o Note: that you should choose a company in which you are interested and a company
for which there is an annual report to the Securities and Exchange Commission
(called the 10-K).
o I suggest avoiding federally regulated companies such as banks, insurance companies,
and brokerages.
o I suggest choosing a company that sells a product which you understand and with
which you are familiar.
o Your Name:
o Company Name:
Sonia Acosta
McDonald’s Corporation
.
.
CHAPTER 1 - INTRODUCTION
Chapter 1: Select a Company and Gather Documents—Question 1
Fill in the page numbers on the annual report where the following are located.
Required information for this Page
Required information for this Page
workbook project.
No.
workbook project.
No.
Management’s Discussion and
10 Statement of Cash Flows
32
Analysis (MD&A)
Income Statement
30 Notes to Financial Statements
34
31 Report of Independent
Accountants or Independent
Auditors’ Report
49
Statement of Change in
Stockholder’s Equity
33 Five- or Ten-Year Summary of
Operating Results (6-year
summary)
11
Management’s Report
(Responsibility) on Internal
Control over Financial
Reporting
48
(Statement of Earnings)
Balance Sheet
(Statement of Financial Position)
(Item 9A. Control and Procedures in SEC 10K)
Chapter 1: Identify Why You Selected This Company—Question 1
A) What are your motivations and interests in selecting this company?
A) I recently attended an info session regarding careers at McDonald’s through the
Loyola GSB. The presenters included individuals in Human Resources, Accounting,
Finance and Advertising, and each one seemed very enthusiastic about the opportunities
available at McDonald’s for a long and prosperous career laden with great flexibility and
growth. The majority of these individuals had worked for the company for over 10
years, and were very satisfied with McDonald’s as an employer. Although there was not
a representative specifically from my area of focus, marketing, these individuals were
able to speak to the opportunities available in this area. Additionally, I learned that
McDonald’s Corporation is about a lot more than just fast food. I learned McDonald’s
is in the real estate business through the locations they franchise, are heavily focused on
social responsibility and diversity, operate an extensive internship program for both
undergraduate and graduate students, and offer a family friendly, flexible work
environment. After attending this info session and being able to see past the happy
meals and Big Macs, I became very interested in pursuing a career at McDonald’s upon
graduation. Moreover, I was very impressed by everything I had learned, and by the
individuals who seemed genuinely passionate about their careers and the company as a
whole. I think analyzing McDonald’s 10K report will allow me to understand the
business at a deeper level and be better prepared to pursue opportunities within their
2
corporate offices in the future.
What question(s) are you seeking to answer? List at least five questions?
B) Remember to list at least five questions you seek to answer from your analysis of
the company’s annual report.
1) How much did McDonald’s Corporation spend in advertising in 2009?
2) What legal proceedings, if any, was McDonald’s Corporation involved with in 2009?
3) What was the total of McDonald’s Corporation’s assets in 2009? How does that
number differ from 2008?
4) How have McDonald’s Corporation’s sales fluctuated in the last 6 years?
5) How much franchise revenue did McDonald’s Corporation acquire in 2009?
6) What strategic direction is McDonald’s heading towards?
7) What are some of the highlights for McDonald’s Corporation in 2009?
8) How many new restaurants did McDonald’s Corporation open in 2009?
9) What factors does McDonald’s Corporation compete on?
3
Company and Annual Report Essentials
Chapter 1: Company and Annual Report Essentials—Question 1
What is the company’s complete name?
McDonald’s Corporation
Chapter 1: Company and Annual Report Essentials—Question 2
What is the address of your company’s corporate headquarters?
One McDonald’s Plaza Oakbrook, IL 60523
Chapter 1: Company and Annual Report Essentials—Question 3
Identify the company’s Internet site.
http://www.aboutmcdonalds.com/mcd
http://www.mcdonalds.com/
Chapter 1: Company and Annual Report Essentials—Question 4
Identify the e-mail address of the company’s Investor Relations Department.
E-mail address: Not Provided
Chapter 1: Company and Annual Report Essentials—Question 5
Which stock exchange lists your company?
New York Stock Exchange
Chapter 1: Company and Annual Report Essentials—Question 6
What is your company’s stock exchange trading symbol?
MCD
4
Chapter 1: Company and Annual Report Essentials—Question 7
What is your company’s Standard Industrial Classification (SIC) and code?
You may skip this question.
Chapter 1: Company and Annual Report Essentials—Question 8
Locate the board of directors listing. You may have to look on the company’s web. How
many board members does your company have?
13
Chapter 1: Company and Annual Report Essentials—Question 9
How many of the directors are company employees, labeled inside directors? And how
many are non-company directors, labeled outside directors? Why does a company want
and need outside directors?
(Inside and outside directors can usually be identified as such by their title and company. For example, an
inside director will be employed by the company and an outside director will be an employee of another
company or perhaps no longer employed.)
Inside Directors: 1
Outside Directors: 12
A company wants and needs outside directors because these individuals provide a lessbiased business perspective. Additionally, they bring knowledge and views from a
variety of different industries and companies. Also, having outside directors helps to
ensure fairness and accuracy in business operations, and provides for greater vision.
5
Chapter 1: Company and Annual Report Essentials—Question 10
Leadership addresses the stockholders, typically, once a year at the annual stockholders
meeting. Identify where and when this occurred, if this information is reported in your
annual report.
McDonald’s Corporation 2010 Annual Shareholders’ Meeting was held on Thursday,
May 20, 2010, at 9:00 a.m. in the Prairie Ballroom at the Lodge at McDonald’s Office
Campus, Oakbrook, Illinois. Info was found here.
Company Strategy and Business Environment
Chapter 1: Company Strategy and Business Environment—Question 1
Review the chairman’s message of your company’s annual report or from the investors’
relations link on your company’s website. Does it appear to be uplifting or somewhat
apologetic? Identify phrases that support your position.
The chairman’s message is definitely an uplifting one. Mr. McKenna discusses
McDonald’s continued success despite the debilitated economy. He attributes this
success to the company’s unwavering focus on and attention to talent management and
leadership development, providing relevant products and supporting balanced lifestyles.
The message also states, “McDonald’s is well positioned to elevate our industry
leadership.” Moreover, Mr. McKenna reassures shareholders special attention is taken
to keep their interests in mind and deliver the value they are entitled to. He declares the
company has a clear strategic business vision for the decade ahead, assuring that its
employees are working hard to achieve that vision, and sustain growth. Finally, Mr.
McKenna ends on the very positive assumption that McDonald’s best days lie ahead.
Chapter 1: Company Strategy and Business Environment—Question 2
Check below the one primary company strategy identified in the chairman’s message.
Support your answer with phrases found in the chairman’s message that pointed you to
the identified corporate strategy.
NOTE: McDonald’s 2008 Annual Report’s chairman’s message is significantly general
and does not offer many specific phrases that clearly delineate a horizontal growth
strategy. Instead, the use of this strategy is made evident throughout the Annual Report
and 10K through discussions of continuing to expand activities into other geographic
regions, and increasing the range of products offered in its current markets, in order to
satisfy changing consumer needs and wants.
6
Growth: Vertical
Horizontal
Not growth but rather Stability
X
Concentric
or Retrenchment
Conglomerate
.
.
Phrases to support your conclusion:
Management’s ongoing focus on enhancing long-term profitable growth, giving constant
attention to talent management and leadership development, and continuing to provide
relevant offerings and support balanced lifestyles all contribute to the Company’s
continued success.
Chapter 1: Company Strategy and Business Environment—Question 3
Briefly summarize the company’s discussion found in Item 1 of SEC Form 10-K.
