Chapter 14 Financial Statements and Ratios

McDonald's vision for the future is to be the world's best fast-food service company. The goal is to serve hot food quickly to every customer, every time. In the world of business, it is important to realize that what works today may not work tomorrow. Companies must keep a close eye on the technological, competitive, social, and global business environments if they hope to meet sales goals. According to Claire Babrowski, chief operating officer at McDonald's, a common complaint among McDonald's customers is that the food doesn't taste as good as it used to. Further research revealed that customers just want food served hotter. The company is now making hotter, fresher food served faster its central focus. Instead of coming up with new products, such as the failed Arch Deluxe, or new ingredients, McDonald's now markets "Made for You." This means freshly toasted buns, moist meat, and no mustard if the customer does not want it. Sounds simple, right? Well this is a tremendous change from the lined-up, precooked burgers of McDonald's past. In order to achieve their aim of "Made for You" service, McDonald's is developing state-of-the-art equipment to make better food. The development, marketing, and installation of the new equipment needed to implement these changes could cost up to $500 million. Franchise owners are being asked to pay at least $300 million of that cost. Customer service, well-trained, committed workers, and clean, well-run restaurants are other central points included in McDonald's vision for the future. Another part of this vision is international strategies to increase market share and optimize profitability by trimming costs. U.S. strategies involve energizing employees and owners/operators. McDonald's also plans to add about 1750 new restaurants during 1999. Of the new restaurants, 90 percent will be outside the U.S. Who will profit from the transformation taking place at McDonald's? It is the company's hope that the customers will benefit by getting fast, hot, made-to-order food. Customer satisfaction often has a direct impact on sales, which will have an impact on shareholders. McDonald's investment highlights may be reviewed by going to www.mcdonalds.com/corporate/investor/reports/index.html. For a history of dividends and stock split information, try www.mcdonalds.com/corporation...holder/dividend/split_history.html. All this information on McDonald's and more can be found at www.mcdonalds.com. Problem: Preparation: In preparation for this problem, Understand the importance of acquiring and evaluating data Review the accounting terms relating to financial statements and ratios Understand that a company's financial structure consists of its assets, liabilities, and owners' equity Questions: McDonald's international strategies are to increase market shares and optimize profitability by trimming costs or expenses. Expenses are grouped as either fixed or variable. Profit, also called income, is the difference between revenues earned and expenses incurred. The profit margin indicates the relationship between revenues and expenses. Below is an actual McDonald's consolidated statement of income. Review the statement and answer the following questions:

Consolidated Statement of Income
(In millions, except per common share data)
Years ended December 31,	1998	1997	1996
Revenues
Sales by Company-operated restaurants	$ 8,894.9	$ 8,136.5	$ 7,570.7
Revenues from franchised and
affiliated restaurants	3,526.5	3,272.3	3,115.8
Total revenues	12,421.4	11,408.8	10,686.5
Operating costs and expenses
Company-operated restaurants
Food and packaging	2,997.4	2,772.6	2,546.6
Payroll and other employee benefits	2,220.3	2,025.1	1,909.8
Occupancy and other operating expenses	2,043.9	1,851.9	1,706.8
	7,261.9	6,649.6	6,163.2
Franchised restaurants—occupancy expenses	678.0	613.9	570.1
Selling, general and administrative expenses	1,458.5	1,450.5	1,366.4
Made For You costs	161.5
Special charges	160.0		72.0
Other operating (income) expense	(60.2)	(113.5)	(117.8)
Total operating costs and expenses	9,659.5	8,600.5	8,053.9
Operating income	2,761.9	2,808.3	2,632.6
Interest expense—net of capitalized
interest of $17.9, $22.7 and $22.2	413.8	364.4	342.5
Nonoperating (income) expense	40.7	36.6	39.1
Income before provision for income taxes	2,307.4	2,407.3	2,251.0
Provision for income taxes	757.3	764.8	678.4
Net income	$ 1,550.1	$ 1,642.5	$ 1,572.6
Net income per common share	$ 1.14	$ 1.17	$ 1.11
Net income per common share—diluted	1.10	1.15	1.08
Dividends per common share	$ .18	$ .16	$ .15
Weighted-average shares	1,365.3	1,378.7	1,396.4
Weighted-average shares—diluted	1,405.7	1,410.2	1,433.3

1. According to the Income Statement, "Sales by Company-operated restaurants" increased from 1997 to 1998. Calculate the percent of increase as well as the dollar amount.
2. Explain why question (a) is considered a step in preparing a horizontal analysis rather than a vertical analysis.
3. Financial ratios are a series of comparisons in ratio form used to evaluate the performance of a company. Could a current ratio be performed using the McDonald's Income Statement? Explain in full.

2. Give an example of how the technological environment has affected the McDonald's Corporation.

3. Find the annual 1998 McDonald's consolidated balance sheet on the Internet and complete the following.
   1. List the four areas covered under current assets.
   2. "Accumulated depreciation and amortization" is listed under what section of the balance sheet?
   3. What is the December 31, 1998 total dollar amount of liabilities and shareholders' equity?

Include the date in your answers.

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