Roman Holiday. For Part One,

¶ … Roman Holiday. For part one, do not only explain the general auditing concept and rules but also use the methodology to analyze the CASE FACT.

For part 2, please use the data provided by the case to calculate acceptable Accounting risk. And also follow the 3 requirements written in the assignment instructions, in addition, make a conclusion based on your result.

Accounting risk -AccR is accounting risk reflecting accounting uncertainties with respect to an accounting number (this is the risk associated with the lottery ticket illustration). AccR refers to uncertainties associated with the need to use estimates in accrual accounting. These uncertainties arise from the need to make predictions of the future in developing accounting estimates

Probability of Material Mistatement=PMM = AccR + ((1 -- AccR) X AudR)

Please notice that this is a case study report, so it is better to use subjective view in the essay, it is not proper to write such as "You are required to perform ratio analysis on the Income Statement and the Balance Sheet...." In the essay.

Since I have to due this paper in 48 hours, so please finish it ASAP! Thanks very much

Message for - Order Number

Date:03-04-2011-10:03 PM

HI, I have viewed the essay, I think you should relate more to the case fact -- Roman Holiday. For part one, do not only expain the general auditing concept and rules but also use the methodology to analyze the CASE FACT.

For part 2, please use the data provided by the case to calculate acceptable Accounting risk. And also follow the 3 requirements written in the assignment instructions, in addition, make a conclusion based on your result.

Accounting risk -AccR is accounting risk reflecting accounting uncertainties with respect to an accounting number (this is the risk associated with the lottery ticket illustration). AccR refers to uncertainties associated with the need to use estimates in accrual accounting. These uncertainties arise from the need to make predictions of the future in developing accounting estimates

Probability of Material Mistatement=PMM = AccR + ((1 -- AccR) X AudR)

Please notice that this is a case study report, so it is better to use subjective view in the essay, it is not proper to write such as "You are required to perform ratio analysis on the Income Statement and the Balance Sheet...." In the essay.

And since I have to due this paper in 48 hours, so please finish it ASAP!

Please tell me if what you are looking for appears something like this:

How to Brief a Case Using the "IRAC" Method

When briefing a case, your goal is to reduce the information from the case into a format that will provide you with a helpful reference in class and for review. Most importantly, by "briefing" a case, you will grasp the problem the court faced (the issue); the relevant law the court used to solve it (the rule); how the court applied the rule to the facts (the application or "analysis"); and the outcome (the conclusion). You will then be ready to not only discuss the case, but to compare and contrast it to other cases involving a similar issue.

Before attempting to "brief" a case, read the case at least once.

Follow the "IRAC" method in briefing cases:

Facts*

Write a brief summary of the facts as the court found them to be. Eliminate facts that are not relevant to the court's analysis. For example, a business's street address is probably not relevant to the court's decision of the issue of whether the business that sold a defective product is liable for the resulting injuries to the plaintiff. However, suppose a customer who was assaulted as she left its store is suing the business. The customer claims that her injuries were the reasonably foreseeable result of the business's failure to provide security patrols. If the business is located in an upscale neighborhood, then perhaps it could argue that its failure to provide security patrols is reasonable. If the business is located in a crime-ridden area, then perhaps the customer is right. Instead of including the street address in the case brief, you may want to simply describe the type of neighborhood in which it is located. (Note: the time of day would be another relevant factor in this case, among others).

Procedural History*

What court authored the opinion: The United States Supreme Court? The California Court of Appeal? The Ninth Circuit Court of Appeals? (Hint: Check under the title of the case: The Court and year of the decision will be given). If a trial court issued the decision, is it based on a trial, or motion for summary judgment, etc. If an appellate court issued the decision, how did the lower courts decide the case?

Issue

What is the question presented to the court? Usually, only one issue will be discussed, but sometimes there will be more. What are the parties fighting about, and what are they asking the court to decide? For example, in the case of the assaulted customer, the issue for a trial court to decide might be whether the business had a duty to the customer to provide security patrols. The answer to the question will help to ultimately determine whether the business is liable for negligently failing to provide security patrols: whether the defendant owed plaintiff a duty of care, and what that duty of care is, are key issues in negligence claims.

Rule(s):

Determine what the relevant rules of law are that the court uses to make its decision.

These rules will be identified and discussed by the court. For example, in the case of the assaulted customer, the relevant rule of law is that a property owner's duty to prevent harm to invitees is determined by balancing the foreseeability of the harm against the burden of preventive measures. There may be more than one relevant rule of law to a case: for example, in a negligence case in which the defendant argues that the plaintiff assumed the risk of harm, the relevant rules of law could be the elements of negligence, and the definition of "assumption of risk" as a defense. Don't just simply list the cause of action, such as "negligence" as a rule of law: What rule must the court apply to the facts to determine the outcome?

