On what basis of accounting are Spray Net's financial statements prepared?
Spray_Net Franchise · 2025 FDDAnswer from 2025 FDD Document
| Net (loss) | | | | 839,705 | | 839,705 | | Equity at December 31, 2023 | $ 38 | $ | | $ 22,784 | $ | 22,822 | | Equity at January 1, 2023 | $ 38 | | | $ 22,784 | $ | 22,822 | | Net (loss) | | | | (800,545) | | (800,545) | | Equity at December 31, 2024 | $ 38 | $ | - 8.= | $ (777,761) | $ | (777,723) |
SPRAY-NET INC. NOTES TO THE FINANCIAL STATEMENTS
1. THE COMPANY
Spray-Net Inc. ("the Company") is Delaware corporation that was incorporated in September 2016 to offer franchises for the right to own and operate a spray painting, staining and other coating service business, designed for the exterior of homes and other residential buildings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 disbursement of cash.
Franchise Arrangements-The company's franchise agreements 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 Spray-Net franchise for a specified number of years.
Concentration of Credit Risk-Financial instruments that potentially expose the Company to concentration of credit risk primarily consist of
Source: Item 23 — RECEIPTS (FDD pages 75–219)
What This Means (2025 FDD)
According to Spray Net's 2025 Franchise Disclosure Document, the company prepares its financial statements on an accrual basis of accounting, following accounting principles generally accepted in the United States of America. This means that Spray Net recognizes revenues when they are earned and expenses when a liability is incurred, regardless of when cash changes hands. This is a standard accounting practice that provides a more accurate picture of a company's financial performance over time compared to cash-based accounting.
For a prospective Spray Net franchisee, understanding the accrual basis of accounting is important because it affects how the franchisor reports its financial performance. This, in turn, can influence the franchisee's assessment of the financial health and stability of the franchise system. For example, the FDD notes that as of December 31, 2024, 2023 and 2022, Spray Net had non-refundable franchise fees received but not yet earned of $3,872,072, $3,134,425 and $3,355,822 respectively. These fees are recorded as deferred revenues and recognized over the life of the franchise agreement, in compliance with accounting standards.
The accrual method ensures that Spray Net's financial statements reflect the economic reality of its transactions, rather than just the cash flows. This is particularly relevant for franchise businesses like Spray Net, where there can be a significant time lag between when a service is provided and when payment is received. The use of estimates is also noted as necessary for preparing financial statements in accordance with generally accepted accounting principles. These estimates can affect the reported amounts of assets, liabilities, revenues, and expenses, so it's important for potential franchisees to understand that actual results could vary from those estimates.
In summary, Spray Net's adherence to accrual accounting and GAAP provides a level of transparency and comparability that is beneficial for prospective franchisees. By understanding these accounting principles, franchisees can better evaluate the financial information presented in the FDD and make more informed decisions about investing in a Spray Net franchise.