McDonald’sAccounting/Financial Analysis

Profile: Company Background

McDonald’s Corporation (MCD)Details

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Index Membership:

S&ampP 500S&ampP 1500 Super Comp

Sector: Fast food restaurant

Industry: Restaurant

Full Time Employees: 420,000

  1. Business Summary

McDonald’s is the largest chain of fast food restaurants in theworld. The company runs more than 36,000 outlets across 119 countriesaround the globe (&quotOur History and Timeline&quot, 2016).Interestingly, McDonald’s serves almost 68.5 million customers in aday. The company was founded in 1940 in the United States, and in thelate 1940’s it became well-known as a hamburger restaurant. In1955, the restaurant was bought by Ray Kroc, who eventually led theworldwide expansion of McDonald’s Corporation (previously known asMcDonald’s System, Inc.). A McDonald’s restaurant is either runby the company itself, an affiliate or a franchisee. In 2012, BBCreported that after Walmart, McDonald’s is the second largestprivate employer in the world.

  1. Balance Sheet Overview

Balance Sheet Item

2015

2014

2013

Cash

7,685,500

2,077,900

2,798,700

Total Current Assets

9,643,000

4,185,500

5,050,100

Total Assets (including Long-term Assets)

37,938,700

34,227,400

36,626,300

Current Liabilities

2,950,400

2,747,900

3,170,000

Total liabilities (including Long-term liabilities)

30,850,800

21,374,000

20,616,600

Shareholder’s Equity

7,087,900

12,853,400

16,009,700

Total

37,938,700

34,227,400

36,626,300

Table 1. Summary Balance Sheet (&quotAnnual Reports&quot, 2016)

The 3 items of important information revealed by the balance sheetabout McDonald’s financial position over the last three years arediscussed below-

  1. Are Current Assets &gt Current Liabilities?

Yes. In the last 3 years, McDonald’s total current assets were morethan its total current liabilities. This indicates the company’ssound liquidity.

  1. Is Total Stockholders’ Equity &gt Noncurrent Liabilities?

No. Over the last 3 years, McDonald’s Stockholders’ Equitydeclined while its Noncurrent Liabilities increased gradually. Thisindicates the company’s heavy reliance on borrowing, and itjeopardizes its long-term solvency. This is known as “leverage”and excessive leverage is risky for any company.

  1. Is Market Value of Total Stockholders’ Equity &gt Book Value?

Yes. McDonald’s Price to Book Value Ratio is 28.1 (&quotMCDMcDonald`s Corp XNYS&quot, 2016). Consequently, McDonald’s hasbeen a very successful company in creating value for its stockholdersover the last 3 years.

  1. Income Statement Overview

Income Statement Item

2015

2014

2013

Revenue

25,413,000

27,441,300

28,105,700

Gross Profit

9,789,200

10,455,700

10,902,700

Operating Income

7,145,500

7,949,200

8,764,300

Net Income

4,529,300

4,757,800

5,585,900

Table 2. Summary Income Statement (&quotAnnual Reports&quot, 2016)

&nbspIncome Statement %

2015

2014

2013

  1. Revenue Growth

– 10%

– 2.4%

  1. Operating Income/Revenue

25.42

28.28

31.18

  1. Net Income/Revenue

16.11

16.92

19.87

Table 3. Income Statement Elements (% of Sales)

The 3 items of important information revealed by the income statementabout McDonald’s financial performance over the last three yearsare discussed below-

  1. Revenue: Declining over time.

  2. Operating Income/Revenue: This is not stable percentage of sales revenue. It is declining gradually.

  3. Net Income/Revenue: In 2013, McDonald’s Net Income/Revenue was 19.87 percent of its Sales revenue, which decreased to 16.92% in the next year and remained a bit stable in 2015.

Judging from the analysis above, it can be said that McDonald’sfinancial performance has worsened over the last 3 years.

  1. Statement of Cash Flow Overview

&nbsp

2015&nbsp

2014&nbsp

2013&nbsp

Cash from Operations

6,539,100

6,730,300

7,120,700

Add Cash from Financing

735,300

-4618300

-4,043,000

Total Cash Inflows

7,274,400

2,112,000

3,077,700

Less Capital Expenditures

-1,420,000

-2,304,900

-2,673,800

Change in Cash &amp Equivalents

5,854,400

-192,900

403,900

Table 4. Summary of Cash Flow Statement (&quotAnnual Reports&quot,2016)

  1. Cash from Operations: Declining over time.

  2. Ratio of Cash from Operations/Net Income: This should be stable over time. The ratios show considerable improvement each year.