Type of business: McDonald’s franchises and operates restaurants in the food service
industry. These locations serve a varied but limited menu of value-priced items in over
100 countries around the world. All restaurants by the Company or by franchisees, with
a strong focus on consistency and quality at all locations. Revenue is obtained from
franchisees through rent and sales royalties. Additionally, the Company has an equity
investment in several foreign affiliated markets. Most McDonald’s restaurants obtain
products and supplies from independently owned and operated distribution centers
approved by the Company. Finally, the Company’s marketing efforts focus on value,
food taste, menu choice and customer experience, and the Company as a whole focuses
on sustainable growth through environmentally and socially responsible business
practices.
Major business segments: Food service, real estate and franchise licensing.
Primary customers: McDonald’s business is not dependant on any single type of
customer or small groups of customers.
Primary products and/or services: McDonald’s offers a menu of hamburgers and
cheeseburgers, Big Mac, Quarter Pounder with cheese, Filet-O-Fish, several chicken
sandwiches, Chicken McNuggets, Chicken Selects, Snack Wraps, French fries, premium
salads, shakes, McFlurry desserts, sundaes, soft serve cones, pies, cookies, soft drinks,
coffee, McCafe beverages and other beverages. This menu is largely uniform across
restaurants with sometimes small variations in differing geographic locations. Breakfast
items include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and
bagel sandwiches, hotcakes and muffins.
Other:
Competition: McDonald’s competes with international, national, regional and local food
7
product retailers competing on the basis of price, convenience, service, menu variety and
product quality.
Research & Development: McDonald’s operates R&D facilities in the U.S., Europe and
Asia, but expenditures related to these activities are not considered to be material.
Intellectual Property: “McDonald’s” and the Golden Arches logo are considered to be
materially important to McDonald’s business.
Chapter 1: Company Strategy and Business Environment—Question 4
Identify broad-based social, political, economic, and technological concerns that may
affect your company. This will require some thought since most companies are
impacted by each of these categories in some way. Put N/A if one of the categories does
not apply.
Social: Socially, McDonald’s is affected by concerns of obesity. Individuals have been
known to place the blame on the company for their weight and/or health problems
caused by what is thought to be unhealthy food products. The company has been sued
based on these claims before, is will undoubtedly continue to face scrutiny from the
health community as well as those concerned with the company’s ability to ingrain a
certain, unhealthy lifestyle in young children. Additionally, McDonald’s must
continually remain sensitive to the cultural differences that exist among the 100 plus
countries the company operates in.
Political: McDonald’s faces political concerns connected to allegations of their use of
hormone enhanced beef in addition to obesity and other health problems allegedly
caused by the products it offers.
Economic: Economically, McDonald’s is vulnerable to a suffering, and highly
fragmented and competitive Informal Eating Out segment, and a generally weakened
economy where people are often choosing to eat at home rather than buy outside food.
Additionally, increasing health conscientiousness serves as a possible threat to the fast
food giant’s economic well-being.
Technological: The risks associated with information security and the use of cash less
payments such as increased investment in technology.
Other: Environmental: Risks and costs associated with increased U.S. and overseas
governmental authority focus on environmental issues such as climate change, the
reduction of greenhouse gases and water consumption. Additionally, McDonald’s is
often questioned on the destruction of tropical forests to make way for cattle ranching.
The company also faces criticism for producing over a million tons of short-used
8
packaging every year.
Wrap-up
Chapter 1: Wrap-up—Question 1
After further review of additional information you should now be confident in
identifying the one primary company strategy, beyond the insight provided by the
chairman’s message?
Check below the one primary company strategy identified in the chairman’s message
and all other supporting documents. Support your answer with phrases.
Growth: Vertical
Stability
Horizontal
Retrenchment
X
Concentric
Conglomerate
.
.
Phrases to support your conclusion using all the information gathered from the chairman’s
message, from Item 1 of the 10-K and other insight gained from completing chapter 1.
Management’s ongoing focus on enhancing long-term profitable growth, giving constant
attention to talent management and leadership, development, and continuing to provide
relevant offerings and support balanced life styles all contribute to the company’s
continued success.
These restaurants serve a varied, yet limited, value-priced menu in more than 100
countries around the world.
The quality of our execution depends mainly on: The success of our plans to improve
existing products and to roll out new products and product line extensions, as well as the
impact of our competitors actions, including in response to our product improvements
and introductions, and our ability to continue robust product development and manage
the complexity of our restaurant operations.
Whether we are able to identify and develop restaurant sites consistent with our plans for
net growth of Systemwide restaurants from year to year; whether new sites are as
profitable as expected.
In 2009, we continued to elevate the customer experience by remaining focused on the
company’s key global success factors of branded affordability, menu variety and
beverage choice, convenience and daypart expansion, ongoing restaurant reinvestment
and operations excellence.
9
CHAPTER 2 - ANNUAL REPORT STRUCTURE
Chapter 2: Financial Highlights—Question 1
Review the financial highlights of your company’s annual report. Identify net sales or
revenues, net income, basic earnings per share (BEPS), and total assets for the current
and preceding years. These are the most common values included in financial highlights.
If your company reports something different, simply cross out an item here and recap
what is reported.
Current Year
One Year Prior
Two Years Prior
In Millions
In Millions
In Millions
Example:
Net sales or revenues
Net income
Basic EPS
Total Assets
22,745.0
23,522.0
22,787.0
4,551.0
4,313.0
2,395.0
4.17
3.83
2.02
30,225.0
28,462.0
29,392.0
Based on your preliminary review, is your company performing better than, equal to, or
less favorably than in the prior year? Briefly explain.
Based on this preliminary review, McDonald’s is performing marginally better than in
the prior year, with slight increases in net income and total assets, and a slight decrease
in net sales.
General Company and Marketing Information
You may skip this question.
Chapter 2: General Company and Marketing Information—Question 1
Identify other types of general information found within the annual report. Look for
pictures of product and people that are colorful and send a positive signal to the reader.
Exclude the specific components identified in Chapter 1: Select a Company and Gather Documents—Question 1.
Category
Example: Volunteer
Activities
Message
Ongoing and contributing to the success of the
community
10
Management’s Discussion and Analysis
Chapter 2: Management’s Discussion and Analysis—Question 1
Results of Operations:
Identify the primary drivers/issues that explain current and future results of operations
discussed in the MD&A. For example, the gross profit percentage increased because of
improved buyer/supplier relations resulting in greater overall operating performance. Or
an increase in operating expenses because of increased fuel costs reduced profits. List
the six major drivers/issues of performance you find in the MD&A section of the annual
report.
1. In 2009, we continued to elevate the customer experience by remaining focused
on the company’s key global success factors of branded affordability, menu
variety and beverage choice, convenience and daypart expansion, ongoing
restaurant reinvestment and operations excellence.
2. In the U.S., we grew sales and market share with comparable sales up for the 7 th
consecutive year rising 2.6% in 2009 as a result of a continued focus on classic
menu favorites such as the Big Mac and Quarter Pounder, increased emphasis on
everyday affordability, and the national market launch of the new McCafe
premium coffees and premium Angus Third Pounder.
3. The strength of the alignment between the Company, its franchisees and
suppliers (collectively referred to as the System) has been key to McDonald’s
success over the years. This business model enables McDonald’s to consistently
deliver locally-relevant restaurant experiences to customers and be an integral
part of the communities we serve. In addition, it facilitates our ability to
identify, implement and scale innovative ideas that meet customers’ changing
needs and preferences.
