MAMMA JILL’S PIZZA (Suggested time: 45 minutes)

You, CPA, just got home from work when you get a call from John Mendelusk, a good friend
and former roommate of yours who lives in Kenora, Ontario. John was always the chef in the
house and had always dreamed of one day owning his own restaurant.

John begins, “Hi CPA, it is John! Guess what? The corner pizzeria is going up for sale. I’ve been
talking with the owner, Jill, and she’s retiring, so she wants to sell the business. We’re still in
preliminary discussions but I’m really excited about the prospects.”
CPA: “Oh, Mamma Jill’s Pizza? That place has great pizza and it’s always busy.”
John: “Exactly. Their specialty is using only the freshest ingredients which results in a great
taste. This is totally consistent with my cooking philosophy! I think I’m ready to make the leap
into the restaurant world and my wife and kids fully support my decision. The pizza industry is
competitive but I know my pizza pretty well.

“Jill sent me her latest financial statements. She got a private loan several years ago when she
was having some cash flow issues, and the bank insists that she submit financial statements that
are compliant with Accounting Standards for Private Enterprises, whatever that means. Jill also
says an accounting firm, DKS LLP, performs a review of the financial statements every year. I
was wondering if you could help by interpreting them for me, since you’ve always been the
numbers person! I’m particularly interested in these things called financial ratios. I read an
article about it the other day, it sounded very relevant but was all Greek to me. The only thing I
know so far is that they have a lot of cash in the bank so I assume their cash flow issues have
gone away.”

CPA: “Sure John, I would love to help.”

John: “Great! I will send you the financial statements (Exhibit I) and the magazine article
(Exhibit II) by email after we get off the phone. Oh, one other thing. I will be obtaining all the
assets and liabilities of the business, but it is not currently incorporated. The article said that any
good restaurant owner should be thinking about the tax advantages of incorporating. They are
including an article on this topic in next month’s issue, but I thought you might be able to tell me
more. Incorporating never made sense to me and just sounds like a big administrative nightmare.
How does incorporating differ from just including the income on my personal tax return? Do I
really get tax advantages?”

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EXHIBIT I
FINANCIAL STATEMENTS AND SELECTED NOTES
MAMMA JILL'S PIZZA
BALANCE SHEET

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