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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 thepopularity of health and fitness among social trends. As a result Average Joe?s has applied to TD Bank fora $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 payback 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 if 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 to proceed 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 comparables from the bank.You have located various industry ratios that can be used as a benchmark (Exhibit III).

Required: Prepare the report.Exhibit I: Financial Statements

Average 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 0

Income (loss) before taxes 479,040 350,855

Provision for (benefit from) income taxes 134,131 98,239

Net 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 1,020,862 750,953

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

Ratio Industry Ave

Profitability 2014

1 Return on Equity 15.00%

2 Return on Assets 8.00%

3 Financial Leverage Percentage 7.00%

4 Earnings per Share $4.40

5 Quality of Income 75.00%

6 Profit Margin 10.00%

7 Fixed Asset Turnover 2.00

Tests of Liquidity

8 Cash Ratio 7.00%

9 Current Ratio 1.00

10 Quick Ratio 0.75

11 Receivable Turnover 13.00

12

Average Days in Accounts

Receivable 28.08

13 Payable Turnover 19.00

14 Average Days in Accounts Payable 19.21

15 Inventory Turnover 6.50

16 Average Days in Inventory 56.15

Solvency and Equity Position

17 Times Interest Earned 5.40

18 Cash Coverage 6.30

19 Debt to Equity Ratio 1.35

Miscellaneous

20 Book Value Per Share $29.00

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 payback 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 if 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 to proceed 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 comparables from the bank. You have located various industry ratios that can be used as a benchmark (Exhibit III). Required: Prepare the report. Exhibit I: Financial Statements Average Joe's Gym Statement of Financial Position As at Dec 31 Assets Current Cash Marketable Securities Accounts Receivable Inventory Prepaid Expenses Capital Property and Equipment, net TOTAL ASSETS Liabilities and Shareholders' Equity Current Accounts Payable Accrued and Other Liabilities Current Portion of LongTerm Debt Long Term Debt Shareholders Equity Common Shares (50,000 outstanding) Retained Earnings TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 2014 2013 235,359 145,780 223,450 425,770 17,500 1,047,859 134,550 457,206 174,930 355,790 19,500 1,141,976 2,756,950 3,804,809 2,492,655 3,634,631 294,305 237,595 375,900 907,800 95,700 244,760 345,900 686,360 1,280,330 1,601,500 595,817 1,020,862 3,804,809 595,817 750,953 3,634,631 Average Joe's Gym Income Statement For the Year Ended December 31st Sales Cost of Sales Gross Profit 2014 2,975,990 1,368,955 1,607,035 2013 2,575,990 1,184,955 1,391,035 Expenses Amortization General and Administrative Marketing and Sales Interest Expense Office Expense Wages and Benefits, Administration Total Operating Expenses 155,490 134,500 175,680 76,820 295,980 315,000 1,153,470 125,490 102,800 155,600 96,090 255,000 315,000 1,049,980 453,565 25,475 0 479,040 134,131 344,909 341,055 9,800 0 350,855 98,239 252,616 750,953 344,909 75,000 1,020,862 573,338 252,615 75,000 750,953 Operating Income Gain (losses) on marketable securities Impairment loss on capital assets Income (loss) before taxes Provision for (benefit from) income taxes Net Income Opening Balance Retained Earnings Net Income Dividends Closing Balance Retained Earnings 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 Ratio Profitability 1 Return on Equity 2 Return on Assets 3 Financial Leverage Percentage 4 Earnings per Share 5 Quality of Income 6 Profit Margin 7 Fixed Asset Turnover Tests of Liquidity 8 Cash Ratio 9 Current Ratio 10 Quick Ratio 11 Receivable Turnover Average Days in Accounts 12 Receivable 13 Payable Turnover 14 Average Days in Accounts Payable 15 Inventory Turnover 16 Average Days in Inventory Solvency and Equity Position 17 Times Interest Earned 18 Cash Coverage 19 Debt to Equity Ratio Miscellaneous 20 Book Value Per Share Industry Ave 2014 15.00% 8.00% 7.00% $4.40 75.00% 10.00% 2.00 7.00% 1.00 0.75 13.00 28.08 19.00 19.21 6.50 56.15 5.40 6.30 1.35 $29.00