4. Our customer-centered strategies seek to optimize price, product mix and
promotion as a means to drive sales and profits. This approach is complemented
by a focus on driving operating efficiencies and effectively managing restaurantlevel costs by leveraging our scale, supply chain infrastructure and risk
management practices. Our ability to successfully execute our strategies in
every area of the world contributed to improved profitably as measured by
combined operating margin of 30.1% in 2009, an improvement of 2.7 percentage
points over 2008.
5. In Europe, comparable sales rose 52%, marking the 6th consecutive year of
comparable sales increases. This performance reflected Europe’s strategic
priorities to upgrade the customer and employee experience, enhance local
relevance, and build brand transparency.
6. Through the execution of multiple initiatives surrounding the five key drivers of
exceptional customer experiences - People, Products, Place, Price and
Promotion – we have enhanced the restaurant experience for customers
worldwide and grown sales and customer visits in each of the last six years.
11
Liquidity:
Recap in your own words (do not copy and paste) what you find about your company’s
liquidity in the MD&A section of the annual report. Look for information about the
ability of the company to satisfy short-term cash needs and the ability to generate
operating cash flows, for example.
As McDonald’s has moved towards a more heavily franchised business model helps the
company maintain a healthy, stable, low cost and less capital intensive operating cash
flow from rent and royalty income received from franchise owner/operators.
Additionally, in 2009, cash from operations experienced a boost from strong global
performance for a total of $5.8 billion.
Capital Resources:
Recap own words (do not copy and paste) what you find about your company’s capital
resources in the MD&A section of the annual report. Look for information about cash
reserves and credit availability. For example, your company’s MD&A section may have
a disclosure about an established lined of credit to fund future growth.
The combination of heavy cash flows, an excellent credit rating and steady access to
credit makes it possible for McDonald’s to easily fund capital expenditures and pay
dividends to shareholders.
Reports by Management
Chapter 2: Reports by Management—Question 1
Review the Management’s Report (Responsibility) on Internal Control over Financial
Reporting in your company’s annual report. Answer the following questions.
Who is responsible for maintaining the
internal controls designed to provide
reasonable assurance that the books and
records reflect the transactions of the
company?
Management
12
Record the statement that identifies
Management assessed the design and
management’s conclusion about internal effectiveness of the Company’s internal
controls.
control over financial reporting as of
December 31, 2009. In making this
assessment, management used the
criteria set forth by the Committee of
Sponsoring Organizations of the
Treadway Commission in Internal
Control – Integrated Framework. Based
on management’s assessment using
those criteria as of December 31, 2009,
management believes that the
Company’s internal control over
financial reporting is effective.
Who audited management’s assessment
of the effectiveness of your company’s
internal control over financial reporting?
Ernst & Young, LLP
Independent Auditors’ Report
Chapter 2: Independent Auditors’ Report—Question 1
Review the Independent Auditors’ Report of your company’s annual report and answer
the following questions.
Who was the company’s auditor and
where is it located?
Ernst & Young, LLP, Chicago, IL
What is the responsibility of the auditor?
To express an opinion on these financial
statements based on our audits.
Who is responsible for the preparation of
and information within the company’s
financial statement?
The Company’s management
The audit was conducted in accordance
with what?
The standards of the Public Company
Accounting Oversight Board (United
States)
13
What was the opinion of the auditor?
The auditor believes the financial
statements present fairly, in all material
respects, the consolidated financial
position of McDonald’s Corporation at
December 31, 2009 and 2008, and the
consolidated results of its cash flows for
each of the three years in the period ended
December 31, 2009 in conformity with
U.S. generally accepted accounting
principles.
Financial Statements and the Related Notes
Chapter 2: Multi-year Summary of Operating Results—Question 1
Identify the major components provided in Item 6. Selected Financial Data of the 10-K
annual report. Summarize the insight provided by each. Look for stable, increasing or
decreasing trends. Consistent, slightly improving performance signals management has
control of the business. Inconsistent performance signals management does not have
control of the business.
Component
Summary of Insight
Example: The Home Depot
Statement of Earnings Data
Sales and earnings have grown significantly over time.
Operating expenses are growing at an increasing rate.
Total Revenues
Total revenues have consistently grown slightly since
2004 until a marginal decrease in 2009.
Operating Income
Operating income has increased almost double-fold
over the last 6 years.
Cash provided by operations
Cash provided by operations has increased steadily
over time with a small decrease in 2009.
Financial position at year end
Per common share
Total assets have fluctuated over time (up and down),
with a positive jump in 2009. Total debt and total
shareholder’s equity have also fluctuated slightly over
time, with a slight increase in 2009.
Market price at year end has increased steadily over
time, although at a much slower rate in the last 2 years.
14
Franchised Sales
Franchised sales have increased steadily over time with
no dips.
.
15
CHAPTER 3 - FINANCIAL STATEMENTS
The Balance Sheet
Chapter 3: Balance Sheet—Question 1
Identify the date shown at the top of your selected company’s balance sheet.
Current Year
December 31, 2009
Prior Year
2008
Does the company’s fiscal year follow the calendar year? Yes ___X__ No ___
If not, why do you think it is different?
N/A
Chapter 3: Balance Sheet—Question 2
Review the current asset section of your selected company’s balance sheet. Explain
why the order of individual items begins with cash. In your opinion, would it be more
or less appropriate to order these items according to dollar magnitude? Explain.
The order of individual items begins with cash, because these are listed in order of
liquidity, and cash is the most liquid asset. I believe it would less appropriate to list
these items according to dollar magnitude because having high cash flows is more
meaningful for daily operations than assets tied up in accounts receivables, inventories,
etc. Therefore, I believe it is more appropriate to view cash before other less liquid
assets.
Chapter 3: Balance Sheet—Question 3
Review your company’s balance sheet (or SEC Form 10-K) and compare accumulated
depreciation to the historical cost of Plant and Equipment (PE) using the following ratio.
Compute the following:
Accumulated depreciation
Plant and Equipment
Percentage of Asset Life Used Up

High percentage means older assets

Low percentage means newer assets
Show your work by specifying the
16
amount of Accumulated Depreciation
and the amount of Plant and
Equipment
11,909.0/33,440.5 = 0.36%
Is the investment in fixed assets, on average, relatively recent? If not, can we assume
that these assets will be replaced shortly?
It seems the investment in fixed assets, on average, is relatively recent.
Chapter 3: Balance Sheet—Question 4
Since property, plant, and equipment (PPE) and long-term investments in stock
represent a company’s investment, why do we distinguish between them in the balance
sheet?
We distinguish between them in the balance sheet because property, plant and
equipment are tangible assets and those most essential to the company’s business.
These cannot be easily liquidated. Long term investment in stock, on the other hand, are
less tangible and easier to liquidate.
Chapter 3: Balance Sheet—Question 5
Review the noncurrent asset section of your company’s balance sheet. Are any
intangible assets listed? If so, identify the types of intangible assets and the percent of
total assets that the intangible assets represent.
Intangible Asset 1:Investments in and advances to affiliates 1,212.7
Intangible Asset 2: Goodwill 2,425.2
Intangible Asset 3:Miscelaneous 1,639.2
Total Intangible Assets  Total Assets = 5,277.1 ÷ 30,224.9 = 0.17
If this company were to be acquired by another company, would the intangible assets
influence the purchase price? Explain your answer.
If McDonald’s were to be acquired by another company, the intangible assets would influence
the purchase price by allowing for a higher present value discount due to the fact that there is
usually greater risk involved with an investment in an intangible asset than a tangible one.
Although the intangible assets are not high, they still constitute what I believe to be a
significant enough percentage of total assets to allow for a lower selling price negotiation.
Chapter 3: Balance Sheet—Question 6
17
Now review your company’s total assets for the most recent year. What percentage of
total assets is current? Noncurrent? Indicate the amounts of each.
