Cherry's Cupcakes (CC) is a rapidly expanding, popular chain of cupcake restaurants that has

been operating throughout Eastern Canada for over 25 years. CC is a family owned business

that employs over 215 staff in its 19 locations.

CC is owned by Cherry Charles whose passion for baking is evident in the high-quality cupcake recipes that she has designed. Cherry has an intimate understanding of nut allergies and takes

pride in ensuring that CC locations only bake and sell cupcakes that are nut free. CC locations also provide baking lessons to local parents of children who suffer from severe allergies.

For the past four years, CC has been the recipient of an annual government grant that is given to restaurants in Canada who provide community education on food allergy and anaphylaxis awareness. In addition to annual inspections of the programming materials, the government requires CC to produce audited financial statements on an annual basis.

Cherry would like to open four more cupcake restaurants in Labrador City, Gander, St. John's and Corner Brook in the next two years and in order to finance this expansion, CC has recently assumed a long term loan with National Bank.

Extracts from CC's financial statements are as follows (in '000)

REVENUE $7,890

NET INCOME BEFORE TAX $4,600

TOTAL ASSETS $11,700

ACCOUNTS RECEIVABLE $885

INVENTORY $3,875

ACCOUNTS PAYABLE $1,025

Additional information:

A $150,000 bonus was paid to CC's management team in 2017due to its extraordinary contribution of opening up three new locations during the year.

During 2017, in an effort to generate cash for the expansion, CC sold a tract of land located in Regina, Saskatchewan. The gain on the sale of the land$480,000.

CC has been audited for many years by Lemon and Reed, CPAs. As part of the planning for the 2017 financial statement audit, you have been asked to calculate overall, performance and specific materiality thresholds forCC.