Rule(s):

Determine what the relevant rules of law are that the court uses to make its decision. These rules will be identified and discussed by the court. For example, in the case of the assaulted customer, the relevant rule of law is that a property owner's duty to prevent harm to invitees is determined by balancing the foreseeability of the harm against the burden of preventive measures. There may be more than one relevant rule of law to a case: for example, in a negligence case in which the defendant argues that the plaintiff assumed the risk of harm, the relevant rules of law could be the elements of negligence, and the definition of "assumption of risk" as a defense. Don't just simply list the cause of action, such as "negligence" as a rule of law: What rule must the court apply to the facts to determine the outcome?

Application/Analysis:

This may be the most important portion of the brief. The court will have examined the facts in light of the rule, and probably considered all "sides" and arguments presented to it. How courts apply the rule to the facts and analyze the case must be understood in order to properly predict outcomes in future cases involving the same issue. What does the court consider to be a relevant fact given the rule of law? How does the court interpret the rule: for example, does the court consider monetary costs of providing security patrols in weighing the burden of preventive measures? Does the court imply that if a business is in a dangerous area, then it should be willing to bear a higher cost for security? Resist the temptation to merely repeat what the court said in analyzing the facts: what does it mean to you? Summarize the court's rationale in your own words. If you encounter a word that you do not know, use a dictionary to find its meaning.

Conclusion

What was the final outcome of the case? In one or two sentences, state the court's ultimate finding. For example, the business did not owe the assaulted customer a duty to provide security patrols.

Note: "Case briefing" is a skill that you will develop throughout the semester. Practice will help you develop this skill. Periodically, case briefs will be collected for purposes of feedback. At any time, you may submit your case brief(s) for feedback.

Roman Holiday Pizza:

Due to the staple set by the IPO as well as, if not increasingly more than, investors focusing on the promise of pure speculation, the Roman Holiday financed its growth. As is evident, the IPO planted the seed, and the investors nourished the growth.

That is the beauty of the successful and rising platform established through successful investments; it all becomes quite circular. Then, by reinvesting and refinancing earnings, everything becomes stronger. Just as easily, however, this corporation could have been buried.

1. What is a franchising arrangement? And how is this reflective of business expansion? Moreover, how does this support business growth? From HighBeam Business, these key-terms set the stage from here on out:

MLA: Pondent, Corr S. "About Reacquired Franchise Rights" (29 December 2010). Highbeam Business: Money. eHow. Demand Media, Inc. Web. 18 March 2011.

About Reacquired Franchise Rights

A franchising arrangement is a way to expand a company's business without investing a lot of additional money. The franchisee gets the use of an existing business model, or franchise rights, as well as business support, and pays the franchisor a franchise fee in return.

Reacquired Rights

The franchisor could decide to buyback franchise rights from the franchisee for various reasons. For instance, the company may want to maintain consistency with its suppliers and wholesalers.

Accounting Treatment

Typically, the accounting treatment for reacquired franchise rights is to amortize, or write down, the value of the acquisition over a period of time. This is the approach that many restaurant industry franchisors have followed.

Aggressive Treatment

Some companies take a more aggressive approach in accounting for their reacquired franchise rights. Not writing down the value of these rights over time boosts the company's profits since the write-downs would reduce earnings.

*Corr S. Pondent has provided these clear and concise definitions, so I will post them upfront in order to draw a more linear flow from here on out.

2. Auditee client impairment analysis:

Citation: Katz, Jonathan G. Secretary Commissioner (16 February 2000). SEC Concept Release: International Accounting Standards. SECURITIES and EXCHANGE COMMISSION. 17 CFR PARTS 230 and 240 [RELEASE NOS. 33-7801, 34-42430; INTERNATIONAL SERIES NO. 1215] FILE NO. S7-04-00 [RIN: 3235-AH65] INTERNATIONAL ACCOUNTING STANDARDS

According to the Securities and Exchange Commission (SEC):

B. High Quality Auditing Standards

The audit is an important element of the financial reporting structure because it subjects information in the financial statements to independent and objective scrutiny, increasing the reliability of those financial statements. Trustworthy and effective audits are essential to the efficient allocation of resources in a capital market environment, where investors are dependent on reliable information.

Quality audits begin with high quality auditing standards. Recent events in the United States have highlighted the importance of high quality auditing standards and, at the same time, have raised questions about the effectiveness of today's audits and the audit process. We are concerned about whether the training, expertise and resources employed in today's audits are adequate.

Audit requirements may not be sufficiently developed in some countries to provide the level of enhanced reliability that investors in U.S. capital markets expect. Nonetheless, audit firms should have a responsibility to adhere to the highest quality auditing practices -- on a world-wide basis -- to ensure that they are performing effective audits of global companies participating in the international capital markets. To that end, we believe all member or affiliated firms performing audit work on a global audit client should follow the same body of high quality auditing practices even if adherence to these higher practices is not required by local laws. Others have expressed similar concerns.

