PREPARED BY:: FLUTURA BIILCARII PREPARED BY FLUTURA B LCAR IINSTRUCTOR:: NSTRUCTOR LEDIIA CIIRKO LED A C RKO Date 25th May, 2011
BOSTON CHICKEN INC
1. How is the company reporting on its performance and risks? What are the keys assumptions behind these policies? Do you think that its accounting policies reflect the risks? 2. What adjustments, if any, would you make to the firm's accounting policies? 3. What questions would you ask management about the company's performance? 4. How is Boston Chicken performing? 5. What assumptions is the market making about the company's future performance and risks? Do you agree with those assessments?
Question 1 Some of the assumptions under of which the company is reporting the financial statements are: 1. Pre-opening costs are amortized over one year 2. Deferred financing costs are amortized over the period of the related financing. 3. Revenue from Company-operated stores is recognized in the period related food and beverages are sold. 4. Revenue derived from initial franchise fees and area development fees is recognized when the franchise store opens. 5. Royalties are recognized in the same period related franchise store revenue is generated. 6. The notes give the option to convert the loan into equity in the franchisee at a 12-15% premium over the equity price at formation franchise. 7. Financing costs on notes receivable to franchisees are shown as earned. The company does not make allowance for defaults on these notes. 8. By changing the assumption for franchisee defaults, we can estimate the effect in the income statement.
1% allowance 2% allowance
Net income before tax Bad debt expense on $202,500 notes receivable Adjusted net income before tax Percent change
$20,450 $2,025 $18,425 10%
20,450 6,075 14,375 30%
According to the accounting assumptions that the company follows, the company doesn’t look risky, so it’s... [continues]
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