Boston Chicken wanted to be a home meal replacement. Its main strategy includes (1) focus on franchising to larger regional developers who will open new stores in the region; (2) focus on home cook taste food and keen on introducing new varieties of food choices; (3) rapid expand to open new stores; (4) keen on operation and process improvement.
Such a strategy made the business expand fast in term of the business scale and number of Boston Chicken stores, either company owned stores or franchised stores.
The main risk was also clear. As Boston Chicken financed most of its areas developers and competition of the fast-food market was quite fierce, Boston Chicken¡¯s business closely related to the business of its franchising stores. Besides, over 50% of the total revenue was the franchising related in 1994 fiscal year, including initial franchising fee and continuing franchising fees. Besides, the financial supports from Boston Chicken was very crucial to the system-wide business. As per the company¡¯s management¡¯s anticipation, both Boston Chicken and its area developers would have need for additional financing during the 1995 fiscal year.
What are the major accounting policies that have a significant impact on the company¡¯s financial statements? What are the financial statement consequences of these policy choices? What are the key assumptions behind these policies? Are these assumptions justified given the company¡¯s strategy and prospects?
1.The policy of revenue recognition has a significant impact on the company¡¯s financial statements.
Presently more than half of Boston Chicken¡¯s revenue came from royalties & franchise-related income (such as interest income, software revenue and etc.) However, some of the revenue recognition rules are aggressive. For example, every new franchise store contributed $35,000 one time franchise fee at its...