COMMERCE 1AA3 Study Guide - Quiz Guide: Tim Hortons, Cash Flow Statement, Corporate Social ResponsibilityExam
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Question 1: Four of your friends, already finished college, recently started a construction company in Brantford, Ontario.
They recently finished building two residential homes. Unfortunately, two days prior to closing, a vicious tornado struck
Brantford, destroying 100 homes including the two homes owned by your friends. In addition, your friends were trying to
save money and did not purchase any insurance to cover these types of losses. Define, compare and contrast the
difference between discontinued operations and extraordinary items. How should your friends’ $450,000 loss resulting
from the tornado be classified on the income statement?
Discontinued operations – Result from the disposal of a major segment of the business and are reported net of
income tax effect.
•Extraordinary items - Gain or losses that are considered unusual in nature, infrequent in occurrence, and not
dependent primarily on decisions by management or owners. They are reported net of tax on the income
statements. These items are presented separately because of their non-recurring nature and thus are not useful in
predicting the future income of the company.
•These two terms are similar in that they are both unusual, non-recurring items that are not part of regular
operations. These two items are different in that discontinued operations result from management’s decision
making whereas extraordinary items result from external influences outside of management’s direct control.
•The $450,000 loss resulting from the tornado should be classified as extraordinary item due to the fact that it is
outside of management’s control.
Question 2: Think about the impact accounting has on our economy and our nation. Name some external groups
interested in reviewing a company’s financial statements.
∙shareholders and other investors – so they can decide whether to invest in a company
∙bankers – so they can decide whether to extend credit to a company
∙other creditors – so they can decide whether to extend credit to a company
∙Canada Customs and Revenue Agency – so they can collect appropriate amount of tax revenues
∙other governmental agencies – so they can ensure compliance with government rules
∙the general public – so they can assess whether the company is a good corporate citizen i.e. corporate social
Question 3: Your friend’s mother has owned a Tim Horton’s franchise in Hamilton for the past 30 years. The restaurant
has been hugely profitable; in fact, your friend’s mother retired 10 years ago, living on the annual profits from this
restaurant. Briefly list and define the three types of cash flows noted in a cash flow statement. In addition, outline which
type(s) of cash flows are likely positive and which type(s) of cash flows are likely negative for this Tim Horton’s restaurant.
Operating cash flows – cash flows resulting from day to day operations i.e. sale of coffee and donuts, employee wages
Investing cash flows – cash flows resulting from purchase of long-term assets i.e. coffee machines, tables, chairs, racks to
hold muffins/donuts, etc. Also, cash flows resulting from sale of long-term assets when their useful life is over.
Financing cash flows - cash flows resulting from borrowing money from bank in order to be able to purchase long-term
assets and any excess operating expenses i.e. salaries. Also cash flows resulting from re-payment of debt and payment of
dividends to shareholder.
Operating cash flows are likely to be positive as friend’s mother is living on annual profits, investing cash flows are likely
to be slightly negative (there are still some costs annually to replace existing long-term assets), and financing cash flows
are likely to be negative (payment of dividends to the shareholder; namely your friend’s mother).
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