Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 11: Q11-1FSAC (page 598)

McDonald’s Corporation

McDonald’s is the largest and best-known global food-service retailer, with more than 32,000 restaurants in 118 countries. On any day, McDonald’s serves approximately 1 percent of the world’s population. The following is information related to McDonald’s property and equipment.

McDonald’s Corporation

Summary of Significant Accounting Policies Section

Property and Equipment. Property and equipment are stated at cost, with depreciation and amortization provided using the straight-line method over the following estimated useful lives: buildings—up to 40years; leasehold improvements—the lesser of useful lives of assets or lease terms, which generally include option periods; and equipment—three to 12 years.

[In the notes to the financial statements:]

Property and Equipment

Net property and equipment consisted of:

December 31

(In millions) 2014 2013

Land \( 5,788.4 \)5,849.3

Buildings and improvements on owned land 14,322.4 14,715.6

Buildings and improvements on leased land 13,284.0 13,825.2

Equipment, signs and seating 5,113.8 5,376.8

Other 617.5 588.7

39,126.1 40,355.6

Accumulated depreciation and amortization (14,568.6) (14,608.3)

Net property and equipment \(24,557.5 \)25,747.3

Depreciation and amortization expense for property and equipment was

(in millions): 2014—\(1,539.3; 2013—\)1,498.8; 2012—\(1,402.2.

[In its 6-year summary, McDonald’s provides the following information.]

(in millions) 2014 2012 2013

Cash provided by operations \)6,370 \(7,121 \)6,966

Capital expenditures 2,583 2,825 3,049

Instructions

  1. What method of depreciation does McDonald’s use?
  2. Does depreciation and amortization expense cause cash flow from operations to increase? Explain.
  3. What does the schedule of cash flow measures indicate?

Short Answer

Expert verified

Answer

  1. McDonald’s uses the straight-line depreciation method.
  2. Operating cash flow is unaffected by depreciation and amortization expenses.
  3. Cash flow measures, according to McDonald's, are important indicators of growth and financial performance.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depreciation

In accounting, depreciation is charged on tangible assets due to the abrasion or corrosion of the assets. It is taken as an expense in the books of accounts assessed by different accounting firms through different methods.

02

(a) Explaining the method of depreciation that McDonald’s uses

McDonald’s used the straight-line method for depreciating its property and equipment. Straight-line depreciation is the simplest way to assess depreciation over time.By allocating identical amounts to an asset's accounting periods over its useful life, it makes the asset's expense predictable along with smooth net income.

03

(b) Explaining whether depreciation and amortization expenses cause cash flow from operations to increase

Depreciation and amortization expenses have no effect on operating cash flow. These two items are frequently added back to the net income in a cash flow statement to arrive at cash flow from operations, leading to the false conclusion that these costs boost cash flow. Cash revenues and cash costs have an impact on cash flow from operations. Except for the positive tax savings created by these charges, noncash charges have no effect.

04

(c) Explaining the indication of the schedule of cash flow measures

Even as expansion accelerates, cash supplied by operations is forecasted to fund capital expenditures over the next three years, according to the timetable of cash flow measurements. When measured in absolute amounts or percentages, it is clear that McDonald's feels cash flow measurements are relevant indications of growth and financial success.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What are the major factors considered in determining what depreciation method to use?

(Depletion, Timber, and Unusual Loss) Conan O’Brien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 2005 at a cost of \(550 per acre. In 2017, O’Brien began selectively logging this timber tract. In May 2017, Mount Leno erupted, burying the timberland of O’Brien under a foot of ash. All of the timber on the O’Brien tract was downed. In addition, the logging roads, built at a cost of \)150,000, were destroyed, as well as the logging equipment, with a net book value of \(300,000.

At the time of the eruption, O’Brien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O’Brien estimated the land to have a value of \)200 per acre after the timber was harvested. O’Brien includes the logging roads in the depletion base.

O’Brien estimates it will take 3 years to salvage the downed timber at a cost of \(700,000. The timber can be sold for pulp wood at an estimated price of \)3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.

Instructions

  1. Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno.
  2. Prepare the journal entry to record the depletion prior to the eruption.
  3. If this tract represents approximately half of the timber holdings of O’Brien, determine the amount of the unusual loss due to the eruption of Mount Leno for the year ended December 31, 2017.

Use the information for Lockard Company given in BE11-2. (a) Compute 2017 depreciation expense using the double-declining-balance method. (b) Compute 2017 depreciation expense using the double-declining-balance method, assuming the machinery was purchased on October 1, 2017.

Electroboy Enterprises, Inc. operates several stores throughout the western United States. As part of an operational and financial reporting review in a response to a downturn in its markets, the company’s management has decided to perform an impairment test on five stores (combined). The five stores’ sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2016.

Original cost \(36million

Accumulated depreciation \)10 million

Estimated remaining useful life 4 years

Estimated expected future

annual cash flows (not discounted) \(4.0 million per year

Appropriate discount rate 5 percent

Accounting

  1. Determine the amount of impairment loss, if any, that Electroboy should report for fiscal 2016 and the book value at which Electroboy should report the five stores on its fiscal year-end 2016 balance sheet. Assume that the cash flows occur at the end of each year.
  2. Repeat part (a), but instead assume that (1) the estimated remaining useful life is 10 years, (2) the estimated annual cash flows are \)2,720,000 per year, and (3) the appropriate discount rate is 6 percent.

Analysis

Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2017 (before Electroboy closes the books on fiscal 2016). During the conference call, you learn that management is considering selling the five stores, but the sale won’t likely be completed until the second quarter of fiscal 2017. Briefly discuss what implications this would have for Electroboy’s 2016 financial statements. Assume the same facts as in part (b) above.

Principles

Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.

(Impairment) Presented below is information related to equipment owned by Suarez Company at December 31, 2017.

Cost

\(9,000,000

Accumulated depreciation to date

1,000,000

Expected future net cash flows

7,000,000

Fair value

4,800,000

Assume that Suarez will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry to record depreciation expense for 2018.
  3. The fair value of the equipment at December 31, 2018, is \)5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
See all solutions

Recommended explanations on Business Studies Textbooks

Business Development

Read Explanation

Managerial Economics

Read Explanation

Financial Performance

Read Explanation

Nature of Business

Read Explanation

Introduction to Business

Read Explanation

Managers

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free