Question

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

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

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.

(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.

(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.

(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.