From an academically published article titled "Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance" from Emily E. Griffith, Jacqueline S. Hammersley, and Kathryn Kudous, evident become the Auditee client impairment analysis:

Griffith, Emily E. (University of Georgia). Hammersley, Jacqueline S. (University of Georgia). Kadous, Kathryn (Emory University). "Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance." (October 2010). Web. 18 March 2011.

Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance

Market participants rely on accounting estimates, including fair values and impairments, to get a clear picture of a company's financial condition; however, estimates are difficult to audit. We analyze how auditors assess the reasonableness of accounting estimates with the goals of identifying what difficulties auditors experience in performing the task and how their performance can be improved. We interview 15 very experienced auditors from the set of firms that perform over 100 audits of public companies annually to assess how auditors perform the task and what difficulties they experience. We compare interview results with audit standards to evaluate how well auditors match required steps in the process. We perform a content analysis of PCAOB inspection reports to further shed light on difficulties auditors experience in auditing estimates. We find that both auditors and regulators report auditor difficulties with over-reliance on management assertions. That is, auditors sometimes fail to understand management's process for generating the estimate, fail to adequately test the underlying data and assumptions, and fail to notice inconsistencies of the estimate with other internal data or external conditions. We draw on the mindset literature in judgment and decision making to suggest ways that auditors can improve their performance in this important task.

3. Analysis of key assumptions

-Annual growth rate (e.g., internal, Moody's, S&P): calculate a reasonable range. See 4 below [Sensitivity analysis: for the growth rate and discount rate identify reasonable high and low values for each rate, with supporting reasons based on your research. Your estimates should incorporate current market conditions as much as possible. This combined with your other assumptions creates four alternative present value scenarios].

Theoretically, Cost-Benefit Analysis is used to obtain a discount rate through the classical and relative utilitarian prosperity functions, two separate methods. The necessary condition here becomes time-invariance, a state at least appeased, if not positively persuaded in any favor, as conceptualized through an overlapping model with independent or exogenous growth; the U.S. Office of Management and Budget demonstrates this entire definition by way of time-variance. The implied discount rate, concerning two independent principles of perpetuated equity, will measure up to the growth rate of the authentic per-capita income (more than 5% on a grand scale of growth; 1% to 2% during a moderately advantageous period); the U.S. Office of Management and Budget hopes to see steady growth like 2%, maybe fluctuating between 1% and 3%; however, any greater fluctuation, up or down, always implies a rebound (i.e., any abrupt rise perpetuates an abrupt loss). From here, this governed functionality allows for the discount rate to be better-defined for a heterogeneous society, and then substantiated through an independent principle equating the growth rate of per-capita income.

-Weekly revenues: pick a best single point estimate, with supporting reasons based on your research.

Source Citation: Levine, David; Michele Boldrin (2008-09-07). Against intellectual monopoly. Cambridge University Press. pp. 312.

Weekly Revenue depends on these three key assumptions:

1) Average per-unit sales price, or per-unit revenue:

This is the price that you receive per unit of sales. Take into account sales discounts and special offers. Get this number from your Sales Forecast. For non-unit-based businesses, make the per-unit revenue $1 and enter your costs as a percent of a dollar. The most common questions about this input relate to averaging many different products into a single estimate. The analysis requires a single number, and if you build your Sales Forecast first, then you will have this number. You are not alone in this, the vast majority of businesses sell more than one item, and have to average for their Break-even Analysis.

2) Average per-unit cost:

This is the incremental cost, or variable cost, of each unit of sales. If you buy goods for resale, this is what you paid, on average, for the goods you sell. If you sell a service, this is what it costs you, per dollar of revenue or unit of service delivered, to deliver that service. If you are using a Units-Based Sales Forecast table (for manufacturing and mixed business types), you can project unit costs from the Sales Forecast table. If you are using the basic Sales Forecast table for retail, service and distribution businesses, use a percentage estimate, e.g., a retail store running a 50% margin would have a per-unit cost of .5, and a per-unit revenue of 1.

3) Monthly fixed costs:

Technically, a break-even analysis defines fixed costs as costs that would continue even if you went broke. Instead, we recommend that you use your regular running fixed costs, including payroll and normal expenses (total monthly Operating Expenses). This will give you a better insight on financial realities. If averaging and estimating is difficult, use your Profit and Loss table to calculate a working fixed cost estimate-it will be a rough estimate, but it will provide a useful input for a conservative Break-even Analysis.

-Expense ratios (focus on variable costs, can assume fixed costs apply to all operations (i.e., are allocated fixed costs)): pick a best single point estimate, with supporting reasons based on your research.

-Discount rate (market risk adjusted? risk free?): calculate a reasonable range [Sensitivity analysis: for the growth rate and discount rate identify reasonable high and low values for each rate, with supporting reasons based on your research. Your estimates should incorporate current market conditions as much as possible. This combined with your other assumptions creates four alternative present value scenarios].

