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Boston Chicken Case Essay

1102 words - 5 pages

Boston Chicken Case Analysis
Team 4F

EF 663 – Accounting for Decision Making

In theory Boston Chicken is a solid company with a strong short-term strategy. They have positioned themselves in a unique market which offers a meal replacement to consumers aside from the generic fast food restaurant. They have invested in their supply chain network and their operational activities. Overall customer satisfaction and product consistency improved through the use of flagship stores, as well as technology that enabled immediate customer feedback. They implemented drive in windows for added customer convience, which increased their sales volume. However their strategy is not without flaw. ...view middle of the document...

Exhibit 1 - 2

Further dissecting the income statement, as illustrated in Exhibit 1 - 3 gives us a discrete breakout of revenue that is generated from royalties, franchise fees and company-operated stores. Franchise fees comprise a significant portion of the revenue. What is less clear is the revenue that is being generated from interest bearing loans to financed developers. Concurrently there is no mention of average revenue per store, it is our assumption that revenue from operations may be artificially overstated, reflecting income that is being generated as a result of interest from financing developers and possibly software licensing. This aggressive practice not only manifests itself in the income statement but also in valuation of assets that appear on its balance sheet.

Exhibit 1 - 3

Another accounting red flag is their depreciation schedule which is greatly accelerated compared to the standard policy for buildings. The normal principle for depreciation is 39 years using the straight line method, theirs is assuming 15-30 years in deprecation using the straight line methodology. Depicted in Exhibit 1 – 4 below are two assumptions (lower limit and upper limit) with an estimated cost per store of $1,153,703.70.

Exhibit 1 - 4

The franchise owners need to invest a significant amount of equity funding to open up a franchise as well as promise that they would open 50-100 stores in a certain area. Furthermore, this was the only requirement that potential franchisees had to meet. It does not appear that research was done to investigate potential profitability, previous market saturation and location factors. The financial statements of Boston Chicken do accurately account for individual franchise profitability. In fact, on average the Return on Investment (ROI) is 1.75% with average weekly revenue projected at $388 and annual yearly income of $20,176. Below in Exhibit 1 – 5 is a snapshot of the balance sheet ratios, and while they demonstrate short-term health and solvency, the long term is in question.

Exhibit 1 - 5
  | 1994 | 1993 |
Working Capital | $32,049.0 | $2,788.0 |
Current Ratio | 2.175 | 1.271 |
Equity Ratio | 0.608 | 0.862 |
Debt Ratio | 0.328 | 0.138 |

We also believe that corporate financed developer loans could become a potential problem for Boston Chicken. No liability account has been setup as an allowance for...

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