Question: The following is an excerpt from McDonald’
The following is an excerpt from McDonald’s Corporation’s 2015 Management Discussion and Analysis. The MD&A, which is included in the Form 10-K annual report to the SEC, provides insight into the financial statements, with a focus on explaining changes from one period to the next.
REVENUES
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales, minimum rent payments and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
In 2015, constant currency revenue growth was driven by positive comparable sales and the benefit from expansion. In 2014, constant currency revenue was flat compared to the prior year, reflecting the impact of negative comparable sales, partially offset by expansion.
Revenues
![The following is an excerpt from McDonald’s Corporation’s 2015 Management Discussion and Analysis. The MD&A, which is included in the Form 10-K annual report to the SEC, provides insight into the financial statements, with a focus on explaining changes from one period to the next.
REVENUES
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales, minimum rent payments and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
In 2015, constant currency revenue growth was driven by positive comparable sales and the benefit from expansion. In 2014, constant currency revenue was flat compared to the prior year, reflecting the impact of negative comparable sales, partially offset by expansion.
Revenues
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about 70% of the combined restaurant margins in 2015, 2014 and 2013. In 2015, franchised margin dollars decreased $297 million or 4% (increased 4% in constant currencies). The constant currency increase was due to positive comparable sales performance, expansion and refranchising. In 2014, franchised margin dollars decreased $32 million or 0% (increased 1% in constant currencies), reflecting a benefit from expansion and refranchising, offset by negative comparable sales performance. In connection with the Company’s long-term financial targets, the Company plans to refranchise about 4,000 restaurants for the four-year period ending 2018. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.
Franchised margins
• U.S.: In 2015, the decrease in the franchised margin percent was due to higher occupancy costs. In 2014, the decrease was primarily due to negative comparable sales and higher occupancy costs.
• International Lead Markets: In 2015, the franchised margin percent reflected the benefit from positive comparable sales performance and the negative impact from higher lease expense and refranchising. In 2014, the decrease was due to weaker results in Germany and the negative impact from refranchising, primarily in Germany and Australia, partly offset by positive results in the U.K.
• High Growth Markets: In 2015, the decrease in the franchised margin percent was primarily due to the impact from refranchising. In 2014, the decrease was primarily due to negative comparable sales across the segment. The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.
COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2015, Company-operated margin dollars decreased $370 million or 13% (1% in constant currencies). In 2014, Company-operated margin dollars decreased $415 million or 13% (11% in constant currencies), reflecting weak results across all segments.
Company-operated margins
• U.S.: In 2015, the decrease in the Company-operated margin percent was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition. In 2014, the decrease was due to the impact of negative comparable guest counts and higher commodity and labor costs, partly offset by higher average check.
• International Lead Markets: In 2015, the increase in the Company-operated margin percent was due to higher comparable sales and the result of refranchising efforts, partly offset by higher labor and occupancy costs. In 2014, the increase was primarily due to positive results
in France, partly offset by weaker results in Germany.
• High Growth Markets: In 2015, the decrease in the Company-operated margin percent was Primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from the 2014 supplier issue. In 2014, the decrease was primarily due to the negative impact of the supplier issue in China and weaker results in Russia.
Source: McDonald’s Corporation 2015 Form 10-K.
The following is McDonald’s statement of comprehensive income, also from its 2015 Form 10-K.
Consolidated Statement of Comprehensive Income
McDonald’s has two sources of revenue: sales at company-owned stores and rent and royalty
revenues from franchised stores. Because McDonald’s has a substantial number of foreign
units—only about a third of the company’s revenues are from its U.S. operations—fluctuations
in exchange rates significantly affect the company’s results, as reported in U.S. dollars.
Required:
1. Examine the Statement of Comprehensive Income. How did exchange rates fluctuate in 2015, 2014, and 2013? (The phrase “exchange rates” here refers to a basket of exchange rates of the foreign countries in which McDonald’s operates, versus the U.S. dollar. Obviously, not every exchange rate will have behaved the same way. This question is Asking about a weighted-average exchange rate against the U.S. dollar.)