According to the "Introduction to EBAT," two key assumptions persist:

II. INTRODUCTION to EBAT (EVIDENCE BASED ACCOUNTING THEORY) and RISK BASED ACCOUNTING PRINCIPLES

Start with lottery ticket example: how to record asset 1 and asset 2 above? Why?

There are 2 key assumptions (i.e., warrants that are assumed true) of EBAT argumentation:

1) All material uncertainties ( accounting as well as auditing) should be treated consistently, and

2) This consistent treatment is achieved using statistical hypothesis testing decision rules: If probability of MM after considering all the evidence is greater than audit risk, then reject the recorded amount; otherwise accept. (Just like the decision rule in statistical auditing.)

Some simple illustrations can be used to show that under EBAT:

Market values are not always relevant

Historical costs are not always relevant

Expected values are not always relevant

Management intentions and ability to act on them are always relevant

In lottery ticket asset 2 can auditor reduce the associated risk with evidence?

If not, then audit risk model does not cover an important class of uncertainties in financial reporting -- that related to what we call accounting uncertainties.

To cover this deficiency we introduce an expanded risk model PMM, where PMM stands for post audit probability of material misstatement associated with an accounting number in the FS. EBAT thus leads to risk based accounting principles.

From: Introduction to EBAT: How to "Reasonably" Record (Risky) Lottery Investments so that they "Present Fairly"

Sensitivity analysis: for the growth rate and discount rate identify reasonable high and low values for each rate, with supporting reasons based on your research. Your estimates should incorporate current market conditions as much as possible. This combined with your other assumptions creates four alternative present value scenarios.

Saltelli, a., S. Tarantola, F. Campolongo, and M. Ratto. Sensitivity Analysis in Practice: A Guide to Assessing Scientific Models. John Wiley and Sons. 2004.

Saltelli, a., Ratto, M., Andres, T., Campolongo, F., Cariboni, J., Gatelli, D. Saisana, M., and Tarantola, S. Global Sensitivity Analysis. The Primer, John Wiley & Sons. 2008.

Hornberger, G. Spear, R. An approach to the preliminary analysis of environmental systems. Journal of Environmental Management 7, 7 -- 18. 1981.

Sensitivity analysis (SA) regards the study of how the variation (uncertainty) in the output of a mathematical model can be apportioned, qualitatively or quantitatively, to different sources of variation in the input of the model (Hornberger, Spear).

Monte Carlo Filtering: the objective is to identify regions in the space of the input factors corresponding to the high or low values of the output.

Saltelli, a., S. Tarantola, F. Campolongo, and M. Ratto. Sensitivity Analysis in Practice: A Guide to Assessing Scientific Models. John Wiley and Sons. 2004.

Saltelli, a., Ratto, M., Andres, T., Campolongo, F., Cariboni, J., Gatelli, D. Saisana, M., and Tarantola, S. Global Sensitivity Analysis. The Primer, John Wiley & Sons. 2008.

Hornberger, G. Spear, R. An approach to the preliminary analysis of environmental systems. Journal of Environmental Management 7, 7 -- 18. 1981.

Sensitivity analysis (SA) regards the study of how the variation (uncertainty) in the output of a mathematical model can be apportioned, qualitatively or quantitatively, to different sources of variation in the input of the model (Hornberger, Spear).

Monte Carlo Filtering: the objective is to identify regions in the space of the input factors corresponding to the high or low values of the output.

The total of one specified quantity to another, or one bulk group of items to a separate group of items, constitutes a Ratio. Ratios are divided by a colon; for example, 2:1. This is read as two-to-one.

A summary of these 3 concepts make up the main chapter structure of this report, followed by an overall conclusion; this conclusion also provides a recommendation section.

A financial statement should provide a formalized draft (record) of the financial activities of a business (company, corporation, enterprise, trade, or partnership) or individual.

Through the preparation of this report, an astute means of communication must be available. Therefore, with this assignment, my main aim is to provide a well thought-out and justified recommendation in concern to a future action to be taken. Moreover, a set, required course structure must avail.

Ratio analysis on the Income Statement and the Balance Sheet, more frequently regarded as Financial Statements: four basic financial statements, accompanied by a management discussion and analysis:

Balance sheet: also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and Ownership equity at a given point in time.

Income statement: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state.

Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period.

Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

"Financial Statements." Encyclopaedia Britannica Online. Encyclopedia Britannica, 1999. Web. 13 January 2011.

You are required to perform ratio analysis on the Income Statement and the Balance Sheet under the three headings used in the text and lecture (profitability, liquidity and financial stability). You are required to show your calculations for the ratio analysis. The number of ratios performed under each heading should reflect the marks allocated to each. You do not have to show the calculations for the percentage analysis as most students do this on an excel spreadsheet but you need to submit it in a Word document -- the template supplied.

Calculations:

The total of one specified quantity to another, or one bulk group of items to a separate group of items, constitutes a Ratio. Ratios are divided by a colon; for example, 2:1. This is read as two-to-one.

