long-Term Debt375,900345,900

Total907,800686,360

Long Term Debt1,280,3301,601,500

Shareholder's Equity

Common Shares (50,000 Outstanding)595,817595,817

Retained Earnings1,020,862750,953

Total Liabilities and Shareholders' Equity3,804,8093,634,631

Average Joe's Gym

Income Statement

For the Year Ended December 31st

20142013

Sales2,975,9902,575,990

Cost of Goods Sold1,368,9551,184,955

Gross Profit1,607,0351,391,035

BUSI 1043: INTRODUCTION TO FINANCIAL ACCOUNTING4

Exhibit II - Additional Information Regarding the Loan

The loan will be used to purchase $1 million in additional capital assets. The additional assets will result in an increase in revenue of 20%.

The loan will bear interest at 6%. Principal payments of $200,000 per annum will be required.

The company will withhold any dividend payments during the foreseeable future in order to support the debt to equity ratio.

The capital assets are expected to have a useful life of 15 years with no residual value.

All other fixed expenses are expected to remain consistent.

The existing loan will require a principal payment of approximately $375,900 during the upcoming fiscal year. The payment for the following fiscal year is expected to be $300,000.

Accounts receivable, inventory, prepaid expense, and accounts payable will all increase by 40% as a result of the increased sales.

The marketable securities will be converted to cash at the beginning of the year.

Exhibit III - Industry Benchmarks

Industry Ave

Ratio on Profitability 2014

Return of Equity15.00% Return on Assets8.00% Financial Leverage Percentage7.00% Earnings per Share$4.40

Quality of Income75.00% Profit Margin10.00% Fixed Asset Turnover2.00

Tests of Liquidity

Cash Ratio7.00% Current Ratio1.00

Quick Ratio0.75

Receivable Turnover13.00

Average Days in Accounts

Receivable28.08

Payable Turnover19.00

Average Days in Accounts Payable19.21

Inventory Turnover6.50

Average Days in Inventory56.15

Solvency and Equity Position

Times Interest Earned5.40

Cash Coverage6.30

Debt to Equity Ratio1.35

Miscellaneous

BookValue Per Share$29.00

Prepare the report. It is to include, organized and presented in a logical manner:

quantitative analyses;

ratio analyses;

qualitative analyses; and

appropriate recommendations given the case facts and analyses completed.