2. Decompose the change in revenue into the effects of (a) growth in the revenue as reported in the local currency and (b) the effect of changes in exchange rates. You should have a total of 16 (2 × 4 × 2) such analyses, one for each combination of the following:
• Revenue types (company-owned, franchised)
• Market types (U.S., international lead markets, high growth markets, foundational markets/corporate)
• Year (2015 vs. 2014, 2014 vs. 2013) Both of the components [(a) and (b)] in each of the 16 analyses should be stated in U.S. dollars and they should sum to the total change in revenues as reported in U.S. dollars for that particular combination of revenue type, market type, and year. For example, the two components of the analysis for company-owned stores in the international lead markets for 2015 vs. 2014 should sum to −$645 million ($4,798 million minus $5,443 million).
3. Discuss the results in Requirement 2 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.
4. Using the information from the MD&A, determine the margin percentages (margin dollars divided by revenues) broken out in the following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets/corporate).
• By year (2015, 2014, 2013).
Each percentage you report should relate to one of each of the three categories listed, for a total of 2 × 4 × 3 = 24 percentages.
5. Determine 16 (2 × 4 × 2) “constant currency” margin percentages broken out in the Following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets & corporate).
• By year (2015, 2014).
To find the “constant currency” margin percentage: Use the McDonald’s disclosure to determine what the 2014 revenue and margin dollars would have been for each of the eight combinations of revenue type and market had exchange rates not changed from 2013 to 2014, holding all else constant. Then compute the margin percentages for 2014 using the revenues and margin dollars you computed. Similarly, determine what the 2015 revenue and margin dollars would have been for each combination of revenue type and market had exchange rates not changed from 2014 to 2015, holding all else constant. Then compute the margin percentages for 2015 using the revenues and margin dollars you computed. Note that in doing this analysis, you should look only at pairs of years, not all three at once. In other words, when looking at the 2015 constant currency margin percentage, you assume the exchange rate was the same as in 2014, not that it was still the same as in 2013.
6. Discuss the results in Requirements 4 and 5 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.](../images/the-following-is-an-excerpt-from-mcdonalds-corporations-2015-management-discussion-and-223153-1.jpg)
![The following is an excerpt from McDonald’s Corporation’s 2015 Management Discussion and Analysis. The MD&A, which is included in the Form 10-K annual report to the SEC, provides insight into the financial statements, with a focus on explaining changes from one period to the next.
REVENUES
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales, minimum rent payments and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
In 2015, constant currency revenue growth was driven by positive comparable sales and the benefit from expansion. In 2014, constant currency revenue was flat compared to the prior year, reflecting the impact of negative comparable sales, partially offset by expansion.
Revenues
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about 70% of the combined restaurant margins in 2015, 2014 and 2013. In 2015, franchised margin dollars decreased $297 million or 4% (increased 4% in constant currencies). The constant currency increase was due to positive comparable sales performance, expansion and refranchising. In 2014, franchised margin dollars decreased $32 million or 0% (increased 1% in constant currencies), reflecting a benefit from expansion and refranchising, offset by negative comparable sales performance. In connection with the Company’s long-term financial targets, the Company plans to refranchise about 4,000 restaurants for the four-year period ending 2018. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.
Franchised margins
• U.S.: In 2015, the decrease in the franchised margin percent was due to higher occupancy costs. In 2014, the decrease was primarily due to negative comparable sales and higher occupancy costs.
• International Lead Markets: In 2015, the franchised margin percent reflected the benefit from positive comparable sales performance and the negative impact from higher lease expense and refranchising. In 2014, the decrease was due to weaker results in Germany and the negative impact from refranchising, primarily in Germany and Australia, partly offset by positive results in the U.K.
• High Growth Markets: In 2015, the decrease in the franchised margin percent was primarily due to the impact from refranchising. In 2014, the decrease was primarily due to negative comparable sales across the segment. The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.
COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2015, Company-operated margin dollars decreased $370 million or 13% (1% in constant currencies). In 2014, Company-operated margin dollars decreased $415 million or 13% (11% in constant currencies), reflecting weak results across all segments.
