McDonald's Financial Accounting - Essay Example

Financial Accounting – McDonald’s The Annual Reports of any organization are considered to be the most important source of providing information about the operation of that organization. The Annual Reports tend to include information that pertains to the financial as well as non-financial performance of an organization. These Annual reports portray the performance of any given organization over a number of years usually 5 to 6 years. These Annual Reports are of great assistance for many different stakeholders and potential investors. The stakeholders and potential investors review these Annual Reports to analyze the current and predict the future performance of an organization by reviewing the trend carried out by the organization and the market trend. McDonald’s was formed in 1940 as a barbeque restaurant but later developed into a huge chain of hamburger fast food restaurants. “McDonald's is the leading global foodservice retailer with more than 33,000 local restaurants serving more than 64 million people in 119 countries each day. More than 80% of McDonald's restaurants worldwide are owned and operated by independent local men and women” (About McDonald’s.com, 2011). The accountant’s report accompanying the Annual Report usually refers to the auditor’s report. The purpose of the accountant’s report is to give an opinion on the presentation of the financial performance of the organization. The auditors review the entire financial data before forming an opinion on the financial statements of an organization. The accountant’s report of McDonald’s is reviewed by the Ernst and Young, who are a Public Accounting firm and are the auditors of McDonald’s. According to them, the financial statements of McDonald’s seem to be fairly presented in all material respect and that the financial statements are prepared in accordance with the U.S Generally Accepted Accounting Principle. The main idea or the main purpose of this report is to assure the shareholders and the investors that the company in question is not performing any fraudulent activity that may not be in line with their respective objectives (McDonald’s, 2010) Financial Statements are a proper record of financial performance of any given business entity. These financial statements provide a reflection of an organization’s performance with respect to the resources being used in order to attain the favorable/unfavorable results. The most important financial statements are: Income Statement The income statement displays the net profit or loss made by a company through the normal course of its operation. The profit or loss reported within the Income statement pertains to a specific period of time (usually 12 months which constitutes a year end). The only transactions recorded within the Income Statement are those which affect the profit. These transaction normally tend to be affiliated with the income earned and the expenditure incurred during a period of time. The Consolidated Income Statement of McDonald’s shows a profit of $4946.3 million in the year ending 2010. This profit figure is 8.6% and 14% higher than the profit figures of 2009 and 2008 respectively. These figures clearly suggest that McDonald’s has performed extensively well; keeping in mind the global economic crisis that had prevailed within the global economy(McCallig, 2008). Balance Sheet The Balance Sheet is a statement that portrays the result at any particular point in time. The Balance Sheet provides a snap shot of the entire business in question since its inception till the point in time when the Balance Sheet is created. The Balance Sheet is categorized into broader categories showing the assets, liabilities and the equity of a business entity. These categories are shown separately with the assets portion under one heading while the equity and liabilities portion under the other heading. The assets portion must eventually tie up with the amount displayed under the equity and liabilities heading. The prime purpose of preparing a Balance Sheet is to show the true and fair view of the state of affairs of any given organization. The Balance Sheet displays the detailed picture of all the assets, liabilities and the equity of a company and if proper calculation techniques have been adopted to value the assets, liabilities and the equity instruments, a proper judgment of the position of a business can be viewed. The Balance Sheet of McDonald’s shows the Capital Employed figure to be $31975.2 million (Spurga, 1986). Owner’s Equity Statement The Owner’s equity statement is prepared after the preparing the Income Statement. The Owner’s Equity Statement shows the beginning and the ending balances of the owner’s equity. This amount is derived by adding the net income of the current period to the prior year ending balance of owner’s equity and the deductions are made for any withdrawals being made during the operation of the business. The major deductions made to the Owner’s Equity are usually for cash dividends. The Owner’s Equity Statements gives an insight