Current
Noncurrent
11%
89%
Should companies have a greater investment in current assets or noncurrent assets, or
does it depend on the nature of their business? Explain your answer.
The useful life of non current assets is generally above two years, while the useful life of
current assets is generally under one year. Additionally, noncurrent assets have less
liquidity than current assets and can’t be turned into cash as quickly as current assets.
Therefore, I believe whether to invest more in current assets versus noncurrent assets
depends on the nature of a business and specific their cash flow needs.
Chapter 3: Balance Sheet— Question 7
You may skip this question.
Chapter 3: Balance Sheet—Question 8
Identify the information that relates to the stockholders’ equity section of your
company’s most recent balance sheet.
Number of common shares authorized?
3.5 billion shares
Number of common shares issued?
1,660.6 million shares
Number of common shares outstanding?
583.9 million shares
Number of treasury shares held by the company?
545.3 million shares
Chapter 3: Balance Sheet—Question 9
Answer the following questions relative to the stockholders’ equity section of the
balance sheet.
By what amount did retained earnings increase or
decrease from the prior year?
Retained earnings increased by
$2,316.9 (in millions) from the
prior year.
Was the increase or decrease in retained earnings
equal to the company’s current year net income or net
loss?
Yes or No*
18
Chapter 3: Balance Sheet—Question 10
List (write-in) each financial statement element as shown in your company’s balance
sheet and its related dollar value. Double check the math to ensure that your $assets =
$liabilities + $shareholders’ equity.
Assets (In Millions)
Stockholders’ Equity
Liabilities (In Millions)
(In Millions)
Cash & Equivalents:
$1,796.0
Accounts payable: $636.0
Preferred stock: $0
Accounts & Notes
Receivable: $1,060.4
Income taxes: $202.4
Common stock: $16.6
Inventories: $$106.2
Other taxes: $277.4
Additional paid-in capital:
$4,853.9
Prepaid expenses and other
current assets: $453.7
Accrued interest: $195.8
Retained earnings:
$31,270.8
Investments in and
advances to affiliates:
$1,212.7
Accrued payroll & other
liabilities: $1,659.0
Accumulated other
comprehensive income:
$747.4
Goodwill: $2,425.2
Current maturities of longterm debt: $18.1
Common stock in treasury:
$(22,854.8)
Miscellaneous: $1,639.2
Long-term debt: $10,560.3
Net property & equipment:
$21,531.5
Other long-term liabilities:
$1,363.1
Deferred income taxes:
$1,278.9
Chapter 3: Balance Sheet—Question 11
From the asset and liability sections of the balance sheet, identify the three major
accounts that changed the most from the prior year (e.g., accounts receivable, accounts
payable, inventory, etc.). What events might explain these changes?
Working to explain why these changes occurred contributes to a greater understanding
about a company.
Account
Miscellaneous
Assets (+)
Explanation
The significant increase in miscellaneous assets could be explained
by an increase in royalties owed to McDonald’s from newly opened
franchised restaurants.
19
Property &
Equipment (+)
The significant increase in property & equipment could be
explained by large purchases of machinery and equipment required
to run newly opened restaurants.
Long-term Debt
(+)
The significant increase in long-term debt could be explained by the
building of additional restaurant facilities financed through longterm debt.
Chapter 3: Balance Sheet—Question 12
Identify the combined carrying values (dollar amounts) of the following selected
account groups taken from your company’s balance sheet. Note that you should include
all the assets in one of the three asset categories and all of the liabilities into one of the
two liability categories, and all of the equity accounts into one of the four equity
categories.
Account Groups
Current
Year
Prior Year
(in millions)
Increase or
Decrease
(in dollars)
(in millions)
(in millions)
Current Assets
Net Fixed Assets
Intangible and Other Noncurrent Assets
Total Assets
Current Liabilities
Long-term Liabilities
Common Stock
Additional Paid in Capital
Retained Earnings
Other Equity Components
Total Liab. & Equity = Total Assets
$3,416.3
$3,517.6
Decrease of
$101.3
$21,531.5
$20,254.5
Increase of
$1,277
$5,277.1
$4,689.4
Increase of
$587.7
$28,461.5
$1,763.4
$2,988.7
$2,537.9
$450.8
$13,202.3
$12,541
$661.3
$16.6
$16.6
Equal
$4,853.9
$4,600.2
Increase of
$253.7
$31,270.8
$29,953.9
Increase of
$1,316.9
($724.5)
($20,188.1)
Decrease of
($20,912.6)
$30,224.9
$28,461.5
$1,763.4
$30,224.9
20
Chapter 3: Balance Sheet—Question 13
Prepare a common-sized balance sheet (expressed in percentages) using the following
account groups.
Account Group
Current
Year
Prior Year
Increase or
Decrease
(current year
percent minus
prior year
percent)
Current Assets
11%
12%
1% Decrease
Net Fixed Assets
71%
71%
Equal
Intangible and Other Noncurrent Assets
18%
17%
1% Increase
100%
100%
Current Liabilities
0.1%
8.9%
8.8%
Decrease
Long-term Liabilities
44%
44%
Equal
0.06%
0.01 %
Decrease
16%
16%
Equal
Retained Earnings
103.5%
101.7%
1.8%
Increase
Other Equity Components
(57.1%)
(54.77%)
2.33 %
Decrease
100%
100%
Total Assets
Common Stock
Additional Paid in Capital
Total Liabilities and Stockholders’
Equity
0.05%
You may skip this question.
Chapter 3: Balance Sheet—Question 14
Identify the three balance sheet groups from question 13 above that changed most
significantly. Within each of these groups, identify the primary balance sheet
element that drove this change. What events might explain these changes?
Group Name:
Explanation:
Chapter 3: Balance Sheet—Question 15
21
Judging by the current ratio, did your company become more or less liquid when
comparing this year to last year?
Current Ratio for current year (show
the amounts): In Millions:
Current Ratio for prior year (show the
amounts): In Millions:
Current Ratio= $3,416.3/$2,988.7 = 1.14
Current Ratio = $3,517.6/$2,537.9 =
1.39
Explain why your company is more or less liquid.
According to McDonald’s current ratio for the current year versus the prior year, the
company became less liquid. The higher a company’s current ratio, the more capable it
is of paying back its short-term liabilities such as debt and payables with its short-term
assets such as cash, inventory and receivables. Because the company’s current ratio
decreased from 2008 to 2009, McDonald’s is now less capable of paying back shortterm debts with short-term assets, and has therefore become less liquid.
Chapter 3: Balance Sheet—Question 16
Did your company increase or decrease its financial leverage when comparing total
long-term debt to total assets from this year to last? Show the amounts you use to
compute the total long-term debt to equity ratios.
Current Year (show the amounts):
Prior Year (show the amounts):
In Millions
In Millions
Total long-term debt  Total assets
Total long-term debt  Total assets
= $10,560.3 ÷ $30,224.9 = 0.35
= 10,186.0 ÷ 28,461.5 = 0.36
Explain why leverage has increased or decreased:
McDonald’s financial leverage has decreased because the company is experiencing
slightly higher (0.01 decrease) difficulty in paying interest and principal while obtaining
more funding. In other words, their debt to asset ratio decreased because their long-term
debt increased, although only slightly.
22
The Income Statement or Statement of Earnings
Chapter 3: Income Statement—Question 1
Review the heading of your company’s income statement. Does the
company’s income statement provide two or three years of comparative
information? (Insert number to the right.)
_3_yrs.
Why do you think the SEC requires that balance sheets provide two years of
comparative financial information and income statements provide three years of
comparative financial information?