Company-operated margins
• U.S.: In 2015, the decrease in the Company-operated margin percent was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition. In 2014, the decrease was due to the impact of negative comparable guest counts and higher commodity and labor costs, partly offset by higher average check.
• International Lead Markets: In 2015, the increase in the Company-operated margin percent was due to higher comparable sales and the result of refranchising efforts, partly offset by higher labor and occupancy costs. In 2014, the increase was primarily due to positive results
in France, partly offset by weaker results in Germany.
• High Growth Markets: In 2015, the decrease in the Company-operated margin percent was Primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from the 2014 supplier issue. In 2014, the decrease was primarily due to the negative impact of the supplier issue in China and weaker results in Russia.
Source: McDonald’s Corporation 2015 Form 10-K.
The following is McDonald’s statement of comprehensive income, also from its 2015 Form 10-K.
Consolidated Statement of Comprehensive Income
McDonald’s has two sources of revenue: sales at company-owned stores and rent and royalty
revenues from franchised stores. Because McDonald’s has a substantial number of foreign
units—only about a third of the company’s revenues are from its U.S. operations—fluctuations
in exchange rates significantly affect the company’s results, as reported in U.S. dollars.
Required:
1. Examine the Statement of Comprehensive Income. How did exchange rates fluctuate in 2015, 2014, and 2013? (The phrase “exchange rates” here refers to a basket of exchange rates of the foreign countries in which McDonald’s operates, versus the U.S. dollar. Obviously, not every exchange rate will have behaved the same way. This question is Asking about a weighted-average exchange rate against the U.S. dollar.)
2. Decompose the change in revenue into the effects of (a) growth in the revenue as reported in the local currency and (b) the effect of changes in exchange rates. You should have a total of 16 (2 × 4 × 2) such analyses, one for each combination of the following:
• Revenue types (company-owned, franchised)
• Market types (U.S., international lead markets, high growth markets, foundational markets/corporate)
• Year (2015 vs. 2014, 2014 vs. 2013) Both of the components [(a) and (b)] in each of the 16 analyses should be stated in U.S. dollars and they should sum to the total change in revenues as reported in U.S. dollars for that particular combination of revenue type, market type, and year. For example, the two components of the analysis for company-owned stores in the international lead markets for 2015 vs. 2014 should sum to −$645 million ($4,798 million minus $5,443 million).
3. Discuss the results in Requirement 2 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.
4. Using the information from the MD&A, determine the margin percentages (margin dollars divided by revenues) broken out in the following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets/corporate).
• By year (2015, 2014, 2013).
Each percentage you report should relate to one of each of the three categories listed, for a total of 2 × 4 × 3 = 24 percentages.
5. Determine 16 (2 × 4 × 2) “constant currency” margin percentages broken out in the Following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets & corporate).
• By year (2015, 2014).
To find the “constant currency” margin percentage: Use the McDonald’s disclosure to determine what the 2014 revenue and margin dollars would have been for each of the eight combinations of revenue type and market had exchange rates not changed from 2013 to 2014, holding all else constant. Then compute the margin percentages for 2014 using the revenues and margin dollars you computed. Similarly, determine what the 2015 revenue and margin dollars would have been for each combination of revenue type and market had exchange rates not changed from 2014 to 2015, holding all else constant. Then compute the margin percentages for 2015 using the revenues and margin dollars you computed. Note that in doing this analysis, you should look only at pairs of years, not all three at once. In other words, when looking at the 2015 constant currency margin percentage, you assume the exchange rate was the same as in 2014, not that it was still the same as in 2013.
6. Discuss the results in Requirements 4 and 5 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.](../images/the-following-is-an-excerpt-from-mcdonalds-corporations-2015-management-discussion-and-223153-2.jpg)
![The following is an excerpt from McDonald’s Corporation’s 2015 Management Discussion and Analysis. The MD&A, which is included in the Form 10-K annual report to the SEC, provides insight into the financial statements, with a focus on explaining changes from one period to the next.
REVENUES
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales, minimum rent payments and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
In 2015, constant currency revenue growth was driven by positive comparable sales and the benefit from expansion. In 2014, constant currency revenue was flat compared to the prior year, reflecting the impact of negative comparable sales, partially offset by expansion.