Financial Ratios, which are used to explain how to discern the numbers found within applicable statements and to solve critical concerns, are important. For example, through the use of appropriately formatted financial ratios, businesses can itemize and then acknowledge early on whether a problem will ensue from excess debt or inventory, whether customers are paying according to terms, whether the operating expenses are too high and whether the company assets are being used appropriately to further generate income. With the appropriate implementation of Financial Ratios, a good indication of the company's financial strengths and weaknesses becomes quite evident.

From the University of Missouri (small business technology & development centers university of missouri): Examining these ratios over time provides some insight as to how effectively the business is being operated.

Many industries compile average industry ratios each year. Average industry ratios offer the small business owner a means of comparing his or her company with others within the same industry. In this manner, they provide yet another measurement of an individual company's strengths or weaknesses. Robert Morris & Associates is a good source of comparative financial ratios. Following are the most critical ratios for most businesses, though there are others that may be computed.

Note: There may be different ways to compute ratios. It is important to be consistent from year to year and use the same method when making comparisons. FisCAL calculates ratios the same way as Robert Morris Associates (RMA).

1. Liquidity

Liquidity measures a company's capacity to pay its debts as they come due. There are two ratios for evaluating liquidity.

Current Ratio: The current ratio gauges how capable a business is in paying current liabilities by using current assets only. Current ratio is also called the working capital ratio. A general rule of thumb for the current ratio is 2 to 1 (or 2:1 or 2/1). However, an industry average may be a better standard than this rule of thumb. The actual quality and management of assets must also be considered.

The formula is:

Total Current Assets

Total Current Liabilities

Quick Ratio: Quick ratio focuses on immediate liquidity (i.e., cash, accounts receivable, etc.) but specifically ignores inventory. Also called the acid test ratio, it indicates the extent to which you could pay current liabilities without relying on the sale of inventory. Quick assets are highly liquid and are immediately convertible to cash. A general rule of thumb states that the ratio should be 1 to 1 (or 1:1 or 1/1).

The formula is:

Cash + Accounts Receivable

( + any other quick assets )

Current Liabilities

2. Safety

Safety indicates a company's vulnerability to risk, e.g., the degree of protection provided for the business' debt. Three ratios help you evaluate safety.

Debt to Equity: Debt to equity is also called debt to net worth. It quantifies the relationship between the capital invested by owners and investors and the funds provided by creditors. The higher the ratio, the greater the risk to a current or future creditor. A lower ratio means your client's company is more financially stable and is probably in a better position to borrow now and in the future. However, an extremely low ratio may indicate that your client is too conservative and is not letting the business realize its potential.

The formula is:

Total Liabilities (or Debt)

Net Worth (or Total Equity)

EBIT/Interest: This assesses the company's ability to meet interest payments. It also evaluates the capacity to take on more debt. The higher the ratio, the greater the company's ability to make its interest payments or perhaps take on more debt.

The formula is:

Earnings Before Interest & Taxes

Interest Charges

Cash Flow to Current Maturity of Long-Term Debt: Indicates how well traditional cash flow (net profit plus depreciation) covers the company's debt principal payments due in the next 12 months. It also indicates if the company's cash flow can support additional debt.

The formula is:

Net Profit + Non-Cash Expenses*

Current Portion of Long-term Debt

*Such as depreciation, amortization and depletion.

3. Profitability

Profitability ratios measure the company's ability to generate a return on its resources. Use the following four ratios to help your client answer the question, "Is my company as profitable as it should be?" An increase in the ratios is viewed as a positive trend.

Gross Profit Margin: Gross profit margin indicates how well the company can generate a return at the gross profit level. It addresses three areas -- inventory control, pricing and production efficiency.

The formula is:

Gross Profit

Total Sales

Net Profit Margin: Net profit margin shows how much net profit is derived from every dollar of total sales. It indicates how well the business has managed its operating expenses. It also can indicate whether the business is generating enough sales volume to cover minimum fixed costs and still leave an acceptable profit.

The formula is:

Net Profit

Total Sales

Return on Assets: This evaluates how effectively the company employs its assets to generate a return. It measures efficiency.

The formula is:

Net Profit Before Taxes

Total Assets

Return on Equity: This is also called return on investment (ROI). It determines the rate of return on the invested capital. It is used to compare investment in the company against other investment opportunities, such as stocks, real estate, savings, etc. There should be a direct relationship between ROI and risk (i.e., the greater the risk, the higher the return).

The formula is:

Net Profit Before Taxes

Net Worth

4. Efficiency

Efficiency evaluates how well the company manages its assets. Besides determining the value of the company's assets, you and your client should also analyze how effectively the company employs its assets. You can use the following ratios:

Accounts Receivable Turnover: This ratio shows the number of times accounts receivable are paid and reestablished during the accounting period. The higher the turnover, the faster the business is collecting its receivables and the more cash the client generally has on hand.

