McDonald\'s Corporation McDonald\'s is the largest and best-known global food-se
ID: 2418065 • Letter: M
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. Presented on the next page is information related to McDonald's property and equipment.
Instructions
What method of depreciation does McDonald's use?
Does depreciation and amortization expense cause cash flow from operations to increase? Explain.
What does the schedule of cash flow measures indicate?
(a)What method of depreciation does McDonald's use?
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 40 years; 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) Land Buildings and improvements on owned land Buildings and improvements on leased land Equipment, signs and seating Other 2011 $ 5,328.3 13,079.9 12,021.8 4,757.2 2010 $5,200.5 12,399.4 11,732.0 4,608.5 550.4 542.0 Accumulated depreciation and amortization Net property and equipment 35,737.6 (12,903.1) $22,834.5 34,482.4 (12,421.8) $22,060.6 Depreciation and amortization expense was (in millions): 2011-$1,329.6; 2010-$1,200.4; 2009-$1,160.8. [In its 6-year summary, McDonald's provides the following information.] Cash Provided by Operations (dollars in million Cash provided by operations Capital expenditures 2011 $7,150 $2,730 2010 $6,342 $2,135 2009 $5,751 $1,952Explanation / Answer
According to the property and equipment section of summary of significant accounting policies, McDonald’s used straight-line method to allocate cost of the assets over their useful lives.
Depreciation and amortization expenses are added back to net income in the operating section of the cash flow statement to arrive at cash generated by operations and therefore this does not result in an increase in the cash from operations.
The schedule of cash flows shows that the cash provided by operations are consistently more than the capital expenditure over the last three years and therefore the company will be able to expand its operations in future also and this clearly indicates that the cash flow measures reflect growth and financial strength.