What costs are included in Aplus' cost of sales?
Aplus Franchise · 2024 FDDAnswer from 2024 FDD Document
rvice offerings. We record revenue from other retail transactions on a net commission basis when a product is sold and/or services are rendered.
Lease Income
Lease income from operating leases is recognized on a straight-line basis over the term of the lease.
Cost of Sales
We include in cost of sales all costs incurred to acquire fuel and merchandise, including the costs of purchasing, storing and transporting inventory prior to delivery to our customers. Items are removed from inventory and are included in cost of sales based on the retail inventory method for merchandise and the LIFO method for motor fuel. Cost of sales does not include depreciation of property and equipment as amounts attributed to cost of sales would not be significant. Depreciation is classified within operating expenses in the consolidated statements of operations and comprehensive income.
Motor Fuel and Sales Taxes
Certain motor fuel and sales taxes are collected from customers and remitted to governmental agencies either directly by the Partnership or through suppliers. The Partnership's accounting policy for wholesale direct sales to dealers, distributors and commercial customers is to exclude the collected motor fuel tax from sales and cost of sales.
For retail locations where the Partnership holds inventory, including commission agent locations, motor fuel sales and motor fuel cost of sales include motor fuel taxes. Such amounts were $274 million, $285 million and $332 million for the years ended December 31, 2023, 2022 and 2021, respectively. Merchandise sales and cost of merchandise sales are reported net of sales tax in our consolidated statements of operations and comprehensive income.
Source: Item 22 — CONTRACTS (FDD page 68)
What This Means (2024 FDD)
According to Aplus's 2024 Franchise Disclosure Document, cost of sales includes all costs incurred to acquire fuel and merchandise. This encompasses the expenses of purchasing, storing, and transporting inventory before it is delivered to customers. For merchandise, costs are determined using the retail inventory method, while for motor fuel, the last-in-first-out (LIFO) method is used to determine cost of sales.
Notably, Aplus does not include depreciation of property and equipment in the cost of sales, as the amounts attributed to it are not significant. Instead, depreciation is classified within operating expenses in the consolidated statements of operations and comprehensive income. Additionally, the company's accounting policy excludes collected motor fuel tax from sales and cost of sales for wholesale direct sales to dealers, distributors, and commercial customers. However, for retail locations where Aplus holds inventory, including commission agent locations, motor fuel sales and motor fuel cost of sales include motor fuel taxes.
Furthermore, Aplus receives payments for branding incentives related to fuel supply contracts. These unearned branding incentives are deferred and amortized on a straight-line basis over the term of the agreement as a credit to cost of sales. This means that the initial payment is not immediately recognized but is instead spread out over the life of the contract, reducing the cost of sales over time. This accounting practice can impact the reported profitability of Aplus locations, particularly in the early years of a franchise agreement.