What should be evaluated regarding accounting policies used by All States M.E.D.?

According to All States M.E.D.'s 2024 Franchise Disclosure Document, during an audit, the appropriateness of the accounting policies used by the company should be evaluated, along with the reasonableness of significant accounting estimates made by management, and the overall presentation of the financial statements. This evaluation is part of an audit performed in accordance with Generally Accepted Auditing Standards (GAAS). The auditor must exercise professional judgment and maintain professional skepticism throughout the audit.

All States M.E.D. utilizes the accrual basis of accounting, where assets, liabilities, revenues, and expenses are recognized when they are earned or incurred, regardless of when cash changes hands. Property and equipment are recorded at cost, and depreciation is calculated using the straight-line method over an estimated useful life of five years. For federal income tax purposes, accelerated depreciation methods are used. Major renewals and betterments that extend the useful lives of property and equipment are capitalized, while expenditures for maintenance and repairs are expensed as incurred.

Franchise revenues are recognized according to Financial Accounting Standards ASC 606. This standard allows franchise fees from franchise sales to be recognized, net of an allowance for uncollectible amounts, if the initial franchise fee is distinct from the franchise license. A portion of the initial franchise fee is allocated to specific performance obligations and recognized as revenue when the company has fulfilled its material obligations related to those performance obligations. Initial franchise fees generally cover pre-opening services determined by the franchisor that are separate and distinct.