McDonalds Annual Report Analysis



McDonalds Annual Report AnalysisIntermediate Accounting III Paper07263765December 8, 2013Jorge Omar Delgado AlizagaJodi Krausman1000000December 8, 2013Jorge Omar Delgado AlizagaJodi KrausmanTable of ContentsContentIntroduction32011-2012 deferred tax assets or deferred tax liabilities amounts and what information is disclosed in the footnotes related to deferred taxes and What gives rise to these deferred taxes3-4Defenition of deferred tax liability and deferred tax asset4What temporary and permanent differences does the company disclose in their footnotes and what are other examples of temporary and permanent differences5What is the amount of income tax provision in the two most recent years on the income statement?5What information is disclosed in the footnotes relating to income tax expense?6Does the company have a net operating loss carry-forward or carry-back?6What are the guidelines for carry-forwards and carry-backs?6-7Does the company have a defined benefit or defined contribution plan?What are the key elements of the plan discussed in the footnotes?What amounts on the balance sheet relate to this plan?7What are the differences between defined benefit and defined contribution plans?7-8What are the earnings per share amounts disclosed on the income statement for the most recent year?8-9What dilutive securities are discussed in the footnotes?9Identify and describe other examples of dilutive securities.How do these impact earnings per share?9-10What kind of share-based compensation does the company have? And What are the key elements of this plan discussed in the footnotes? 10What was compensation expense for the two most recent years?………….......................................................................................................................... 10Identify and describe other types of share-based compensation11Does the company use the direct or indirect cash flow presentation method? And What is the difference between these two methods?11-12How does the cash flow statement agree to the other financial statements?12-13What investing and financing activities does the company have?13What are some other examples of investing and financing activities?.13What noncash transactions does the company have on its cash flow statement?13What are some other examples of noncash transactions?14Conclusion14-15Work Cited16-17IntroductionMcDonalds is one of the biggest fast food franchises worldwide, McDonald’s franchise has always been categorized for: their variety of foods options, their customer service, the ambient of their franchise locations and their affordable prices McDonald was one of the first fast food companies to expand from just the U.S. to many nations across the world and to this day those franchise location overseas continue to expand and continue to be production. In this report, you will find an analysis of the 2012 McDonald annual report, within this report will be information regarding the deferred income taxes of McDonald both asset and liability, the temporary differences that McDonald has experienced, income tax provision, operating loss carry-forward, and defined benefit plan. There will be information that describes the amount of basic earnings per share and diluted earnings per share, there will be information regarding share-based compensation, information regarding which method is used when making the cash flow statement. This report will also discuss the financial and investing activities done by the company and whether or not McDonald has non cash transactions. 2011-2012 deferred tax assets or deferred tax liabilities amounts and what information is disclosed in the footnotes related to deferred taxes and What gives rise to these deferred taxesBoth the deferred tax asset and deferred tax liability amounts are posted in McDonald’s 2012 annual statement. The Deferred tax asset amount has lowered in 2012 when comparing it to the amount that McDonald’s experienced during 2011. According to “McDonald’s 2012 Annual Report”, in 2011, the amount of deferred tax asset before valuation allowance was (1,634.9 million), this amount was reduced in 2012 to (1615.8 million). The 2012, total Deferred tax liability amount has risen significantly when you compare it to the total deferred tax liability amount of 2011, in 2011 the ending total deferred tax liability amount was (2,193.0 million) and in 2012 that amount raised to (2,350.5 million). The amount of deferred income tax recorded in the balance sheet in 2011 was (1,344.1 million), and in 2012 that amount raised to (1531.1 million). The amount of net deferred tax liability for 2011 was (660.1 million) and in 2012 that amount raised exponentially to (861.5 million) (McDonald’s 2012 Annual Statement). Definition of deferred tax liability and deferred tax assetAccording to Investopedia, a deferred tax asset is described as an item on the balance sheet under the assets category that its used to reduce any future income tax expense, most of the time, a deferred tax asset occurs as a result of net loss carryovers but this only occurs when the company deems that the asset will almost positively be used in the near future. When a company decides to include a deferred tax asset on its balance sheet, it must ensure that there is more than 50 percent chance that in the coming fiscal quarters, the company will experience a positive accounting income (Deferred Tax Asset). As stated by Investopedia, Deferred Tax liability can be defined as an account that is placed in the company’s balance sheet whenever there is a temporary difference