I believe the SEC requires that balance sheets provide two years of comparative
financial information and income statements provide three years of comparative
financial information, because the income statement can paint a more comprehensive
picture of a company’s financial position than the balance sheet can. While a balance
sheet only gives a snapshot of a company’s financial position at one specific date, the
income statement offers a more comprehensive picture of a company’s financial position
throughout the course of a year. It tells us how a business incurred its revenues and
expenses through operating and non-operating activities, and the net profit loss incurred
over that same period. Analyzing three years of this information rather than two is more
beneficial for spotting trends and company performance over time. Because the balance
sheet is more of a snapshot, two years of data is sufficient for analysis.
Chapter 3: Income Statement—Question 2
Review the middle section of your company’s income statement. Did operating income
(loss) increase or decrease from the prior year and by how much? You may have to
compute operating income (loss).
Increased by $398.1 Million
Decreased by $ ______________
Chapter 3: Income Statement—Question 3
Does the middle section of your company’s income statement show a nonoperating
income (loss) increase or decrease from the prior year and by how much? You may have
to compute nonoperating income (loss).
Increased by $ ______________
Decreased by $53.3 Million
Chapter 3: Income Statement—Question 4
Why is it important to know the different sources of income—operating or
nonoperating?
23
Operating items are those related to the day-to-day management if a business. These
include sales, cost of sales, selling, general and administrative expense, research and
development costs, etc. Nonoperating income items, on the other hand, include things
like investing and financing activities. In recent years, analysts have begun to focus
more heavily on operating income figures as these are more indicative of a business’s
day to day performance and financial health. Although more long-term items like those
included in nonoperating income are also important, operating income indicates how
well or poorly a business is doing from day to day, and therefore affecting its ability to
thrive or fail in the future.
24
Chapter 3: Income Statement—Question 5
If any of the irregular events are shown on your company’s income statement, describe
the nature and the amount. Select the most current year affected by the event if multiple
years are affected.
Irregular Event
Restructuring charge?
Discontinued operation?
Extraordinary event?
Amount
Nature of the Change
N/A
0.05 The Company previously operated Boston
Million Market in the U.S., which it sold in August
(2007) 2007. As a result of the disposal, Boston
Market’s results of operations and
transaction gain are reflected as discontinued
operations.
N/A
Importance of the Income Statement
Creditors, employees, suppliers, investors, and others use the income statement. The report
serves as a measuring stick of how a company has performed, where it appears to be heading,
and what future cash flows are likely to be. The first question most users want answered is what
is net income? Next, they want to know how that figure compares to the prior years.
Chapter 3: Income Statement—Question 6
Review the lower section of your selected company’s income statement. Did net income
(loss) increase or decrease from the prior year and by how much?
Increased by $0.35 Million
Decreased by $ ______________
25
Chapter 3: Income Statement—Question 7
Prepare a common-sized income statement for the categories below. You must include all the
income statement items in one of the Account/Category groups so that the percentages add
correctly. Your percentages should add down like the Example column.
Account/Category
Net Sales (revenues)
− Cost of Goods/Services (if applicable)
Example
100%
Current
Year
100%
Prior
Year
100%
Increase or
Decrease
(40%)
(40.21%)
(42.03%)
1.82%
Decrease
= Gross Profit
1.82%
Increase
60%
59.79%
57.97%
− Operating Expenses
(15%)
(36.95%)
(31.59%)
= Operating Income (Loss)
45%
28.84 %
26.28%
3%
1.03%
1.55%
= Income before taxes
48%
27.78%
25.71%
2.07%
Increase
− Income Tax Expense
(18%)
(8.51%)
(7.84%)
0.67%
Increase
= Net Income
30%
20.1%
18.34%
± Non-operating Income (Loss)
5.36%
Increase
2.56%
Increase
0.52%
Decrease
1.76%
Increase
Chapter 3: Income Statement—Question 8
Identify the three income statement accounts/categories that changed the most in
Question 7 (sales, cost of goods sold, operating expenses, non-operating income, income
tax expense). What events might explain these changes?
Explanation:
Account or
Category:
(Hint – the MD&A section will provide good information to answer
this question.)
Operating
Expenses
Operating expenses fluctuate as the company recognizes gains or
loses resulting from sales of restaurants.
Operating Income
Operating expenses fluctuate as the company recognizes gains or
loses resulting from sales of restaurants.
Income Before Taxes
Explanation not found.
26
Chapter 3: Income Statement—Question 9
Identify your company’s Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if
not reported.
Basic EPS
Diluted EPS
Current year
4.17
4.11
Preceding year 1
3.83
3.76
Preceding year 2
2.02
1.98
Why is diluted EPS always equal to or less than basic EPS?
Diluted EPS is always equal to or less than basic EPS, because EPS is equal to earnings
divided by shares, and uses the shares that are actually issued or current shares. Diluted
EPS, on the other hand, uses the shares a company could potentially issue if current
shares, stock options, warrants, convertibles and other potential sources of dilution are
taken into consideration.
Statement of Cash Flows (SCF)
Chapter 3: SCF—Question 1
Is the SCF dated in the title for a period of time similar to the income statement or for a
point in time similar to the balance sheet? Why?
The income statement shows revenues and expenses generated and incurred by a
company in addition to the net gain or loss from the company’s equity position during
that same time period. The Statement of Cash Flows shows an analysis of all the
activities during the accounting period that affected cash, impacted mostly by
operations, financing and investments. The balance sheet on the other hand is only a
snap shot of the company on a single date and is concerned with the company’s assets,
liabilities and shareholder’s equity. The SCF is dated in the title for a period of time
similar to the income statement, because these two statements are more highly related
than the SCF and the balance sheet.
Chapter 3: SCF—Question 2
Identify the following sections of the SCF and record the amounts. Check the math by
summing to the cash balance at end of year. Verify that the ending cash balance
reported on the SCF is the same as reported on the balance sheet.
27
Section
Current
Year
Prior Year
(In Millions)
(In Millions)
Second
Prior Year
(In Millions)
Net operating cash flows
5,751.0
5,917.2
4,876.3
Net investing cash flows
(1,655.3)
(1,624.7)
(1,150.1)
Net financing cash flows
(4,421.0)
(4,114.5)
(3,996.3)
Effects of exchange rate fluctuations
57.9
(95.9)
123.3
Net increase (decrease) in cash flows
(267.4)
82.1
(146.8)
Cash balance at beginning of year
2,063.4
1,981.3
2,128.1
Cash balance at end of year
1,796.0
2,063.4
1,981.3
Does the total match balance sheet cash?
Yes / No
Yes / No
Not available
Chapter 3: SCF—Question 3
Record net sales, net income and net operating cash flows below. All three should be
trending in approximately the same direction. If so, this is a sign of a well-run business.
If one or more are going in a different direction, or random, then you must keep an eye
open for an explanation why.
Item
Net Sales
Current Year
Prior Year
Second Prior Year
(In Millions)
(In Millions)
(In Millions)
22,744.7
23,522.4
22,786.6
Net Income
4,551.0
4,313.2
2,395.1
Net Operating
Cash Flows
5,751.0
5,917.2
4,876.3
Explain why net sales, net income and net operating cash flows are trending together or
differently. (Hint: Look at depreciation expense and substantial changes in inventory,
accounts receivable and accounts payable balances. Explaining why is a key learning
point.)
