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BUSI 1043: INTRODUCTION TO FINANCIAL ACCOUNTING 1 AVERAGE JOE’S GYM Background You are an Analyst for the professional service firm, BUSI 1043 LLP

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BUSI 1043: INTRODUCTION TO FINANCIAL ACCOUNTING 1
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
Liabilities 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 3,634,631
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,
net
2,756,950 2,492,655
TOTAL ASSETS 3,804,809 3,634,631

Average Joe’s Gym
Income Statement
For the Year Ended December 31st
2014 2013
Sales 2,975,990 2,575,990
Cost of Goods Sold 1,368,955 1,184,955
Gross Profit 1,607,035 1,391,035

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 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
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.

Evaluation
Final Exam will be marked in its entirety out of 100. The following rubric indicates the criteria
students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of
Final
Grade
1. Identification and Analysis of Issues (80%)
a. Quantitative Analysis /30
b. Ratio Analysis /20
c. Qualitative Analysis /20
d. Prepare entries stated in Exhibit II /10
2. Recommendation (10%)
a. Provides appropriate recommendation given the case facts and
analysis completed.
/10
3. Attention to Detail (10%)
a. Spelling, grammar, and formatting /10
Total /100