What accounting method does Cinnaholic use, as stated in the financial statements?
Cinnaholic Franchise · 2025 FDDAnswer from 2025 FDD Document
Basis of Accounting-The accompanying financial statements have been prepared on an accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. Under the accrual method, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or disbursement of funds.
Franchise Arrangements-The Company's franchise arrangements generally include a license which provides for payments of initial fees as well as continuing royalties to the Company based upon a percentage of sales. Under this arrangement, franchisees are granted the right to operate a Cinnaholic bakery for a specified number of years.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 61)
What This Means (2025 FDD)
According to Cinnaholic's 2025 Franchise Disclosure Document, the company uses the accrual basis of accounting. This means that Cinnaholic recognizes revenues when they are earned and expenses when liabilities are incurred, regardless of when the cash is actually received or disbursed. This accounting method is in conformity with accounting principles generally accepted in the United States of America.
For a prospective franchisee, this information is primarily relevant in understanding how Cinnaholic itself manages its finances. However, it's also a best practice for franchisees to adopt a similar, if not the same, accounting method to ensure consistency and comparability when reporting financial information to the franchisor. While Cinnaholic uses the accrual method, franchisees should consult with their own financial advisors to determine the most appropriate accounting method for their specific business circumstances, considering factors like business size and complexity.
The FDD also mentions that Cinnaholic franchise arrangements include licenses that provide for payments of initial fees and continuing royalties based on a percentage of sales. These arrangements grant franchisees the right to operate a Cinnaholic bakery for a specified number of years. The company also records revenue in accordance with the Financial Accounting Standards Board (FASB). The transaction price attributable to performance obligations are recognized as the performance obligations are satisfied. The portion of the franchise fee, if any, that is not attributable to a distinct performance obligation are amortized over the life of the related franchise agreements. Commission paid for franchises are amortized over the life of the franchise agreement. The company adopted ASC-606 and ASU 2021-02 using the modified retrospective method starting with January 1, 2020.
It is important for prospective franchisees to understand the accounting policies used by Cinnaholic, as this can provide insights into how the franchisor manages its finances and recognizes revenue. This information, combined with professional financial advice, can help franchisees make informed decisions about their investment and business operations.