Revenues
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about 70% of the combined restaurant margins in 2015, 2014 and 2013. In 2015, franchised margin dollars decreased $297 million or 4% (increased 4% in constant currencies). The constant currency increase was due to positive comparable sales performance, expansion and refranchising. In 2014, franchised margin dollars decreased $32 million or 0% (increased 1% in constant currencies), reflecting a benefit from expansion and refranchising, offset by negative comparable sales performance. In connection with the Company’s long-term financial targets, the Company plans to refranchise about 4,000 restaurants for the four-year period ending 2018. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.
Franchised margins
• U.S.: In 2015, the decrease in the franchised margin percent was due to higher occupancy costs. In 2014, the decrease was primarily due to negative comparable sales and higher occupancy costs.
• International Lead Markets: In 2015, the franchised margin percent reflected the benefit from positive comparable sales performance and the negative impact from higher lease expense and refranchising. In 2014, the decrease was due to weaker results in Germany and the negative impact from refranchising, primarily in Germany and Australia, partly offset by positive results in the U.K.
• High Growth Markets: In 2015, the decrease in the franchised margin percent was primarily due to the impact from refranchising. In 2014, the decrease was primarily due to negative comparable sales across the segment. The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.
COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2015, Company-operated margin dollars decreased $370 million or 13% (1% in constant currencies). In 2014, Company-operated margin dollars decreased $415 million or 13% (11% in constant currencies), reflecting weak results across all segments.
Company-operated margins
• U.S.: In 2015, the decrease in the Company-operated margin percent was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition. In 2014, the decrease was due to the impact of negative comparable guest counts and higher commodity and labor costs, partly offset by higher average check.
• International Lead Markets: In 2015, the increase in the Company-operated margin percent was due to higher comparable sales and the result of refranchising efforts, partly offset by higher labor and occupancy costs. In 2014, the increase was primarily due to positive results
in France, partly offset by weaker results in Germany.
• High Growth Markets: In 2015, the decrease in the Company-operated margin percent was Primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from the 2014 supplier issue. In 2014, the decrease was primarily due to the negative impact of the supplier issue in China and weaker results in Russia.
Source: McDonald’s Corporation 2015 Form 10-K.
The following is McDonald’s statement of comprehensive income, also from its 2015 Form 10-K.
Consolidated Statement of Comprehensive Income
McDonald’s has two sources of revenue: sales at company-owned stores and rent and royalty
revenues from franchised stores. Because McDonald’s has a substantial number of foreign
units—only about a third of the company’s revenues are from its U.S. operations—fluctuations
in exchange rates significantly affect the company’s results, as reported in U.S. dollars.
Required:
1. Examine the Statement of Comprehensive Income. How did exchange rates fluctuate in 2015, 2014, and 2013? (The phrase “exchange rates” here refers to a basket of exchange rates of the foreign countries in which McDonald’s operates, versus the U.S. dollar. Obviously, not every exchange rate will have behaved the same way. This question is Asking about a weighted-average exchange rate against the U.S. dollar.)
2. Decompose the change in revenue into the effects of (a) growth in the revenue as reported in the local currency and (b) the effect of changes in exchange rates. You should have a total of 16 (2 × 4 × 2) such analyses, one for each combination of the following:
• Revenue types (company-owned, franchised)
• Market types (U.S., international lead markets, high growth markets, foundational markets/corporate)
• Year (2015 vs. 2014, 2014 vs. 2013) Both of the components [(a) and (b)] in each of the 16 analyses should be stated in U.S. dollars and they should sum to the total change in revenues as reported in U.S. dollars for that particular combination of revenue type, market type, and year. For example, the two components of the analysis for company-owned stores in the international lead markets for 2015 vs. 2014 should sum to −$645 million ($4,798 million minus $5,443 million).
3. Discuss the results in Requirement 2 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.
4. Using the information from the MD&A, determine the margin percentages (margin dollars divided by revenues) broken out in the following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets/corporate).
• By year (2015, 2014, 2013).
Each percentage you report should relate to one of each of the three categories listed, for a total of 2 × 4 × 3 = 24 percentages.
