1. Summary of Significant Accounting Policies

Basis of Presentation — The accompanying Unaudited Condensed Consolidated Financial Statements for the third quarter and nine-month periods ended September 30, 2011 and 2010 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All significant intercompany accounts and transactions have been eliminated. These Unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all material normal recurring adjustments necessary to fairly state the financial position and the results of operations for the periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the audited Consolidated Financial Statements of Sonic Automotive, Inc. (“Sonic” or the “Company”) for the year ended December 31, 2010, which were included in Sonic’s Annual Report on Form 10-K.

Recent Accounting Pronouncements — In June 2011, the Financial Accounting Standards Board (“FASB”) issued an update to “Comprehensive Income” in the Accounting Standards Codification (“ASC”). This update requires an entity to present total net income, the components of other comprehensive income and total comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update is effective for issuers with fiscal years and interim periods within those years beginning after December 15, 2011. Sonic chose to early adopt the provisions of this update (as permitted by the terms of the update) and has included separate Unaudited Condensed Consolidated Statements of Comprehensive Income immediately following its Unaudited Condensed Consolidated Statements of Income.

Lease Exit Accruals — Lease exit accruals relate to facilities Sonic has ceased using in its operations. The accruals represent the present value of the lease payments, net of estimated or actual sublease proceeds, for the remaining life of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. A summary of the activity of these lease exit accruals consists of the following:

Income Tax Expense — The overall effective tax rates for the third quarter and nine-month periods ended September 30, 2011 and 2010 are higher than federal statutory rates due to the effect of state income taxes. The overall effective tax rate from continuing operations was 38.5% and 39.5% for the third quarter and nine-month periods ended September 30, 2011, respectively. The overall effective tax rate from continuing operations was 37.7% and 39.8% for the third quarter and nine-month periods ended September 30, 2010, respectively. The effective rate for the nine-month period ended September 30, 2011 was different than the prior year period due to the level of overall taxable income and the shift in the distribution of taxable income between states in which Sonic operates.