What accounting principles must Afuri Ramen Dumpling's management adhere to when preparing and presenting financial statements?
Afuri_Ramen_Dumpling Franchise · 2024 FDDAnswer from 2024 FDD Document
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Cash and cash equivalents:
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Foreign transactions:
Transactions outside the United States include agreements with franchisees in Canada, Singapore, and Hong Kong. Foreign transactions are subject to risks inherent in transacting under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange. The functional currency of all of the Company's foreign transactions is US dollars.
Trade accounts receivable:
Trade accounts receivable are carried at their estimated collectible amounts. Management charges a 5% late fee and 1.5% interest per month on unpaid balances. No revenue was recognized for the year ended December 31, 2023 related to these charges.
Source: Item 23 — Receipts (FDD pages 50–189)
What This Means (2024 FDD)
According to Afuri Ramen Dumpling's 2024 Franchise Disclosure Document, the company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). This indicates that Afuri Ramen Dumpling adheres to a standardized set of accounting rules and guidelines when presenting its financial data. These principles ensure transparency and consistency in financial reporting, making it easier for potential franchisees and other stakeholders to understand the company's financial performance and position.
Specifically, the financial statements are prepared on the accrual basis of accounting. This means that revenues and expenses are recognized when they are earned or incurred, regardless of when cash changes hands. This method provides a more accurate picture of a company's financial performance over a period of time compared to the cash basis of accounting, where revenues and expenses are recognized only when cash is received or paid.
In addition, Afuri Ramen Dumpling considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The company also recognizes royalty and marketing fee revenues from operating franchised restaurants monthly and records deferred revenue when it has not yet fulfilled its performance obligation for training services and for initial franchise fees collected but recognized over the course of the agreement. For transactions outside the United States, including agreements with franchisees in Canada, Singapore, and Hong Kong, the functional currency is US dollars. Trade accounts receivable are carried at their estimated collectible amounts, with management charging a 5% late fee and 1.5% interest per month on unpaid balances.
Management is responsible for the preparation and fair presentation of the financial statements in accordance with U.S. GAAP, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. This responsibility includes evaluating whether there are conditions or events that raise substantial doubt about the company's ability to continue as a going concern within one year after the date that the financial statements are available to be issued.