In the case of McDonald’s, net sales, net income and net operating cash flows seem to
be trending slightly different between 2009 and 2008. Between 2008 and 2007, these
balances all shifted in the same direction (increased), although in a slightly different
direction between 2008 and 2009. Depreciation expense decreased between 2007 and
2008 (-6.3 million), and increased between 2008 and 2009 (+8.4 million). Inventory
also experiences significant changes across the three years, decreasing by 13.8 million
between 2007 and 2008, and by 5.3 between 2008 and 2009. Similarly, accounts
receivable decreased by a significant 122.6 million between 2007 and 2008, and
increased by 129.2 between 2008 and 2009. Finally, accounts payable experienced less
28
drastic shift between 2007 and 2008 with a 3.7 million decrease. On the other hand, it
increased 15.6 million between 2008 and 2009. These sizable changes and differing
shifts between these accounts explains why net sales, net income and net operating cash
flows trended differently between 2007 and 2009, as these accounts are largely affected
by depreciation expense, inventory, accounts receivable and accounts payable.
Chapter 3: SCF—Question 4
Identify the primary cash outflows and inflows from investing activities.
Description of Activity
Amount
(In Millions)
Cash outflow: Property and equipment expenditures, Purchases of
restaurant businesses and Other
Cash inflow: Sales of restaurant businesses and property and
Proceeds on sale of investment
2206.2
550.9
Consider three key issues at this point: 1) Is the company increasing the amount of plant
and equipment? 2) Is the company simply replacing plant and equipment? Is the
company reducing plant and equipment? This is an indicator of the company’s overall
strategy. For example, a company that is increasing its assets is a growing company.
What is your company doing in this regard?
According to the cash outflows and inflows reported by McDonald’s for 2009, the
company is growing its business by increasing its assets and acquiring new restaurants,
and increasing the amount of plant and equipment (these are probably being purchased
for us in newly acquired restaurants). This also corresponds to the company’s horizontal
growth strategy where they aim to propel growth through expansion into other
geographic regions, in this case by continuing to acquire and operate additional
restaurant locations.
Chapter 3: SCF—Question 5
Identify the primary cash inflow and outflow from financing activities.
Description of Activity
Amount
(In Millions)
Cash inflow: Long-term financing issuances, Proceeds from stock
option exercises, Excess tax benefit on share-based compensation
1,575
Cash outflow: Net short-term borrowings, Long-term financing
repayments, Treasury stock purchases, Common stock dividends
and Other
5,996
29
Consider two key issues at this point. How is the company being financed, through debt
or equity? Can you determine which is growing faster and why? A sound corporate
strategy is to finance a company with debt during stable times (when it’s easier to make
regular payment of principal and interest) and to finance a company with equity during
unstable times (because the company is not required to pay dividends).
The company is being financed largely through debt. By looking at the amounts of cash
inflow and cash outflow from financing activities over three years, it is evident that the
company’s debt is growing faster than its equity. This is probably caused by a
continuing focus on expanding to new restaurant locations. Because the company’s net
income has steadily increased over the last three years, it seems appropriate that the
company choose this time to grow business through debt rather than equity.
The Statement of Stockholders’ Equity (SSE)
Chapter 3: SSE—Question 1
Identify the elements that comprise the statement of stockholders’ equity section of your
company.
1. Common stock, issues: Shares, Amount 2. Additional paid-in capital
3. Retained earnings 4. Accumulated other comprehensive income (loss): Deferred
hedging adjustment, Foreign currency translation 5. Common stock in treasury:
Shares, Amount 6. Total shareholders’ equity
30
Chapter 3: SSE—Question 2
Identify the cash dividends per share.
(List both the amount and the
specific location where you
found it.)
$2.05 per share,
found on the SSE,
left column, under
Common stock
cash dividends
Determine the dividend payout percentage.
(Show work)
Dividends/Net
Income =
16.6/4,551= .36%
Compute dividend yield.
(Show work)
3.22%
Is your company’s dividend yield a reasonable return given current market conditions?
McDonald’s dividend yield seems reasonable considering current market conditions,
especially considering the small returns one can expect from a simple savings account.
Notes to the Financial Statements
Chapter 3: Notes to the Financial Statements—Question 1
How does your company define “cash and cash equivalents”?
Cash and cash equivalents is defined by McDonald’s as any short-term, highly liquid
investments with an original maturity of 90 days or less.
Chapter 3: Notes to the Financial Statements—Question 2
How does your company value its “inventories”? Explain the meaning of the inventory
valuation method. Are domestic and international inventories valued the same? Service
companies will typically not have inventory.
McDonald’s does not disclose its inventory valuation method in its 2009 10K report.
Chapter 3: Notes to the Financial Statements—Question 3
Does your company report any investments in marketable securities? Identify the
31
respective amount(s) invested.
NOTE: After examination of McDonald’s 10k report, it does not seem that the company
reports any investments in marketable securities.
Category
Current Year Amount
Trading Securities
Available-for-Sale Securities
Held-to-Maturity Debt Securities
Chapter 3: Notes to the Financial Statements—Question 4
You should be able to find this information among the following places: Note 1 on
significant accounting policies, the income tax footnote, a separate note on supplemental
cash flow information, and/or the bottom of the cash flow statement.
What was your company’s income tax
expense for the current year?
(Identify the financial statement or the footnote or other location
where you found this information)
1,683.5 million, Statement of Cash Flows
What is this year’s effective tax rate for
Effective Tax Rate: 29-31%
your company? (If not disclosed directly,
(Stated on page 15 of 10K)
the effective tax rate can be computed as
(Show work)
income tax expense ÷ income before tax.)
It is useful to know the effective tax rate of
a company in comparison to the 35%
statutory tax rate.
statement or the footnote or other location
How much cash was paid for income taxes (Identify the financial
where you found this information)
in the current year? (Hint: Look in the SCF
$1.683.5 million (Found in SCF under
or the notes for supplemental cash flow
disclosures, or in the income tax footnote. Supplemental cash flow disclosures)
Chapter 3: Notes to the Financial Statements—Question 5
Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed
asset group(s), depreciation methods used, and the estimated useful lives of these fixed
assets.
Fixed Asset Group
Depreciation Method
Estimated Lives (range)
Buildings
Straight-line method
Up to 40 years
Lease Hold Improvements
Straight-line method
The lesser of useful lives of
assets or lease terms, which
generally include option
periods.
32
Equipment
Straight-line method
Three to 12 years
Chapter 3: Notes to the Financial Statements—Question 6
Review the balance sheet, note #1, and any notes on intangible assets, and identify the
amount of goodwill reported in the current year.
Amount reported in current year.
Identify the amount of any significant write-down of
goodwill that occurred during the current year.
$ 2,425.2 million
$ $94.7 million, Currency
Translation
$34.5 million,
Subsidiaries/affiliates
$58.6 million, Net restaurant
purchases (sales)
How does management describe how it accounts for goodwill as disclosed in the note(s)
to the financial statements?
Goodwill is accounted for by assigning it to the reporting unit expected to benefit from
the synergies of the combination from purchases of McDonald’s restaurant businesses
and ownership increases in international subsidiaries or affiliates. For example, if a
Company-operated restaurant is sold within 24 months of acquisition, the goodwill
associated with the acquisition is written off entirely. If a restaurant is sold beyond 24
months from the acquisition, the amount of goodwill written off is based on the relative
fair value of the business sold compared to the reporting unit which is defined as each
individual country.
Chapter 3: Notes to the Financial Statements—Question 7
You may skip this question.
Chapter 3: Notes to the Financial Statements—Question 8
Review your company’s lease footnote and/or the 10-K schedule of contractual
obligations, then identify the following amounts:
Future minimum lease payments (total) under
operating leases
(Identify where you found this information)
$10, 717 in millions
(found under Contractual
Obligations & Commitments Note,
pg. 25)
33
Future minimum lease payments (total) under
capital leases
(Identify where you found this information)
$26,013
(found under Contractual
Obligations & Commitments Note,
pg.25)
As a user of reported financial information, would you be concerned about a significant
amount of operating leases that are not reported in the balance sheet? Explain.