    2015

    2014

    2013

    1.44

    1.41

    1.28

  3. Capital Expenditures:

  1. Are needed for growth

  2. Should be growing over time. But McDonald’s is cutting back its capital expenditures each year.

  3. Should be funded more by internal Cash from Operations than by external Cash from Financing. And this is the case here. Therefore, Cash from Operations is the main source of funding used by McDonald’s.

  1. Responsibility for: a) The issuance, and b) The content of the company financial statements

McDonald’s Management is responsible for theissuance and the contents of the financial statements. The managementis also responsible for the objectivity and integrity of thefinancial statements and for setting up and maintaining sufficientinternal control over the process of financial reporting (&quotBoardCommittees &amp Charters&quot, 2016).

  1. Assurance of compliance with GAAP and being free from material misstatement

As mentioned above that, McDonald’s managementis responsible for the objectivity and integrity of the financialstatements and for setting up and maintaining sufficient internalcontrol over the process of financial reporting. McDonald’sinternal control over financial reporting is designed to providereasonable assurance regarding the consistency of financial reportingand the preparation of financial statements for external purposes inaccordance with GAAP. Its internal control over financial reportingincludes the following policies and procedures:

I. Pertain to the maintenance of records that, inreasonable detail, fairly and accurately resemble the dispositionsand transactions of the assets of the Company

II. Provide rational guarantee that transactionsare recorded as necessary to permit preparation of financialstatements in accordance with GAAP and

III. Provide rational guarantee about preventionor timely detection of unauthorized acquisition, use or dispositionof the Company’s assets, which could have a material effect on thefinancial statements.

Moreover, the audit report of ERNST &amp YOUNGLLP as the Independent Registered Public Accounting Firm also assuredthat the financial statements are in compliance with GAAP, and arefree of material misstatements.

  1. The usefulness of notes to the financial statements

Notes are supplemental and explanatory data, whichprovide the basic detail that underlies the financial statements(&quotNotes To The Financial Statements Definition&quot,2012). Two facts learned from reading thefootnotes from McDonald’s annual reports are as follows-

  1. The consolidated financial statements include the accounts of the Company and its subsidiaries. Investments in affiliates owned 50% or less (primarily McDonald’s Japan) are accounted for by the equity method and

  2. Sales by Company-operated restaurants are recognized on a cash basis.

  1. Facts learnt from the Business Section of the 10-K

The business section of the 10-K provides overallinformation about a company. It tells us what kind of business thecompany does, how its internal and external operations are managed,and it also gives us some financial information about the business.Two facts learnt from McDonald’s Business Section of the 10-K aredescribed below-

  1. The Company is primarily a franchisor, with more than 80% of McDonald`s restaurants owned and operated by independent franchisees.

  2. McDonald`s typical franchise term is 20 years. It requires franchisees to meet rigorous standards and generally does not work with passive investors.

  1. Facts learnt from the Management`s Discussion and Analysis of Financial Condition and Results of Operations (MD&ampA) in the 10-K

  1. For the year ended December 31, 2015, the U.S., International Lead Markets and High Growth Markets segments accounted for 34%, 30% and 24% of total revenues, respectively and

  2. Comparable sales in the International Lead markets grew 3.4% and comparable guest counts increased 1.0%. All major markets contributed to the positive comparable sales performance except France, which was impacted by macro-economic headwinds.

References

Annual Reports.(2016).&nbspAboutmcdonalds.com.Retrieved 18 July 2016, fromhttp://www.aboutmcdonalds.com/content/mcd/investors/financial-information/annual-report.html

Board Committees &amp Charters.(2016).&nbspAboutmcdonalds.com.Retrieved 19 July 2016, fromhttp://www.aboutmcdonalds.com/mcd/investors/corporate-governance/board-committees-charters.html

MCD McDonald`s Corp XNYS.(2016).&nbspMorningstar.com.Retrieved 18 July 2016, fromhttp://www.morningstar.com/stocks/XNYS/MCD/quote.html

Notes To The Financial StatementsDefinition. (2012).&nbspInvestopedia.Retrieved 19 July 2016, fromhttp://www.investopedia.com/terms/f/footnote.asp

Our History and Timeline.(2016).&nbspMcdonalds.com.Retrieved 18 July 2016, fromhttps://www.mcdonalds.com/us/en-us/about-us/our-history.html