Understanding Common Accounting Terms

Physical resources owned by your business.

• Current assets include cash and items that can be converted into cash within a reasonable period of time, typically a year, such as accounts receivable and inventory.
• Fixed assets are physical resources that are not intended to be converted into cash; they produce benefits over an extended period of time. Fixed assets include equipment.

A financial statement prepared by an accountant that lists a business’ assets (what is owned), liabilities (what is owed), and net worth (assets minus liabilities). It is prepared at the end of an accounting period (for example, a month or a quarter) and can be used to track changes in a company’s indebtedness, liquidity (availability of cash), and profitability.

A term applied to cash that is received by and paid out by a business. Cash is regarded as a stream that flows into a franchise when customers purchase gasoline and store merchandise and that flows out of a franchise as rent, wages, taxes, and similar expenses are paid. Cash flow is not reflected directly on financial statements, but it may be calculated according to the following formula:

Net Profit + Depreciation +/- Working Capital - Withdrawal - Capital Expenditures = Cash Flow

A portion of the cost of a business’ capital equipment that may be deducted from annual gross profits as an operating expense. There are several types of accounting methods for determining depreciation including straight line and accelerated. Both assume that the capital equipment has a “useful life” after which time it has only minimal value (salvage value). The cost of the equipment, minus any salvage value, is deducted over the course of its useful life. In straight line depreciation the original cost minus the salvage value is divided by the number of years of useful life into equal dollar amounts. These amounts are deducted each year as an operating expense throughout the useful life period (in some cases five, but more typically ten to fifteen years).

In accelerated depreciation different formulas can be used to provide larger dollar amounts in the early years of useful life. The amount of depreciation deducted as an expense declines over time. Two of the more common types of accelerated depreciation include double-declining-balance depreciation and sum-of-the-year’s-digits depreciation. Each method of depreciation offers particular benefits. Consult your accountant for advice on which is best for your operation.

An Income Statement, also known as a Profit and Loss Statement or simply P&L, provides a summary of each element that produces your franchise’s net profit. It provides information on sales income, product costs, operating expenses, and the resulting net profits. Income Statements are organized to follow the net profit formula:

Sales Income - Product Costs = Gross Profit - Operating Expenses = Net Profit

A term used to describe the use of debt to improve the profitability of a business. Leverage can best be described in terms of its effect on the Balance Sheet and on the Return on Equity ratio (ROE). When a company borrows to purchase assets, it increases the asset portion of the Balance Sheet and liability portion; net worth (equity) stays the same. If the assets are used to generate more net profits, then the profitability of the business has been improved as reflected in the ROE ratio in the following example: Higher Net Profit e Unchanged Equity = Higher Return on Equity Liabilities, Current and Long-Term Liabilities are monies owed to others that are stated in summary form on a business’ Balance Sheet. They include accounts payable, taxes, sales contracts, and similar obligations.

Obligations that will be paid within the next year.

Obligations that continue over several years such as multi-year sales contracts and long-term leases.

A term used to describe a business’ ability to meet its current liabilities using its current assets; in simple terms, it means that a business has enough cash from its operations to meet its obligations in a timely manner. There are three major measures of liquidity: Working Capital, Current Ratio and Quick Ratio.

Compares current assets to current liabilities by subtracting current liabilities from current assets. A business can identify the amount of cash needed to have on hand take advantage of discount and special term of payment. The formula for Working Capital is as follows:

Working Capital = Current Assets - Current Liabilities

Compares the amount of money you have on hand or will have on hand within the next year to the amount of money you owe (or will owe within the next year). In other words, it compares current assets to current liabilities as stated on the Balance Sheet. The formula for Current Ratio is as follows:

Current Ratio = Current Assets ÷ Current Liabilities

Also known as the “acid test” ratio, compares only the most readily available assets to current liabilities. Those most readily available assets include cash and accounts receivable, but exclude inventory. The formula for Quick Ratio is as follows:

Quick Ratio = Quick Assets ÷ Current Liabilities

There are industry-wide standards for what are considered “healthy” ratios, but in practice what is acceptable varies significantly by the type of business.

Margins or gross profit margins represents a comparison between gross profit and the retail price at which an item is sold. The margin is usually expressed as a percentage and is illustrated in the following formula:

Gross Profit Margin (GPM) = (Retail Price - Cost) ÷ Retail Price

Determining a Price or Retail Extension:

Retail Price = Cost/(100% - Gross Profit Margin %)

Purchase in Bulk for an Individual Sale:

Purchase of a case of 24 units. Cost of the case is $10.65. If, for example, the desired Gross Profit Margin is 35%.The retail price of an individual unit is calculated as follows:

10.65/(100%-35%) =10.65/.65= $16.38 Retail Extension

$16.38 ÷ 24 = $.68 Per unit retail

Mark Up:

This represents the amount by which the retail price of an item has to be set above cost in order to produce the desired amount of gross profit.