Yes, because this could significantly affect future operating expenses, therefore affecting
future income and financial stability.
Chapter 3: Notes to the Financial Statements—Question 9
Review your company’s long-term debt note and identify the following (consider the
three most significant liabilities only):
Instrument
Maturity Date
Rate
Amount Due
Fixed
2010-2039
5.6%
$4,667.6 million
Floating
2010-2039
2.9%
$1,300.0 million
How much interest expense was
recognized in the current year?
How much cash was paid for interest in
the current year? (Hint: Look in the SCF
or the notes for supplemental cash flow
disclosures, or in the long-term debt
footnote.)
(Identify the financial statement or the footnote or other location
where you found this information)
$24million, found in Interest Expense note of
Item 7
(Identify the financial statement or the footnote or other location
where you found this information)
$468.7 million, found in SCF under
Supplemental cash flow disclosures
Chapter 3: Notes to the Financial Statements—Question 10
You may skip this question
Chapter 3: Notes to the Financial Statements—Question 11
Based on your review of the contingencies note, briefly identify specific events that have
led to the accrual of contingent liabilities in your selected company’s the balance sheet.
34
According to the contingencies note in McDonald’s 10k, “The Company
does not believe that any such matter currently being reviewed will have a material
adverse effect on its financial condition or results of operations.”
Chapter 3: Notes to the Financial Statements—Question 12
Based on your review of the segment-reporting note to the financials, identify the
reported operating segments, their related revenues, and operating income. Identify the
largest three if more than three are disclosed.
Note: “The business is managed as distinct geographic segments. Significant reportable
segments include the United States (U.S.), Europe, and Asia/Pacific, Middle East and
Africa (APMEA). In addition, throughout this report we present “Other Countries &
Corporate” that includes operations in Canada and Latin America, as well as Corporate
activities.”
Reportable Operating Segments
Net Sales Revenue
Net Operating Income
(In Millions)
(In Millions)
U.S.
$7,943.8
$3,231.7
Europe
$9,273.8
$2,588.1
APMEA (Europe and
Asia/Pacific, Middle East and
Africa)
$4,337.0
$989.5
35
Chapter 3: Notes to the Financial Statements—Question 13
Based on your review of the segment-reporting note to the financials, identify the
geographical segments and their related revenues. Identify the largest three if more than
three are disclosed.
Country
U.S.
Europe
APMEA
Net Sales Revenue
(In Millions)
$7,943.8
$9,273.8
$4,337.0
Chapter 3: Notes to the Financial Statements—Question 14
Based on your review of the notes to the financials or the statement of stockholders’
equity, identify the components (no more than four) that comprise Other Comprehensive
Income for your company.
Component
Amount
Deferred hedging adjustment
$16.5 million
Foreign currency translation
$865.5 million
36
CHAPTER 4 - FINANCIAL ANALYSIS
Summary Financial Analysis Report
Profit Margin %
Answers how well the
business performed.
Gross
Margin
Pre-Tax
Margin
Net Profit
Margin
Gross Profit /
Total Revenue
Operating Income
/ Total Revenue
Net Income /
Total Revenue
.
Sales
Financial
Statement
Operating
Income
Financial
Statement
Operating
Cash
Flows
Financial
Statement
Company Two
Years Prior
Company One
Year Prior
7,905.2/22,786.6 = 35
8,639.2/23,522.4 =
37
40.0
36.5
36.8
$3,879.0/22,786.6=
17.0
$6,442.9/23,522.4=
27.4
29.1
19.8
16.8
$2,395.1/22,786.6
= 10.5
$4,313.2/
23,522.4 = 18.3
20.5
14.1
12.1
Company Two
Years Prior
Company One
Year Prior
(From Financial Statement
two years prior)
(From Financial Statement
one year prior)
$16,611.0 million
(From Financial Statement
two years prior)
$3,879.0 million
(From Financial Statement two
years prior)
$4,876.3 million
Company
Company
Industry
S&P 500
Industry
S&P 500
Not required
Not required
Not Provided
Not required
Not required
Not Provided
Not required
Not required
4.00
$16,560.9 million
(From Financial Statement
one year prior))
$6,442.9 million
(From Financial Statement one
year prior)
$5,917.2
million
Evaluate Profitability
McDonald’s exhibits increasing performance above industry averages across the board. This is
consistent with the company’s growth strategic purpose. With growing profit margins, sales,
income and cash flows, it is obvious that McDonald’s continues to be a profitable business even
in today’s shaky economy.
37
Financial Condition
Signals ability to take on
additional debt and
liquidity.
Debt/
Equity
Ratio
(Total Liabilities –
Current Liabilities)
/ Total equity
Current
Ratio
Current assets /
Current liabilities
Quick
Ratio
(Cash+cash equivalents
+
Short term investments
+
Total receivables, net)/
Company
Two Years
Prior
Company
One Year
Prior
Company
Industry
S&P 500
*16,1912,537.9/
13,382.6 = 1.02
NA
0.72
0.97
3,581.9/4,498.5
= 0.80
3,517.6/2,537..9
= 1.39
NA
0.6
1.1
1,981.3+
1,156.4+1,053.
8/ 4,498.5 =
0.93
2,063.4+1,222.3+
931.2/2,537.9=
1.66
NA
0.5
0.7
*(2,395.1+
410.1+
148.4)/410.1
= 7.20
*(4,313.2+
522.6+252.7+
173.8)/522.6
= 10.07
27.7
30.9
40.7
*14,111.94,498.5/
15,279.8 =
0.63
Current Liabilities
Interest
Coverage
EBIT(net
income+interest
expense+taxes)/
Interest expense
Evaluate Financial Condition
The preceding analysis shows that McDonald’s has been aggressive in financing its growth with
debt (high and increasing debt/equity ratio above industry average). Additionally, an increasing
current ratio greater than 1 tells us would be equipped to pay off its obligations if they became
due immediately and shows the company is in good financial condition. A large and growing
quick ratio also demonstrates the company’s high liquidity and tells us the company has the
ability to meet its short-term obligations with its most liquid assets. This too shows the company
is in sound financial condition. Finally, a large and growing interest coverage ratio tells us
McDonald’s is able to easily pay interest on its outstanding debt. In conclusion, all of these
ratios indicates McDonald’s is in a strong financial position.
38
Investment Return %
Signals performance for
managers and owners.
Return On
Equity
Net Income /
Total Equity
Return On
Assets
Net Income /
Total Assets
Return On
Equity
(5-Year
Avg.)
Return On
Assets
(5-Year
Avg.)
Company
Two Years
Prior
Company
One Year
Prior
*2,395.1/
15,279.8= 16
*4,313.2/
13,382.6= 32
*2,395.1/
29,391.7= 8
*4,313.2/
28,461.5= 15
Not required
Not required
Not required
Not required
Company
Industry
S&P 500
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
“No
Investment
Returns data
available”
Evaluate Investment Return
The MSN Money report states “No Investment Returns data available” for McDonald’s. Going
off of the investment return ratios computed for the company one and two years prior, it is
evident that the company’s return on investment is increasing. Return on equity doubled from
2007 to 2008, and return on assets increased almost two-fold by 7 percent in the same time
period. This increasing investment return is consistent with the company’s corporate strategy of
steady growth.
39
Management Efficiency
Signals how well the
company was run by
management.