between the companies’ accounting amount and the company’s tax carrying values, or the expected and implemented income tax rate, or the amount of estimated taxes payable for that particular year. Since this liability may or may not occur during any fiscal year, making it deferred seems like the appropriate choice because if it does occur then a adjustment to the accounts involved will need to occur but if it doesn’t occur during a particular year then the accounts involved won’t be effected . When a company has a deferred tax liability they are taking into account that the accounts in which their lies a dispute, those account’s amounts that are currently recorded most likely will need adjustments at a later date (Deferred Tax liability). What temporary and permanent differences does the company disclose in their footnotes and what are other examples of temporary and permanent differencesThere are no permanenet differeces in the 2012 McDonald Annual Statement, The temporary differnce that is discussed in McDonald’s 2012 annual statement is about the U.S. Deferred income taxes which had not been recorded for temporary differences, the differences that were occuring involved certain foreign subsidiaries and corporate joint ventures, the apporximate difference in 2012, totaled to(14.8 billion), this amount is mostly made of the undistributed earnings which are considered as permaanently invested in operations outside the U.S (McDonald’s 2012 annual statemennt). According Accounting for Income Taxes, examples of temporary difference are: Property Installment sales, Prepaid Expense, and Unrealized gains/loss when assets are recorded at a fair value. Examples of permanent differences are: the amount of life insurance premium given to the benefactor of the insurance once the life insurance holder has become deceased, Cetain penalties such as bribery and Tax-exempt interest (Accounting for Income Taxes).What is the amount of income tax provision in the two most recent years on the income statement?During 2010-2012, the amount of income tax provision has not gone down, during the 2010-2011 period the amount of income tax provision rose by a large quantity, but during the period of 2011-2012, the amount of increase wasn’t so grand. In 2010, the ending income tax provision amount was (2,054.0 million), this amount rose exponentially the following year ending with (2,509.1 million), while 2012 was another increase in income tax provision the amount of increase wasn’t as grand as what occurred the past year, in 2012 the income tax provision amount was(2,614.2 million)(McDonald 2012 Annual Statement).What information is disclosed in the footnotes relating to income tax expense?McDonalds has had a great leap in income tax during the 2010-2012 fiscal years. It started out with 2010 in which the income tax before provision was (7,000.3 million), that amount drastically increased in 2011 reaching(8012.2 million), 2012 did surpase the income tax from the previous fiscal year but the amount it increased by wasn’t as grand as what occurred during 2010 to 2011, the ending income tax expense for 2012 was(8079.0 million) (McDonald 2012 Annual Statement).Does the company have a net operating loss carry-forward or carry-back?McDonald does have a net operating loss carry-forward, in 2011 the net loss carry-forward totaled came out to (71.1 million), and in 2012 that amount raised by a good amount to (92.4 million) (McDonald 2012 Annual Statement).What are the guidelines for carry-forwards and carry-backs?There are three main guidelines for net operating loss carry-forwards or carry-backs. According to Accounting Tools the three guidelines for net operating loss is (1) When the amount of the net operating loss is Carry-back, that amount can be applied to previously recorded taxable income as long as it occurred within the last two fiscal years, as a result of adjusting previous taxable income, the company will have the opportunity to generate an immediate tax rebate. If the company chooses, they can waive the right to apply the carry-back and then all that they would be required to do is to attach a statement to the company’s tax return explaining when was the net operating loss made and the waiver in which you decide not to adjust previously recorded taxable income. (2) If the net operating loss is a carry-forward, then that amount can be used for the next 20 years, every year for the next 20 years the company will reduce the taxable income by subtracting a portion of the net operating loss carry-forward from it. (3) Any net operating loss that remains after the 20th year becomes voided (The Net Operating Loss Carryback and Carry-forward). Does the company have a defined benefit or defined contribution plan? What are the key elements of the plan discussed in the footnotes. What amounts on the balance sheet relate to this plan?McDonalds has a defined benfit and defined contribution plan.In the Comprehensive Income statement, it states that the employment pension plan that McDonald’s has to offer its employees is a defined benefit plan.In the Footnotes there are no key elements of the defined benift plan discussed.In the footnotes it describes McDonald’s defined contribution plan which includes a Profit sharing and Saving plan which inside the plan is a 401k feature, a employee match feature, and a discretionary employer profit sharing match. What are the differences between defined benefit and defined contribution plans?There is one major difference between defined benfit and contribution plan and that is who pays for the pension plans. According to the article “Differences between defined benefit and defined contribution plans” a defined benefit plan is what the name states it to be it is a retirement plan in which the company pays for your pension without you having to spend one dime in making the pension amount, the company decides how much you will recive based on your seniorty in the company meaning how many years you were employed at the company and what your salary was when you worked there. This used to be the most common type of retirement plan for companies but now its almost unheard of. In some cases, your survivors upon your death such as your spouse or your children would be entitled to recive your benfitis. Defined Contribution plans are those plans in which the company has nothing to do with how much an indivudal earns upon reacghing retriement and the reason is that a contribution plan is one in which the employee puts money away to help save for their retiree years. In some occasions employers will match the amount placed by the employee each month but many companies are not requried to assit the employee in expanding their contribution plan amount. Contribution plans are runned by the IRS tax codes. The second major difference is the years of benefits, those indivudals who have a defined benefit plan know that for the rest of their life and possibly after they have passed away, the pension plan will send them their money, but if you have a contribution plan once the 401k states that the money you had in the saving has been given to you then you are no longer given any more money as a 401k only provides you with currency for as long a there is currency in the 401k. The negative side of a defined benfit plan is should the company that you worked for become bankrupt then you will no longer recive any retirement benefits in comparison since contribution plans are based on how much you the employee put into the plan then no matter if your ex employers are banrupt or not your pension amount wont be affected (Differences between defined benefit and defined contribution plans). What are the earnings per share amounts disclosed on the income statement for the most recent year?Since 2010, the amount of basic earning per share of common stock and diluted earning per share of common stock has increased at a steady rate. In 2010 the amount of basic earning per share was ($4.64), and the amount of diluted earning per share was at($4.58), both the basic and diluted eps grew at a steadily rate increase aproxmimatley(.60 cents), in 2011 the basic earnings per share on common stock was valued at ($5.33 ), and the diluted earning per share of common stock was valued at ($5.27), this amount once again was increased but this time at slow rate the following year, the approximate rate of increase is(.09 cents), in 2012 the basic earnings per share on common stock was valued at ($5.41 ), and the diluted earning per share of common stock was valued at ($5.36)(McDonald’s 2012 Annual Statement). What dilutive securities are discussed in the footnotes?In the footnote of McDonald’s 2012 Annual statement the diluted securities that were talked about were the common stocks, in order to calculate the diluted earnings per share all you have to do is divide the net income of the company by diluted weighted average shares which consists of (weighted-average-shares-out-standing (+) diluted effect of share-based compensation which can be calculated by using the treasury stock method) (McDonald’s 2012 Annual Statement). . Identify and describe other examples of dilutive securities and How do these impact earnings per share?Other forms of dilutive securities are: Secondary offering, Convertible Debt/Convertible Equity, and Warrants, Rights, Options and other claims on security. A secondary offering occurs when in order to generate an increase in profit a company decides to release more stock into the market for example if a company has 1000 common stocks in the market and they decide to release another 500 common stocks into the market with the intention that by realizing the stock people will purchase them thus generating an income for the company this is considered as a secondary offering, the downside to secondary offering is that the value of stock crashes meaning that for those first 1000 common stockholders their stocks are now generating half of what their supposed earnings should be and the other (50%) of their supposed earnings per share are given to the holders of the extra 500 common shares that the company released. Convertible Debt/Convertible can occur if a company decides to convert a convertible preferred stock into common stock thus raising the total amount of common stock within the company but the downside to this is that since there are more total common stock when the company divides total income by total common stock the earnings per share will be less thus each stockholder will receive less profits. Equity, and Warrants, Rights, Options and other claims on security occurs when a holder of property rights or warrants decides I want common stocks in the company, so the company does an exchange if you give us the warrants or rights in your possession we will give you common stock shares that equal the worth of your warrants or rights, the downside as like what occurs with all diluted EPS, since there is now more common stock the earning per share for each stock is decreased (Frequently Asked Question). What kind of share-based compensation does the company have? And What are the key elements of this plan discussed in the footnotes?McDonald has a share based compensation plans which permits