The formula for setting a price to produce the desired gross profit is as follows:

Retail Price = Cost ÷ (100% - Gross Profit Margin)

A method by which a business can maintain and account for the value of its inventory. In this method, inventory is kept at its direct cost. As items are added to inventory, the value of the inventory rises by an amount equal to the cost of the additions. As items are removed from inventory by sales, the value of the inventory falls by an amount equal to the cost of the items sold. In Sunoco franchises, gasoline inventories are maintained using this method.

A method by which a business can maintain and account for the value of its inventory. (For another method, see “Cost Accounting Method” in this glossary.) In the Retail Accounting Method, inventory is kept at its retail value. As items are added to inventory, they are marked up to reflect their retail price and the value of the inventory increases by that amount. As items are sold, the value of the inventory falls by an amount equal to the retail price of the items sold. Within your franchise, store merchandise is maintained by this method.

This method is to only be used for the following Product Categories:

• Chicken
• Deli
• Food Service
• Fresh Baked Pizza
• Convection Oven Products
• Fountain Drink - Cold
• Hot Drinks
• FCB

Under this method merchandise additions are made at cost value and no retail value. They will not be extended to a retail value as are other store products. Retail value is added to the retail book inventory via a price change after the item is sold. The retail value will be determined by the related department sales found on the closing register tape.

The amount of money remaining from sales after certain costs and expenses have been taken out.

Gross profit is the amount remaining after product costs have been subtracted from sales income. This amount is controlled by the franchisee when retail prices are set.

Sales Income - Product Costs = Gross Profit

Net profit is the amount remaining after operating expenses are subtracted from gross profit. Thes is illustrated in the formula below:  Gross Profit - Operating Expenses = Net Profit

There are two primary financial measurement tools used to evaluate profitability of a business: Return on Assets Ratio and Return on Equity Ratio. Taken together, these two ratios are a good measure of the profitability of a franchise.

Return on Assets Ratio measures how much profit the business generated with the assets available to it. A high number means that the manager of the business did an excellent job of using the business’ inventory and equipment to bring in a high level of net profit. The formula for Return on Assets (ROA) is as follows:

Return on Assets = Net Profit (after Tax) ÷ Total Assets

Return on Equity measures the return that the owner realized on his investment in the business. Return on Equity measures the net profit (after tax) generated by the business to the net worth of the business (that is, owner’s equity). The number produced lets the owner evaluate the return being realized on his investment in the business. The formula for Return on Equity (ROE) is as follows:

Return on Equity = Net Profit (after Tax) ÷ Net Worth

Program time to time initiated by gasoline supplier for motivating retailer sale more gasoline, calculated usually on monthly basis.

Usually part of the contract between independent dealers and major oil company. Often very similar to gasoline VIP. Major difference is that Gasoline Allowance is set for the time of contract and can not be changed or canceled by any party.

The cash register(s) NRGT totals shall be used as the starting point for obtaining the total monthly gross sales.

The purpose of BUYDOWN form is to keep track of money receivable from manufacturers who offers customer discount on some of the products. For example cig’s.

The purpose of PRICE CHANGE form is to keep track of item price changes in the store and store inventory adjustments. If you sale cigarettes cartons for lower price then your packs, you have to keep truck of it in PRICE CHANGE form. The different between pack price and carton price will not be reimbursed to you, so you have to write it off your inventory and your profit.

Operator shall have performed at least once a month a physical inventory of all merchandise available for sale at its retail value. It is recommended that all operators have this inventory performed more frequently as a management control. Operator may choose an independent service qualified in the performance of retail store inventories.

CStoreOffice® will establish and maintain a retail book inventory (except where current business practices reflect a department to use a cost system such as food service, deli) which shall reflect the value at retail of all merchandise for sale from the store, including, but not limited to, bottle deposits, merchandise for sale in vending units, and consigned merchandise. The value at retail of purchases shall be based on Operators then current retail selling prices taking from the Price Book. The retail book inventory shall be determined initially by a physical inventory of each item in the opening inventory of the store, other than store supplies, at the then current retail selling price. The value of the retail book inventory shall be reestablished by periodic physical inventories taken as described in Physical Inventory above. The amount of inventory determined by a physical inventory shall replace the book inventory which has been calculated since the last physical inventory. The difference between the two inventory totals shall be a current period profit/loss item. The book inventory shall be adjusted by the following normal business activities between physical inventories:

• Adding the value at retail of all merchandise items brought into the store for resale.
• Subtracting all sales and Operator’s withdrawals for personal use.
• Adding or subtracting, as the case may be, the value of all retail selling price increases or decreases on merchandise available for sale from the store.
• Subtracting the retail value of any broken or spoiled merchandise and merchandise employed for store use.
• Subtracting the retail value of merchandise returned to vendors.

A calendar month, except where the commencement, expiration, or termination of the Store Agreement occurs during any calendar month. In that event, the portion of said month which follows the commencement date or precedes expiration or termination shall be an accounting period.

Percent of retail purchases of the category multiplied by the gross profit margin of the category.

A summary of purchases by product category. This report lists the product category, the additions at cost, the retail value of the additions, the gross profit margins, the percent of total retail purchases for each product category, and the profit contribution by each product category.

A detailed report which lists merchandise additions categorized by specific vendor, product category, date of delivery, cost, retail extensions, and gross profit margins.