to all the deductions and the additions made to the original owner’s equity. These additions and deduction are not the one as shown within the Income Statement i.e. those which relate to the buying and selling activities of the business. The Owner’s Equity Statement for McDonald’s shows an ending balance of $14,634.2 million which is adjusted for the changes made through the distribution of dividend and the purchase of Treasury Shares (Thomas, 2005). Cash Flow Statement The Cash Flow Statement shows the changes being brought upon within the Income Statement and the Balance Sheet. The basic aim of the Cash Flow Statement is to reduce the accrual basis of business and analyze the business on a cash basis. The Cash Flow Statement reports on three distinct types of activities carried out within an organization. These activities include operating, financial and investing activities. The Cash Flow Statement gives a great insight on a firm’s liquidity position; this information can be used to alter cash flow changes in the future. Besides this, the statement also provides information for analyzing the changes in assets, liabilities and equity within the organization. The major benefit of Cash Flow Statement is that it can be used to analyze the operating performance of different firms, eliminating the bias being brought upon by the differing accounting policies being followed within different organizations. The Cash Flow Statement for McDonald’s shows an increase of $591 million to its cash and cash equivalents (Thomas, 2005). The footnotes i.e. the Notes to the Financial Statements give a detailed knowledge of the nature of the business and the differing accounting policies followed by an organization. The information presented within the Financial Statements is extensively made understood to the users of the Financial Statements through Foot Notes. The unique things to be noted within the McDonald’s Financial Statement include the differing patterns through which the company earns its revenue. The company’s franchising agreements seem interesting as the company earns 33% of their revenue from franchising agreements and the company has kept a great policy in classifying those revenues under a separate heading. This shows that the company’s ability to generate revenue from the different mix of options. Besides this, the company has also kept a good segmental record with respect to the different geographic regions in which it operates. This information helps in assessing the market area which seems good and attractive and which may be targeted more in order to enhance and boost the revenues of the company (McDonald’s, 2010). McDonalds’ being a trend setter and a global market leader in the fast food and restaurant industry seems to attract the attention of many different companies for the purpose of benchmarking and excellence. Each and every aspect of the company seems interesting. The company reported an increase of 6% within its revenue, an increase of 11% in its Earnings per share, an increase of 9% in the operating income and exorbitant increase of $591 million in the cash provided from operations for the year ended 2010 (McDonald’s, 2010). The Earnings per share trend for McDonald’s can be represented graphically as: With respect to the depreciation and amortization policy, McDonald’s follows a straight line policy when depreciating or amortizing its property and equipment. The useful lives of the property and equipments are estimated by the management on the assumption over which the asset would generate revenue. The property or equipments that are bought or used on a recurring basis are depreciated by calculating the useful lives of the property or equipment with respect to the past experiences with similar assets (McDonald’s, 2010). A contingent liability, which is also a reason of concern for large companies because of its unknown impact, is also prudently handled within McDonald’s. The contingencies are properly reviewed before an amount is estimated. This amount is inserted within the Financial Statements on an accrual basis. Practical approach for contingencies was evidently reported within the Financial Statements (The issue of developmental licensee organization within Latin America and the Caribbean in the year 2007, where McDonald’s agreed to pay a certain amount is reflected within the Consolidated Financial Balance Sheet of 2010 and 2009 under long term liabilities and accrued payroll) (McDonald’s, 2010). Works Cited “Getting to Know Us...” Aboutmcdonalds.com, Our Company. 2011. Web. 21 Nov. 2011. Top of Form McCallig, John. Introductory Financial Accounting: Using International Financial Reporting Standards. Dublin: Donmorris Books, 2008. Print. McDonald’s. McDonald’s Annual Report 2010. Web. 21 Nov. 2011 Top of Form Spurga, Ronald C. Balance Sheet Basics: Financial Management for Non-Financial Managers. New York: F. Watts, 1986. Print. Top of Form Thomas, Andrew. Introduction to Financial Accounting. Maidenhead: McGraw-Hill Education, 2005. Print. Bottom of Form Bottom of Form Bottom of Form Read More