the company to release a variety of equity based incentives such as: stock options, restricted stock units. These equity based incentives to employees and to non-employee directors. As stated in McDonalds 2012 annual statement note section, the share-based compensation plan includes a portion of all share-based awards which is based on the date that the award was given and it is valued at fair value (McDonald’s 2012 Annual Statement). What was compensation expense for the two most recent years?The share-based compensation expense has been increased steadily since 2010. In 2010 the compensation expense account was valued at (83.1 million), this amount increased slightly the following year increasing approximately (three million), and the 2011 share-based compensation account was recorded at (86.2 million). The next year the share-based compensation account has a great increase in cost approximately (seven million), in 2012 the share-based compensation account was recorded at (93.4 million) (McDonald’s 2012 Annual Statement).Identify and describe other types of share-based compensationSome examples of share-based compensation include: stock award plans, and stock option plans. Stock award plans are those plans are executive plans in which the employers provides an employee with a specific number of shares as an incentive to keep employees working hard, and as a benefit for the employee for their continuing employment in the company for a prolonged period. The amount of stock given is valued at the market price on the day that the stocks are granted. Since most of the stock award plans are restricted they are subjected to vesting thus the company will need to record compensation expense throughout the time the employee receives shares of the company. Stock option plans are those in which the employee is not granted stocks of the company as a result of his or her hard work, instead the company gives the employee the option to purchase a specific number of stocks at below market value, the only catch is that the employee must wait until a specific date before he or she can purchase the shares. In a stock option plan there are four important dates that companies must acknowledge and record: (1) the date the option plan was granted, (2) the day that the employee can start purchasing the stocks, (3) the day the employee actually purchases the stocks, and (4) the last day for the employee to purchase the stock at below market value price (Share-Based Compensation Plans).Does the company use the direct or indirect cash flow presentation method and What is the difference between these two methods?McDonalds uses indirect method in order to create their Operational Section of the Cash Flow Statement (McDonalds 2012 Annual Statement). The Indirect method is the most commonly used method as a result of requiring less information that the direct method and thus it requires less calculation, the main purpose of using an indirect method is that you are demonstrating the reconciliation from reported net income to cash provided by operations. One of the biggest differences between an indirect and a direct method is that an indirect method focuses on accrual information rather than use information regarding inflow or outflow of cash and the reason why indirect method follows accrual information is that investors have found it makes it easier for them to read the important information so that they can see the state of operational activity of the company without having to read minority details. In order to calculate operational activates using an indirect method all you have to do is follow the following equation: Net Income from the income statement (+) non-cash items such as Depreciation expense from the income statement (+) Losses from sales of assets or (-) Gains from sales of assets (+) Decreases in current asset accounts or (-) Increases in current asset accounts (+) Increases in current liability accounts or (-) Decreases in current asset accounts (Indirect Method). Direct method is the method favored under FASB 95 as it presents information regarding the inflow and outflow of cash but as a result of having to record thus as a result of being more detailed oriented and time consuming this method has been less favored by companies is the last few years. In order to calculate operational activates using a direct method all you have to do is follow the following equation: add the receipts you have from cash sales add them to the amount of interest that the company accumulated and add that amount by the dividends received then that amount is subtracted from the cash payments for purchases then that amount is subtracted by the cash paid for operating expenses, and finally that amount is subtracted by the amount of cash paid by the company to cover interest and income taxes(Direct Method). How does the cash flow statement agree to the other financial statements?A cash flow statements agrees with the other financial statements such as the balance sheet and the income statement in that it talks about cash inflow and outflows that have occurred during the fiscal period which made up the financial statement and certain items in the cash flow statement is necessary in order to complete the balance sheet and the income statement and vice versa, the difference between a cash flow statement and the balance sheet and income is that the income statement and balance sheet also record transactions involving cash that have not occurred yet and are expected to occur at a later date (What Is A Cash Flow Statement?).What investing and financing activities does the