Sonic 2013 Annual Report Download - page 35

1. Summary of Significant Accounting Policies
Operations
Sonic Corp. (the “Company”) operates and franchises a chain of quick-service restaurants in the United States. It
derives its revenues primarily from Company Drive-In sales and royalty fees from franchisees. The Company also leases
signs and real estate, and receives equity earnings in noncontrolling ownership in a number of Franchise Drive-Ins.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company, its wholly owned subsidiaries
and a number of Company Drive-Ins in which a subsidiary has a controlling ownership interest. All intercompany
accounts and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the amounts
reported and contingent assets and liabilities disclosed in the financial statements and accompanying notes. Actual
results may differ from those estimates, and such differences may be material to the financial statements.
Reclassifications
Certain amounts reported in previous years, which are not material, have been combined and reclassified to
conform to the current-year presentation.
Cash Equivalents
Cash equivalents consist of highly liquid investments, primarily money market accounts that mature in three
months or less from date of purchase, and depository accounts.
Restricted Cash
As of August 31, 2013, the Company had restricted cash balances totaling $18.6 million for funds required to
be held in trust for the benefit of senior noteholders under the Company’s debt arrangements. The current portion
of restricted cash of $11.8 million represents amounts to be returned to Sonic or paid to service current debt
obligations. The noncurrent portion of $6.8 million represents interest reserves required to be set aside for the
duration of the debt.
Accounts and Notes Receivable
The Company charges interest on past due accounts receivable and recognizes income as it is collected.
Interest accrues on notes receivable based on the contractual terms of the respective note. The Company monitors
all accounts and notes receivable for delinquency and provides for estimated losses for specific receivables that are
not likely to be collected. The Company assesses credit risk for accounts and notes receivable of specific
franchisees based on payment history, current payment patterns, the health of the franchisee’s business, and an
assessment of the franchisee’s ability to pay outstanding balances. In addition to allowances for bad debt for
specific franchisee receivables, a general provision for bad debt is estimated for the Company’s accounts receivable
based on historical trends. Account balances generally are charged against the allowance when the Company
believes it is probable that the receivable will not be recovered and legal remedies have been exhausted. The
Company continually reviews its allowance for doubtful accounts.
Inventories
Inventories consist principally of food and supplies that are carried at the lower of cost (first-in, first-out basis)
or market.
Property, Equipment and Capital Leases
Property and equipment are recorded at cost, and leased assets under capital leases are recorded at the
present value of future minimum lease payments. Depreciation of property and equipment and amortization of
capital leases are computed by the straight-line method over the estimated useful lives or the lease term, including
cancelable option periods when appropriate, and are combined for presentation in the financial statements.
Notes to Consolidated Financial Statements
August 31, 2013, 2012 and 2011 (In thousands, except per share data)
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