budget management 176

8/3/2019 Budget Management 176

http://slidepdf.com/reader/full/budget-management-176 1/9

Budget management

Accounting Analysis

For our accounting analysis we found the key accounting policies and related them to our identified key success factors.McDonald¶s most important factors includeconsolidation,financial statement estimates, revenue recognition,advertising costs, compensation from stocks,property andequipment, goodwill, long-lived assets, franchise revenues, and

employee benefit plans.We determined that McDonald¶s has a large amount of flexibility in its accounting methods.Their depreciation methods and goodwill impairment practicesare very important in their financial statements because thenumbers are so substantial.McDonald¶s uses a standard accounting strategy that easily

compares its financial statements with its competitors.When evaluating their quality of disclosure, we determined thatthe company does a great job of explaining the choices theymake and their future estimates in the Letter to the Shareholdersand the Management Discussion and Analysis.Their footnotes are also very easy to understand.There wasnothing in our ratios that raised a red flag for us, as all thenumbers convey clear

patterns in the last five years.There was no reason to undo any accounting distortions because

we did not find any skeptical information that was not explainedin their disclosures.



Accounting Strategy

Based on our review we conclude that McDonald¶s corporationuses standard accounting policies in the industry.

Wendy¶s does not do a good job of explaining their policies butthe

YUM Corporation is easy to compare.

Both of the companies report their revenues in the period that

they are earned. The companies deal with franchising similarlyas they both have a startup fee and collect additional fees basedon sales performance.

McDonald¶s financial statements will be comparable with other companies in this industry segment with similar accounting policies.

In addition, these accounting policies are crucial for congruencyand measuring profitability across the restaurant franchises andother branches of the firms, such as Boston Market andChipotle Mexican grill domestically and internationally.



Sales Manipulation Diagnostics

2007 2008 2009 2010 2011

Net Sales $4,243 $14,870 $15,406 $17,140 $19,065

Cash from Sales 5.18 5.53 5.33 5.24 4.88Accounts Receivable 17.88 16.86 18.01 23.34 25.57Unearned Revenue 0 0 0 0 0Warranty Liablilities 0 0 0 0 0Inventory 143.43 140.95 137.92 132.46 129.25

Core Expense Manipulation Diagnostics

2000 2001 2002 2003 2004

Declining Asset (Sales/Asset) 0.66 0.66 0.64 0.67 0.68Changes in CFFO/OI 0.83 1.00 1.37 1.15 1.10Changes in CFFO/NOA 1.66 1.48 1.68 1.73 1.37Total Accruals/ Sales 0.05 0.07 0.08 0.07 0.07Pension Expense/SG&A 1.69 1.75 1.80 1.86 1.88



Increased volume vs. reduced costs

1 In the early years the fast food wars were fought with

heavy discounting arms where high volume compensated

low margins. However, later on, when the commodity

costs got higher and the minimum wage increased in the

slow-growth environment, there was a demand for higherprofits.McDonald's surrendered the strategy of sacrificing

profits for market share by cutting prices to drive sales and

volume. The company started raising menu prices across

half its system.

2 Later on, in this highly competitive market, McDonalds

changed strategy, aimingat binding customers to apply

more monopolistic price policies.The very low prices was

replaced by product initiatives and promotion to attract

customers and increase margins, and now, the margin of

McDonalds belongs to the highest of the industry.

3 Also, the competition is said to have changed the structure

of profitability by eroding unit-level margins. Thereby it

has become more difficult for restaurant managers to

show growth in earnings and the impact of earnings

growth from newly opened stores has decreased.For the



organization and distribution of tasks within the company,

the high margin means that pushing volume is relatively

more profitable for McDonalds than cutting

costs.Volumes are best affected by decisions taken high up

in McDonald's organizational structure, for example by

division teams launching marketing campaigns or setting

up new stores. However, even if cutting costs has not such

a great relative significance to the overall profit, the

impact of cutting costs is from negliable. This task is

performed by unit manager as well as the maintenance of

long-term relationships and image - areas which should be

concentrated on by incentive policies.



K ey Accounting Policies

As the largest company in the restaurant and food services industry,McDonald¶s Corporation has chosen to find its primary competitiveadvantage in the marketing andoperational areas.As McDonald¶s continues to grow and improve as acompany, it is committed to its key success factors of cost efficiency,

product development, marketing, and promotions.By focusing on these factors McDonald¶s has derived its key accounting

policies. The following is a summary of significant accounting policiesidentified by the managers of McDonald¶s.

Consolidation: The consolidated financial statements include theaccounts of thecompany and its subsidiaries.

Estimates in Financial Statements: McDonald¶s uses accounting principles generally accepted in the U.S. which require management tomake estimates and assumptions which could differ from actual results

that affect the amounts reported in the financial statements.

Revenue Recognition: The Company¶s revenues consist of sales byCompanyoperated restaurants and fees from restaurants operated byfranchisees. Sales byCompany-operated restaurants are recognized on acash basis. Fees from franchised and affiliated restaurants includecontinuing rent and service fees,initial fees and royalties received fromforeign affiliates and developmental

licensees.

Advertising Costs: Advertising costs included in costs of Company-operated restaurants primarily consist of contributions to advertisingcooperatives.Production costs for radio and television advertising areexpensed when the commercials are initially aired. These production



costs as well as other marketing-related expenses are included in selling,general & administrative expenses.

Stock-Based Compensation: The Company accounts for all stock-

based compensation as prescribed by Accounting Principles BoardOpinion No. 25. TheCompany discloses pro forma net income and netincome per common share, as14provided by Statement of FinancialAccounting Standards (SFAS) No. 123, as amended by SFAS No. 148,Accounting for Stock-Based Compensation.

Property and Equipment: Property and equipment are stated at costand are depreciated and amortized using the straight-line method.

Building are given a useful life of up to 40 years and equipment three to12 years.

Goodwill: Goodwill represents the excess cost over the net tangibleassets of acquired restaurant businesses.

Long-Lived Assets: In accordance with SFAS No. 144, Accountingfor theImpairment or Disposal of Long-Lived Assets, long-lived assetsare reviewed for impairment annually in the fourth quarter and whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.

Franchise Revenues: Individual franchise arrangements include alease and a license. Revenue comes from initial fees and rent and servicefees that are based on sales. There are minimum rent payments if thefranchise does not earn enoughin sales.

Employee Benefit Plans: McDonald¶s Profit Sharing Plans for employees in the United States include profit sharing, 401 (k) and stock ownership benefits. All earnings can be invested in the common stock of McDonald¶s along with several other investment alternatives.

budget management 176

Documents