company have?The financial activates that are described in McDonald’s 2012 annual statement under the cash flow statement are: (1) Net Short-term borrowing,(2)Long-term financing issuance,(3)Long-term financing repayment,(4)Treasury Stock Purchases,(5)Common Stock Dividends,(6)Proceed from stock option exercises,(7)Excess tax benefit from share-based compensation, and (8)Other. The Investing activates that are described are: (1) Capital Expenditures, (2) Purchase of Restaurant business, and (3) Sale of Restaurant business and Property (McDonald’s 2012 Annual Statement).What are some other examples of investing and financing activities?Some of the most common forms of financial activities include: (1) Issuance of equity, (2) Issuance of Debt, (3) Retirement of Debt, (4) Repurchasing of Stock, (5) Payment of Dividends (Examples of Financing Activities). Some of the most common forms of Investing activities include: (1) Acquisition of Long Term Investment, (2) Acquisition of Tools and Equipment, (3) Acquisition of Land and Buildings (What are some examples of investing activities?).What noncash transactions does the company have on its cash flow statement?McDonald does have any non-cash transactions on their cash flow statement for 2012 and it is depreciation and amortization which valued as: 2011(1,415.0 million), 2012(1,488.5 million) (McDonald’s 2012 Annual Statement).What are some other examples of noncash transactions?Some of the most common forms of noncash transaction include: (1) obtaining assets either by assuming direct liability or through finance lease, (2) obtaining an entity as a result of equity issue, and (3) any conversion from debt to equity (IAS 7 44 Non-cash transactions Examples). ConclusionMcDonalds is one of the most productive and profitable company of all time, since its origin McDonalds has always been hardworking, looking to expand their horizons into new markets and new industries, both onshore and offshore while having setbacks they always work hard and find solutions to their problems. They can be considered the captain of industry being one of the biggest franchise worldwide and one of the first fast food franchise to expand globally. This is the company to which society looks at for the most delicious hamburgers at an affordable price with quality customer service. Without a doubt society today owes McDonald a great deal especially considering that McDonalds have brought many people satisfaction when eating a McDonald product. Annual reports answer any question that any individual can have about the operation and finance of any company within a specific year, Annual reports are analyzed by the general public, by other companies within the industry to see how they stack against that company, by investors to see how productive and profitable the company is thus knowing whether it’s a good idea or not to invest, and by loan agencies in order to deduct if the company is profitable and stable enough to handle paying off their asked loan within the time allotted. Annual reports are analyzed by the actual company in order to analyze their operations and finances from previous year in order to see if they are more productive, less productive, more profitable, or less profitable. Thus after seeing if they are less productive or less profitable than in previous years then the company knows that they must make changes to their business plan in order to gain more profits and become more productive in the following year. McDonalds’s deferred tax liability amount has risen from last year by a good amount, and the deferred tax asset amount has decreased. McDonald did not have any permanent differences this year but they did have a temporary difference concerning Deferred income taxes. McDonald continues to experience a growth in income tax provision amount. McDonald has net operating loss carry-forward, and McDonalds has a defined benfit and defined contribution plan. the amount of basic earning per share of common stock and diluted earning per share of common continues to grow at a normal rate. McDonald’s share based compensation plan includes: stock options, restricted stock units. Since 2010 the amount of compensation expense has grown steadily. McDonald uses indirect method in order to construct their cash flow statement operational activity section, and there are non-cash items on McDonald’s cash flow statement for 2012 specifically depreciation and amortization. Works CitedAccounting for Income Taxes. Becker Professional Education, CPA Exam Review Retrieved from: Level 1 Cash Flow Direct. Investopedia. Retrieved from: Level 1 Cash Flow Indirect. Investopedia. Retrieved from: Tax Asset. Investopedia, Retrieved from: Tax liability. . Investopedia, Retrieved from: between defined benefit and defined contribution plans. The Cap Times. Mike Ivey. June 20, 2012. Retrieved on December 7, 2013. Retrieved from: of Financing Activities. Chron. Chirantan Basu, Demand Media. Retrieved from: Asked Question. Investopedia. Rob Renaud. February 26, 2009.Retrieved from: IAS 7 44 Non-cash transactions Examples. The International Financial Reporting Standards Database and Textbook. Retrieved from: ’s Corporation: Annual report 2012. (2012). Retrieved from Compensation Plans. Chapter 19 Share Based Compensation and Earnings per Share. Retrieved from: Net Operating Loss Carryback and Carryforward. Accounting Tools. Retrieved from: are some examples of investing activities? Accounting Coach. Retrieved from: Is A Cash Flow Statement? Investopedia. Retrieved from: ................
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