Question:
The Second Cup Ltd. is Canada۪s largest specialty coffee caf̩ franchisor (as measured by the number of caf̩s), with 360 caf̩s. Exhibits 9-5A to C contain Second Cup۪s statement of financial position, Note 12 detailing accounts payable and accrued liabilities, and Note 3(n).
Required:
a. Refer to Note 3(n) in Exhibit 9-5C. How does Second Cup account for gift card sales? Provide an explanation of breakage.
b. Calculate the current ratio for 2013 and 2012. Comment on the company€™s ability to meet its current liabilities. Has it improved over the prior year?
c. Calculate the accounts payable turnover ratio and accounts payable payment period. Second Cup€™s cost of goods sold was $4,054 thousand for its 2013 fiscal year. Comment on these ratios.
Transcribed Image Text:
THE SECOND CUP LTD. S 2013 STATEMENTS OF FINANCIAL POSITION STATEMENTS OF FINANCIAL POSITION As at December 28, 2013 and December 29, 2012 (Expressed in thousands of Canadian dollars) December 28,December 29, 2013 2012 ASSETS Current assets Cash and cash equivalents Trade and other receivables (note 7) Notes and leases receivable (note 8) Inventories (note 9) Prepaid expenses and other assets $ 6,501 4,368 串3,880 4,616 190 11,402 9,593 Non-current assets Notes and leases receivable (note 8) Property and equipment (note 10) Intangible assets (note 11) Total assets 701 3,507 61,730 $77,340 741 3,544 74,802 $ 88,680 LIABILITIES Current liabilities Accounts payable and accrued liabilities (note 12) Provisions (note 13) Other liabilities (note 14) Income tax payable Gift card liability Deposits from franchise partners $ 4,586 S 3,123 138 3,895 4,560 1,480 10.649 11,061 Non-current liabilities Provisions (note 13) Other liabilities (note 14) Long-term debt (note 15) Deferred income taxes Total liabilities SHAREHOLDERS' EQUITY Total liabilities and shareholders' equity 1,380 683 11,089 7,418 31,376 45,964 $77,340 421 11,037 9,190 31,980 56.700 $ 88,680 EXCERPT FROM THE SECOND CUP LTD.'S 2013 ANNUAL REPORT, NOTE 12 12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of: 2013 $ 1,953 362 335 1,936 $4,586 2012 Accounts payable trade Accrued salaries, wages, benefits, and incentives Sales tax payable Accrued liabilities S1,280 577 235 1,031 S 3,123 EXCERPT FROM THE SECOND CUP LTD.'S 2013 ANNUAL REPORT, NOTE 3(N) n. Gift card liability Second Cup has a gift card program that allows customers to prepay for future purchases by loading a dollar value onto their gift cards through cash or credit/debit cards in the cafés or online through credit cards, when and as needed. The gift card liability represents liabilities related to unused balances on the Second Cup Café Card net of estimated breakage. These balances are included as sales from franchised cafés, or as revenue of Company-operated cafés, at the time the customer redeems the amount in a café for products. The gift cards do not have an expiration date and the Company does not deduct non-usage fees from outstanding gift card balances. When the Company determines the likelihood of the gift card being redeemed by the customer is remote and there is not a legal obligation to remit the unredeemed gift cards to a relevant jurisdiction, this amount is recorded as breakage. The determination of the gift card breakage rate is based upon Company-specific historical load and redemption patterns. During 2013, the Company revised its estimated breakage rate from 2% to 3% of gift card sales. Gift card breakage is recognized on a pro rata basis based on historical gift card redemption pattems commenc- ing after a reasonable period from the date of the gift card sale. Breakage is recognized in other operating expenses in the Statements of Operations and Comprehensive Loss and a portion is allocated to the Co-op Fund.
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