The formula is:

Total Net Sales

Accounts Receivable

Accounts Receivable Collection Period: This reveals how many days it takes to collect all accounts receivable. As with accounts receivable turnover (above), fewer days means the company is collecting more quickly on its accounts.

The formula is:

365 Days

Accounts Receivable Turnover

Accounts Payable Turnover: This ratio shows how many times in one accounting period the company turns over (repays) its accounts payable to creditors. A lower number indicates either that the business has decided to hold on to its money longer or that it is having greater difficulty paying creditors.

The formula is:

Cost of Goods Sold

Accounts Payable

Days Payable: This ratio shows how many days it takes to pay accounts payable. This ratio is similar to accounts payable turnover (above.) the business may be losing valuable creditor discounts by not paying promptly.

The formula is:

365 days

Accounts Payable Turnover

Inventory Turnover: This ratio shows how many times in one accounting period the company turns over (sells) its inventory and is valuable for spotting under-stocking, overstocking, obsolescence and the need for merchandising improvement. Faster turnovers are generally viewed as a positive trend; they increase cash flow and reduce warehousing and other related costs.

The formula is:

Cost of Goods Sold

Inventory

Days Inventory: This ratio identifies the average length of time in days it takes the inventory to turn over. As with inventory turnover (above), fewer days mean that inventory is being sold more quickly.

The formula is:

365 Days

Inventory Turnover

Sales to Net Worth: This volume ratio indicates how many sales dollars are generated with each dollar of investment (net worth).

The formula is:

Total Sales

Net Worth

Sales to Total Assets: This indicates how efficiently the company generates sales on each dollar of assets. A volume indicator, this ratio measures the ability of the company's assets to generate sales.

The formula is:

Total Sales / Total Assets; Debt Coverage Ratio

To further indicate the company's ability to satisfy its debt obligations and its capacity to take on additional debt without impairing its survival.

This is the general formula:

Net Profit + Any Non-Cash Expenses / Principal on Debt

Source Citation:

Seid, Michael. "Franchise Relations." Smart Solutions MSA Worldwide, LLC 94 Mohegan Drive, West Hartford, Connecticut, U.S.A. 06117. Web. 18 March 2010.

Nathan, Greg. "THE SIX STAGES of FRANCHISE RELATIONSHIPS." Franchise Chat. Web. 18 March 2010.

Alongside these steps entailed by Greg Nathan, those listed within the far more concise "Franchise Relations" by Michael Seid, which follows, summarizes this point implicitly:

The Glee Stage

"I am very happy with the relationship I have with my franchisor. They obviously care about my success and have delivered all they said. I am excited about my new business and full of hope for the future."

Initially franchisees are filled with glee. Along with their decision to buy a franchise comes the anticipation of whether things will work out and of course the hope of making lots of money.

During the opening stages of the business the franchisor will also be busy providing encouragement and support to their fresh and motivated franchisee. Like a wedding ceremony, the speeches at opening ceremonies of franchised outlets usually contain profound commitments such as;

"We will always be here for you";

"You are the reason for our existence"; or "If you have any problems at all, just call and we will be there."

Positive emotions run high at this stage. There is a great sense of achievement for everyone as the numerous hurdles in establishing the business have now been cleared.

The Glee stage covers the lead up period to buying into the franchise and will usually stay with a franchisee for between 3 and 12 months, depending on their past business experience.

The Fee Stage

"Although I'm making money, these royalty payments are really taking the cream off the top. What am I getting for my money?"

The second Fee stage kicks in as the franchisee gains more of a handle on the business's finances. It comes from a growing appreciation that profit is the result of sales minus expenses. At this point they may become particularly sensitive to the royalty and advertising fees, which they see as annoying expenses that into their profits.

Questions such as, "What am I getting for my money?" will surface in their mind, especially when they review their weekly royalty fees.

At this stage the franchisee's level of satisfaction starts to drop.

There are basically two paths from the Fee stage - either back to Glee, (this can happen when the franchisor provides significant assistance, for example with a rent reduction), or into the Me stage.

The Me Stage

"Yes I am successful. But my success is a result of my hard work. I could probably be just as successful without my franchisor."

As the franchisee moves into the Me stage he or she will typically be thinking that their success is due purely to their own hard work and effort. This natural tendency to take the credit for the good things, is known in psychology as the 'Attribution Effect' or the 'Self-Serving Bias'. Attribution theory explains the thinking process we go through in searching for the best explanation of an event and also suggests that we are not all as rational as we might like to believe.

When we perform well or achieve something we tend to attribute this to our inherent skills and personality. We take the credit. But when we make mistakes or don't perform up to expectations we tend to blame someone else or outside circumstances.

The human ego has always been a master at playing with our minds - giving us reasons why we are right and others are wrong, why we are good and others are bad, why we are smart and others are stupid, and so on. For some people it is a way of protecting their self-esteem.