Company
Two Years
Prior
Company
One Year
Prior
Income/
Employee
Not required
Not required
Revenue/
Employee
Not required
Not required
22,786.6/
(1,053.8+
904.2/2) =
22,786.6/979 =
23.28 or 24 days
23,522.4/(931.2+
1,053.8/2) =
23,522.4/992.5 =
23.7 or 24 days
Receivable
Turnover
Total Revenue /
Average
Accounts
Receivable Trade, Net
Average is defined: (end of last year + end of this year) / 2
(Show work)
(Show work)
Cost of
Inventory
Turnover
Asset
Turnover
Revenue, Total
/ Average Total
Inventory
Total Revenue /
Average Total
Assets
14,881.4
/(125.3 +
149.0/2) = 108.5
22,786.6/
(29,391.7+
29,023.8/2) = 78
14,883.2/(111.5
+125.3/2) =
125.7
(Show work)
23,522.4/(28,461.
5+29,391.7/2) =
79
Company
Industry
S&P 500
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
“No Management
Efficiency data
available.”
Evaluate Management Efficiency
The MSN Money report states “No Management Efficiency data available” for McDonald’s so it
is not possible to compare the company’s data to industry performance. However, from the
receivable, inventory and asset turnover ratios computed for 2007 and 2008, we can see that
these are increasing. This means McDonald’s is becoming more effective in extending and
collecting debts, more efficient in its use of assets, turning over inventory at a quicker pace, and
more efficiently using its assets to generate sales and revenue. This too is consistent with the
company’s corporate strategy of steady growth.
40
CHAPTER 5 - DECISION-MAKING PROCESS
N
ow you must make two decisions.
Chapter 5: Decision-making Process—Question 1
Based upon your review, do the numbers support the company’s explicit strategic focus: a
growth, stability or retrenchment focus? Why or why not?
Based on my review for McDonald’s 10K report for 2009, the numbers are very much consistent
with the company’s explicit strategic focus of growth. The company’s performance has steadily
improved across measures from 2007 through 2009. Upon analysis of the numbers, we find that
the company is increasingly profitable, financially solid and increasingly efficient. Additionally,
we find that it is steadily improving investment return. For those measures for which industry
data is available, we see that McDonald’s if performing well average. From 2007 to 2009, the
company has seen increasing profit margins, sales, income and cash flows. Additionally, the
company has focused aggressively on financing growth with debt and is well-equipped to pay off
its obligations and is increasingly able to pay interest on its outstanding obligations. With highly
liquid assets, the company has developed a consistently strengthening ability to meet its shortterm obligations. Additionally, the company has managed to double its return on equity between
2007 and 2008, and almost double its return on assets. Although limited data was available in
regards to management efficiency, the available numbers demonstrate McDonald’s is becoming
increasingly efficient through growing receivable, inventory and asset turnover ratios. These
numbers tell us the company is increasingly effective in extending and collecting debts, efficient
in using assets to generate sales and revenue, and quickly turning over inventory.
Chapter 5: Decision-making Process—Question 2
Return to the first question in this project.
Chapter 1: Identify Why You Selected This Company—Question 1
A) What is/are your motivation(s) or interest(s) in selecting this company?
B) What question(s) are you seeking to answer?
Prepare a thorough, yet concise answer to your original questions A and B above. Begin your
answer by reiterating what your initial interest and questions were. Support your response with
the information gathered throughout your annual report study.
Initially, I chose to analyze McDonald’s for this project due to a McDonald’s careers info
session that sparked my interest, and changed my view of the company. The individuals who
represented the company during this event communicated a genuine respect and love for their
41
jobs and the company, and had been with the firm for many years in lucrative and satisfying
careers. Additionally, these individuals and their presentation on the company gave me less
one-dimensional view of McDonald’s. I learned the company is in the real-estate business
through the locations they franchise, maintain a strong focus on social responsibility ad
diversity, offer valuable internships, and offer a family friendly, flexible corporate work
environment. Due to my interest in pursuing a career with McDonald’s corporate offices upon
graduation, I felt it would be appropriate to analyze the company’s 10K and evaluate its
financial performance as well as get to know the company at a deeper levels by examining all of
the different assets that play a role in said financial performance.
The following are the original questions I sought to answer through this analysis:
1) How much did McDonald’s Corporation spend in advertising in 2009?
2) What legal proceedings, if any, was McDonald’s Corporation involved with in 2009?
3) What was the total of McDonald’s Corporation’s assets in 2009? How does that number
differ from 2008?
4) How have McDonald’s Corporation’s sales fluctuated in the last 6 years?
5) How much franchise revenue did McDonald’s Corporation acquire in 2009?
6) What strategic direction is McDonald’s heading towards?
7) What are some of the highlights for McDonald’s Corporation in 2009?
8) How many new restaurants did McDonald’s Corporation open in 2009?
9) What factors does McDonald’s Corporation compete on?
Generally, I believe my analysis of McDonald’s 10K report has strengthened my faith in the
company’s financial stability, business model and ability to continually leverage growth even in
a shaky and recovering economy. This has dually strengthened my desire to potentially pursue
a career with the company as I believe it will perform well even in tough economic conditions,
has a stable product offering, and is a company that continually works towards stable growth,
social responsibility, and a diverse and flexible workforce. Specifically, the answers to my
original questions are as follows, and serve to add depth to my understanding of the company
and how it functions:
1) In 2009, McDonald’s Corporation spent $650.8 million in advertising. This is a small
decrease from the amount spent on advertising in 2008 and 2007, $703.4 and $718.3
million respectively. These expenses are concerned primarily with advertising
initiatives deployed for company operated restaurants. Additionally, production costs
for radio and television advertising, expensed when the commercials initially air, and
were $94.7 million in 2009, 79.2 million in 2008 and $87.7 million in 2007. Significant
advertising costs are also incurred by franchisees in individual markets.
2) McDonald’s has a number of pending lawsuits in various jurisdictions concerning a
variety of concerns. The 10K lists the most significant of these including obesity,
allergens, franchising, employees, customers, intellectual property and government
regulations. After reading the summaries of these legal proceedings, I believe these are
lawsuits that afflict most companies, and not anything to be highly concerned about as
far as the integrity of the company.
3) McDonald’s total assets in 2009 were $30,224.9, and $28,461.5.
4) McDonald’s sales have been pretty steady throughout the last six years (2004-2009),
42
5)
6)
7)
8)
9)
increasing each year except for a slight decrease between 2008 and 2009.
In 2009, McDonald’s acquired $7,286 million in franchise revenues. This too has
steadily increased over the last six years (2004-2009).
McDonald’s strategic focus is one of growth. This evident throughout the 10K and
annual report from the chairman’s message to the numbers. Through the financial
analysis completed in chapter 4 of this project, the implementation of this strategic focus
is obvious with increasing numbers across measures including profitability, financial
condition, investment return and management efficiency.
Some of the highlights for McDonald’s in 2009 are as follows:
 Comparable sales grew 3.8% and guest counts grew 1.4%. This is in addition to
respective increases of 6.9% and 3.1% in 2008.
 The company saw growth in combined operating margins from 27.4% in 2008 to
30.1% in 2009
 The company saw growth in operating income of 6%
 Growth was also seen in net income per share of 9%
 Operations provided $5.8 billion in cash
 The company increased its quarterly cash dividend per share 10% to $0.55,
bringing the current annual dividend rate to $2.20 per share
In 2009, McDonald’s opened 824 traditional restaurants and 44 satellite restaurants
(small, limited-menu restaurants for which land and building is generally leased). The
company also closed 215 traditional restaurants and 142 satellite ones in 2009.
McDonald’s restaurants compete with international, national, regional and local retailers
of food products. The company competes on the basis of several factors including price,
convenience, service, menu variety and product quality in a highly fragmented global
restaurant industry.
43