Sonic 2006 Annual Report Download - page 38

1. Summary of Significant Accounting Policies
Operations
Sonic Corp. (the “company”) operates and franchises a chain of quick-service drive-ins in the United States and
Mexico. It derives its revenues primarily from Partner Drive-In sales and royalty fees from franchisees. The company
also leases signs and real estate, and owns a minority interest in several Franchise Drive-Ins.
From time to time, the company purchases existing Franchise Drive-Ins with proven track records in core markets
from franchisees and other minority investors as a means to deploy excess cash generated from operating activities
and provide a foundation for future earnings growth.
Principles of Consolidation
The accompanying financial statements include the accounts of the company, its wholly-owned subsidiaries and
its majority-owned Partner Drive-Ins, organized as general partnerships and limited liability companies. All significant
intercompany accounts and transactions have been eliminated.
Certain amounts have been reclassified in the Consolidated Financial Statements to conform to the fiscal year
2006 presentation.
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.
Cash Equivalents
Cash equivalents consist of highly liquid investments that mature in three months or less from date of purchase.
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 capital leases is 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
Accounting for Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,” the company
reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other groups of assets, which generally
represents the individual drive-in.The company’s primary test for an indicator of potential impairment is operating
losses. If an indication of impairment is determined to be present, the company estimates the future cash flows
expected to be generated from the use of the asset and its eventual disposal. If the sum of undiscounted future cash
flows is less than the carrying amount of the asset, an impairment loss is recognized. The impairment loss is measured
by comparing the fair value of the asset to its carrying amount. Calculating the present value of future cash flows is
Sonic Corp. 2006 Annual Report
36
Notes to Consolidated
Financial Statements
August 31, 2006, 2005 and 2004
(In thousands, except per share data)