Not surprising, we find the Self-Serving Bias alive and well in the franchise relationship. It tends to be at its strongest when the franchisee moves through the Me stage where they will tend to attribute their success to their own work and initiative. If things are not going so well however, the franchisor is inevitably held to blame. Either way the franchisor usually starts to receive some criticism.

The Free Stage

"I really don't like all these restrictions my franchisor is putting on the way I run my business. I feel frustrated and annoyed at their constant interference. I want to be able to do my own thing and express my own ideas."

While the franchise relationship tends to begin with the franchisee relatively dependent on the franchisor this does not last. As a franchisee's business confidence grows, their drive towards independence will increasingly assert itself. A franchisee at this stage might feel resentful having to follow the franchisor's standard operating procedures all the time.

The Free stage is characterized by a need to break free of the restrictions and limitations of the franchise and a testing of the system's boundaries. A franchisee might also test out how tight the franchise agreement is and try to break free of their contractual obligations.

The franchisor might also decide to break free of the franchisee, either through a forced sale or termination of the agreement. Obviously chances of conflict are greatest at this point.

A franchisee who is stuck in this stage can become trouble to him or herself and a negative influence on others. They may also be a ripe target to be exploited by someone wanting to provoke trouble in the franchise network. As we saw in Chapter 6, unscrupulous lawyers or consultants have been known to use franchisees who are unhappy about specific issues as their ticket to make some money.

At this stage the franchisee will either get bogged down in resentment and continue to bicker with their franchisor, revert to the Me stage with intermittent but harmless grumbling, or move to the next stage - the quantum leap - the See stage.

The See Stage

"I guess I can see the importance of following the franchise system. And I do acknowledge the value of my franchisor's support services. I can see that if we all did our own thing standards would drop and we would lose the very things that give us our competitive edge."

Conflict in relationships seldom goes away by ignoring it. For the franchisee to move to the See stage there needs to be some frank and open discussions, where franchisee and franchisor listen carefully to each other's point-of-view. There may be some blood letting as previous disputes or disagreements are reopened. Mistakes and misunderstanding will no doubt have occurred on both sides of the relationship. There needs to be an acceptance and letting go of the past by both parties.

The franchisor might need to be more open in involving the franchisee in future planning or appreciating their specific needs. If the franchise system has been managed fairly and effectively the franchisee will generally come around to seeing that without consistency and adherence to the systems, the strength of the entire group would be lost. It is this shift in perception that characterizes the See stage.

The We Stage

"We need to work together to make the most of our business relationship. I need some specific assistance in certain areas to develop my business but I also have some ideas that I want my franchisor to consider."

From the See stage there is a natural progression to the We stage - a move from independent to interdependent thinking. At this point the franchisee is prepared to put his or her ego aside and recognises that success and satisfaction generally come more easily from working with, rather than against, their franchisor.

To reach the We stage a franchisee must be mature, objective and commercially minded. Most importantly, they must be profitable. As long as a franchisee is not making acceptable profits and feels their franchisor is not responding to their needs they will shake the system for change.

A franchisor that wants their franchisees to move into the We stage must deliver on their obligations and be fair and consistent in their dealings.

Franchisees who have negotiated their way through the franchise relationship minefield to the We stage are a franchise network's greatest asset. They will often be quiet achievers who keep one eye on their profit and one eye on cultivating healthy business relationships, not just with their franchisor but with their suppliers, peers and, of course, their customers.

As mentioned, this more concise definition, titled "Franchise Relations," from Michael Seid better summarizes these valued points made:

FRANCHISE RELATIONS

The franchise relationship is designed to be a long-term association designed to meet mutual personal, financial and professional goals. To achieve that level of success, franchisors must be diligent about creating a culture of exchange and open communication. MSA can assist your company in establishing programs of meaningful communications that will enable you to project a consistent message to your franchise community, while tapping into the passions and business savvy of some of your franchisees through formation of advisory committees and programs of recognition. Some methods to establish and improve franchisee relations:

Source Citation:

Kohlbeck, Mark J., Cohen, Jeffrey R. And Holder-Webb, Lori, Auditing Intangible Assets and Evaluating Fair Market Value - the Case of Reacquired Franchise Rights (February 01, 2009). Issues in Accounting Education, Vol. 24, No. 1, 2009.

Franchisee Advisory Council structure and implementation

Communications programs Incentive and motivations programs for franchisees Operating and other manuals and training programs, in print, web based, CD ROM or DVDs designed to protect the brand

Intranet and social media programs. The foundation of any successful franchisor-franchisee relationship begins with a spirit of mutual trust and respect.

1. Summary of reacquired franchise rights.

By all means, currently in the hotspot (with regard to "Reacquired Franchise Rights") is Krispy Kreme Doughnuts. In a nutshell, Krispy Kreme Doughnuts, Inc. chose to venture into an active expansion by means of a franchise reacquisition. Through the implementation of a 2000 Initial Public Offering (IPO), the active expansion and franchise reacquisition program garnered high-visibility of a franchise reacquisition program; from there, their highly controversial accounting issues became quite a broadly implanted associative means.

