Revenue Recognition for Mcdonald's Corporation
REVENUE RECOGNITION MCDONALD 'S CORPORATION
INTRODUCTION
McDonald’s and Burger King have been in competition for over 50 years. Similar companies can choose different revenue recognition methods that can cause them to appear different. This report’s purpose is to explain McDonald’s revenue recognition policies and methods in comparison to Burger King’s.
DISCUSSION FOR ACCOUNTING POLICIES AND METHODS
McDonald’s and Burger King’s revenues mainly consist of two things, sales and franchise fees. The sales they record are by company-operated restaurants. McDonald’s records these sales using a cash basis system. This system means that the accountants record revenues when the company receives cash, and it records expenses when it pays cash. By using a cash basis, McDonald’s does not have to estimate what it will not receive in its sales. McDonald’s “presents sales net of sales tax and other sales-related taxes” (McDonald’s Annual Report, 44).
Franchise fees are for the services McDonald’s offers to the franchisees. Franchise fees included on the balance sheet are from the franchisees paying rent and a percentage of their sales. Currently this percentage is 4.0% of monthly sales (mcdonalds.com/corp). The company recognizes continuing fees and royalties from the franchise fees in the period in which they are earned. McDonald’s recognizes initial franchise fees when the franchise opens for business. The franchisee must pay 25% cash as a down payment and pay the rest within the next seven years. Because McDonald’s does not show uncollectible accounts or offer information on it, it is difficult to determine how exposed the company is on collectibles.
Burger King includes all of these items in its revenue recognition process. However, it separates franchise fees from franchise rent in a section called property revenues. It receives revenue from property income that it leases or subleases to franchisees. In addition, Burger King’s Annual Report states, “Royalties paid
INTRODUCTION
McDonald’s and Burger King have been in competition for over 50 years. Similar companies can choose different revenue recognition methods that can cause them to appear different. This report’s purpose is to explain McDonald’s revenue recognition policies and methods in comparison to Burger King’s.
DISCUSSION FOR ACCOUNTING POLICIES AND METHODS
McDonald’s and Burger King’s revenues mainly consist of two things, sales and franchise fees. The sales they record are by company-operated restaurants. McDonald’s records these sales using a cash basis system. This system means that the accountants record revenues when the company receives cash, and it records expenses when it pays cash. By using a cash basis, McDonald’s does not have to estimate what it will not receive in its sales. McDonald’s “presents sales net of sales tax and other sales-related taxes” (McDonald’s Annual Report, 44).
Franchise fees are for the services McDonald’s offers to the franchisees. Franchise fees included on the balance sheet are from the franchisees paying rent and a percentage of their sales. Currently this percentage is 4.0% of monthly sales (mcdonalds.com/corp). The company recognizes continuing fees and royalties from the franchise fees in the period in which they are earned. McDonald’s recognizes initial franchise fees when the franchise opens for business. The franchisee must pay 25% cash as a down payment and pay the rest within the next seven years. Because McDonald’s does not show uncollectible accounts or offer information on it, it is difficult to determine how exposed the company is on collectibles.
Burger King includes all of these items in its revenue recognition process. However, it separates franchise fees from franchise rent in a section called property revenues. It receives revenue from property income that it leases or subleases to franchisees. In addition, Burger King’s Annual Report states, “Royalties paid