Julia Mills started an instructional fitness program five years ago. Her business venture, called Mills

Fitness, had started with two clients who each paid her $100 a week (two one-hour classes) to guide

them with in-home exercises. Over time, Julia's client base had grown, and she had hired other

instructors to teach things like Tai Chi and Karate. Last year, she had even rented a warehouse and filled

it with gym equipment so classes could be held there.

Unfortunately, Julia had underestimated the costs of building and running a larger operation. Partway

through equipping the gym, she had run of cash and maxed out her credit cards. However, she had been

able to secure a $20,000 line-of-credit at 6.50% to finish the project. Julia has been paying the interest

on her debts, but hasn't been able to generate enough free cash flow to pay down any principal.

Here is the Liabilities and Shareholder's Equity section of Julia's balance sheet:

LiabilitiesCredit card debt, 20% $12,500Line-of-credit, 6.50% 20,000Long-term bank loan, 4.75% 50,000Total Liabilities $82,500Shareholder's EquityJulia Mills, Capital $30,000Total Liabilities and Shareholder's Equity $112,500Julia suspects that she has not been able to pay off any debt because of her rising expenses. Over the

past year, she has hired three full-time staff at a salary of $50,000 each. Prior to this hire, Julia mainly

used contractors who charged her between $40 and $50 per hour. Here is a list of Julia's other major

expenses:

Julia's salary $6,000 per monthRent for office space $1,500 per monthRent for warehouse $3,000 per monthEquipment maintenance $300-$500 per monthJanitorial services $2,000 per monthContractors (4 fitness trainers) $10,000-$12,000 per month

Julia estimates that her other expenses such as utilities and telecommunications bills total between

$1,500 and $2,000 a month.

To cover her expenses, Julia has increased her rates over time. She wonders if certain rates are too low.

She is charging more than most of the other fitness training services in the area, but her competition

typically pursues people with gym memberships. By having her own facility and offering in-home training,

Julia feels that she has access to a larger market than her competitors. Last month, Julia's sales numbers

looked like this:

In-home sessions (124 individual) $7,440In-home sessions (40 monthly memberships) 20,000Gym training sessions (33 individual) 1,980Gym training sessions (26 monthly memberships) 2,600Specialized group sessions (71 monthly memberships) 9,230Julia promotes her company by allowing customers to "try before they buy." She lets newcomers

experience a free training session of their choice prior to purchasing memberships or more individual

sessions. Furthermore, she lets monthly subscribers pay the end of each month, as opposed to the

beginning. Of course, this occasionally presents collection problems, but Julia believes her friendly

policies do more good than harm. She is expecting 5% monthly growth for the remaining 6 months of

2020.

Julia has been reading up on the importance of budgeting and wants to a better job of managing

short-term finances. Unfortunately, she has no idea where to start. Recently, she has run into issues with

paying bills on time. Her suppliers have been understanding for the most part, but Julia is wondering

what the long-term impact of delaying payments might be.

A sizeable union has approached Julia with a proposal. In short, Julia would offer 300 union members

access to all services for $100 per month, with in-home and gym training sessions capped at five per

month for each member. If this initial arrangement goes well, the union has the option of adding 700

more members to the agreement. Julia isn't sure if this arrangement will be profitable for her, but she is

both excited and anxious at the prospect of adding so many customers at once.

Julia knows she will have to hire an additional staff member to make things work. However, she is

confident that her four salaried trainers will be able to handle the full workload of the new contract, after

some of their current workload (maybe 30 hours per month) is moved to contract employees. Julia

estimates there will be 20% increases in janitorial and equipment maintenance costs with the increased

volume. If 1,000 members are added, Julia expects current contractor, janitorial, and maintenance costs

to double. She will also need a bigger facility in the near future.

Finally, she is growing increasingly concerned about handling the business side of things. Julia's passion is

growing her business and providing great service to her clients, but keeping track of bills, collections, and

other menial tasks have really eaten up her time. Her tax accountant has warned her that bookkeeping

should be done on a monthly basis at minimum, so Julia has tried to learn things on the fly with online

tutorials. She is worried that she isn't doing the work correctly and her accountant will refuse to complete

her tax return this year.

Required: Identify all accounting issues raised in this case and make recommendations for Julia. Help her

prepare budgets and stress the importance of budgeting. Also, advise if she should accept the special

order or not (discuss ALL relevant factors). You are encouraged to refer to course information as well as

other sources. Present your work in professional report form.