Krispy Kreme provides an opportunity by which to examine the several technical and conceptual issues in a realistic setting;

Intangible Assets:

"Krispy Kreme Doughnuts Inc. (KKD) Income statement." 2006-12-16. Yahoo! Finance. Web 18 March 2011.

"Company Profile for Krispy Kreme Doughnuts Inc. (KKD)." Web 18 March 2011.

Krispy Kreme Doughnuts, Inc. (the Company) was founded in 1937 in Winston-Salem, North Carolina.

The Company's efforts were concentrated in North Carolina and surrounding states for much of its early life. By 1996, the Company had grown to 95 units (an average of less than two stores per year). "Krispy Kreme's Entire Menu: Zero Grams Trans Fat." 7 January 2008. Reuters.Web 18 March 2011.

The Company developed an aggressive growth plan in the late 1990s.

"Bristol's Krispy Kreme sells 19,000 doughnuts a day." August 14, 2010. Evening Post. Web 18 March 2011.

Jenkins, Scott (2010-07-31). "Cheerwine doughnut now only in Salisbury." Salisbury Post. Web 18 March 2011.

In the early stages, the Company financed this growth by forming alliances with "Area Developers" and retaining minority equity stakes in the developing ventures. Details about the arrangements are provided below.

In 2000, Krispy Kreme boosted its expansion program with an injection of capital from an initial public offering (IPO), in which approximately 3.4 million shares were sold for a total of $65.7 million. Shares traded on NASDAQ, and the firm's stock listing shifted to the NYSE in 2001. The Company increased the number of retail outlets to over 400 by 2004. In the post-IPO period, store sales posted growth of approximately 19% per annum, attributed partially to publicity from the IPO. Despite this growth, the Company captured less than 10% of the U.S. doughnut market. The leader, Dunkin' Donuts, had over 5,000 stores in 2004. Growth in store sales began to slow in 2005.

"Krispy Kreme Doughnuts Inc. (KKD) Income statement." 2006-12-16. Yahoo! Finance. Web 18 March 2011.

The Doughnut Business: Krispy Kreme is a branded specialty retailer and manufacturer of premium quality doughnuts. Its principal business is to own and franchise Krispy Kreme doughnut stores in the U.S. And internationally. The main product is the Hot Original Glazed, a one-of-a-kind doughnut with an established brand. Each outlet also sells over 20 other varieties of doughnuts and coffee products. Product quality and consistency has provided the Company with a very loyal customer base.

Each of the retail stores is a doughnut factory with the capacity to produce between 4,000 and 10,000 dozen doughnuts daily. Each factory store contains a full doughnut-making production line. The factory store is marketed as a unique retail experience, featuring the store's production process, including a doughnut-making theater. The stores also support multiple sales channels to more fully use production capacity. Stores provide Krispy Kreme doughnuts to be sold in satellite locations, ballparks, and grocery stores, and under private label marketing agreements.

Krispy Kreme factory stores are divided into three categories. First, Company stores are owned by Krispy Kreme. Second, the Company has had an Associate program since the 1940s, where stores are owned by franchisees. Associates enter into 15-year licensing agreements to operate stores in a specific territory and are expected to concentrate on operations of existing stores. The third category is an Area Developer program, launched in the mid-1990s, where franchisees have responsibilities to develop new territories in addition to operating existing stores. Development targets pertaining to territory, number of stores, and timing are specified in the Area Developer Agreement.

"Krispy Kreme Doughnuts Inc. (KKD) Income statement." 2006-12-16. Yahoo! Finance. Web 18 March 2011.

Associates pay royalties of 3% on store sales and 1% on all other sales. Area developers have significantly higher costs: they pay royalties of 4.5% to 6% on all sales, and pay development and franchise fees of $20,000 to $50,000 per store. As of February 1, 2004, there were 141 Company stores, 18 Associates operating 57 stores, and 26 Area Developers operating 159 stores. The Area Developers were under contract to open 250 stores over the duration of their contract periods. The Company had a controlling interest in two of the Area Developers, who operated 24 stores and a minority interest in 15 others, who operated 66 stores.

"Krispy Kreme Doughnuts Inc. (KKD) Income statement." 2006-12-16. Yahoo! Finance. Web 18 March 2011.

Krispy Kreme generates revenue from four sources: company stores, franchise fees and royalties from franchise stores, a vertically integrated supply chain, and offsite bakery production separate from the factory store doughnut production. The franchising program lowers capital requirements and provides a royalty stream. The vertically integrated supply chain provides franchise stores with mixes, equipment, and coffee. This arrangement permits individual stores to lower cost of goods sold and the Company to capture additional profit on these sales.

Financial information extracted from Krispy Kreme's 2004 annual report is provided in Exhibits 1, 2, and 3: