Accounting Principles - Paper

Topics: Balance sheet, Asset, Financial statements Pages: 10 (3373 words) Published: June 5, 2012
a) Which accounting standards or Generally Accepted Accounting Principles (GAAP) are used in preparing the financial statements of the company (International, local or US GAAP standards)? Where did you find that information? For our accounting analysis we found the key accounting policies and related them to our identified key success factors. McDonald’s most important factors include consolidation, financial statement estimates, revenue recognition, advertising costs, compensation from stocks, property and equipment, goodwill, long-lived assets, franchise revenues, and employee benefit plans. We determined that McDonald’s has a large amount of flexibility in its accounting methods. Their depreciation methods and goodwill impairment practices are very important in their financial statements because the numbers are so substantial. McDonald’s uses a standard accounting strategy that easily compares its financial statements with its competitors. When evaluating their quality of disclosure, we determined that the company explain the choices they make and their future estimates in the Letter to the Shareholders and the Management Discussion and Analysis. Their footnotes are also very easy to understand. There was nothing in our ratios that raised a red flag for us, as all the numbers convey clear patterns in the last five years. There was no reason to undo any accounting distortions because we did not find any skeptical information that was not explained in their disclosures. The following is a summary of significant accounting policies identified by the managers of McDonald’s. • Consolidation: The consolidated financial statements include the accounts of the company and its subsidiaries. • Estimates in Financial Statements: McDonald’s uses accounting principles generally accepted in the U.S. which require management to make estimates and assumptions which could differ from actual results that affect the amounts reported in the financial statements. • Revenue Recognition: The Company’s revenues consist of sales by Company operated restaurants and fees from restaurants operated by franchisees. Sales by Company-operated restaurants are recognized on a cash basis. Fees from franchised and affiliated restaurants include continuing rent and service fees, initial fees and royalties received from foreign affiliates and developmental licensees. Continuing fees and royalties are recognized upon opening of a restaurant, which is when the Company has performed substantially all initial services required by the franchise arrangement. • Advertising Costs: Advertising costs included in costs of Company-operated restaurants primarily consist of contributions to advertising cooperatives. Production costs for radio and television advertising are expensed when the commercials are initially aired. These production costs as well as other marketing-related expenses are included in selling, general & administrative expenses. • Stock-Based Compensation: The Company accounts for all stock-based compensation as prescribed by Accounting Principles Board Opinion No. 25. The Company discloses pro forma net income and net income per common share, as 14 provided by Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation. • Property and Equipment: Property and equipment are stated at cost and are depreciated and amortized using the straight-line method. Building are given a useful life of up to 40 years and equipment three to 12 years. • Goodwill: Goodwill represents the excess cost over the net tangible assets of acquired restaurant businesses. The Company’s goodwill mainly consists of amounts paid above value of net tangible assets for purchases of restaurants from franchisees and appreciation of ownership in international subsidiaries such as McDonald’s Japan. • Long-Lived Assets: In accordance with SFAS No. 144, Accounting for the...
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