5. Determine 16 (2 × 4 × 2) “constant currency” margin percentages broken out in the Following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets & corporate).
• By year (2015, 2014).
To find the “constant currency” margin percentage: Use the McDonald’s disclosure to determine what the 2014 revenue and margin dollars would have been for each of the eight combinations of revenue type and market had exchange rates not changed from 2013 to 2014, holding all else constant. Then compute the margin percentages for 2014 using the revenues and margin dollars you computed. Similarly, determine what the 2015 revenue and margin dollars would have been for each combination of revenue type and market had exchange rates not changed from 2014 to 2015, holding all else constant. Then compute the margin percentages for 2015 using the revenues and margin dollars you computed. Note that in doing this analysis, you should look only at pairs of years, not all three at once. In other words, when looking at the 2015 constant currency margin percentage, you assume the exchange rate was the same as in 2014, not that it was still the same as in 2013.
6. Discuss the results in Requirements 4 and 5 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.](../images/the-following-is-an-excerpt-from-mcdonalds-corporations-2015-management-discussion-and-223153-3.jpg)
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about 70% of the combined restaurant margins in 2015, 2014 and 2013. In 2015, franchised margin dollars decreased $297 million or 4% (increased 4% in constant currencies). The constant currency increase was due to positive comparable sales performance, expansion and refranchising. In 2014, franchised margin dollars decreased $32 million or 0% (increased 1% in constant currencies), reflecting a benefit from expansion and refranchising, offset by negative comparable sales performance. In connection with the Company’s long-term financial targets, the Company plans to refranchise about 4,000 restaurants for the four-year period ending 2018. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.
Franchised margins
![The following is an excerpt from McDonald’s Corporation’s 2015 Management Discussion and Analysis. The MD&A, which is included in the Form 10-K annual report to the SEC, provides insight into the financial statements, with a focus on explaining changes from one period to the next.
REVENUES
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales, minimum rent payments and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
In 2015, constant currency revenue growth was driven by positive comparable sales and the benefit from expansion. In 2014, constant currency revenue was flat compared to the prior year, reflecting the impact of negative comparable sales, partially offset by expansion.
Revenues
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about 70% of the combined restaurant margins in 2015, 2014 and 2013. In 2015, franchised margin dollars decreased $297 million or 4% (increased 4% in constant currencies). The constant currency increase was due to positive comparable sales performance, expansion and refranchising. In 2014, franchised margin dollars decreased $32 million or 0% (increased 1% in constant currencies), reflecting a benefit from expansion and refranchising, offset by negative comparable sales performance. In connection with the Company’s long-term financial targets, the Company plans to refranchise about 4,000 restaurants for the four-year period ending 2018. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.
Franchised margins
• U.S.: In 2015, the decrease in the franchised margin percent was due to higher occupancy costs. In 2014, the decrease was primarily due to negative comparable sales and higher occupancy costs.
• International Lead Markets: In 2015, the franchised margin percent reflected the benefit from positive comparable sales performance and the negative impact from higher lease expense and refranchising. In 2014, the decrease was due to weaker results in Germany and the negative impact from refranchising, primarily in Germany and Australia, partly offset by positive results in the U.K.
• High Growth Markets: In 2015, the decrease in the franchised margin percent was primarily due to the impact from refranchising. In 2014, the decrease was primarily due to negative comparable sales across the segment. The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.
COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2015, Company-operated margin dollars decreased $370 million or 13% (1% in constant currencies). In 2014, Company-operated margin dollars decreased $415 million or 13% (11% in constant currencies), reflecting weak results across all segments.
Company-operated margins
• U.S.: In 2015, the decrease in the Company-operated margin percent was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition. In 2014, the decrease was due to the impact of negative comparable guest counts and higher commodity and labor costs, partly offset by higher average check.
• International Lead Markets: In 2015, the increase in the Company-operated margin percent was due to higher comparable sales and the result of refranchising efforts, partly offset by higher labor and occupancy costs. In 2014, the increase was primarily due to positive results
in France, partly offset by weaker results in Germany.
• High Growth Markets: In 2015, the decrease in the Company-operated margin percent was Primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from the 2014 supplier issue. In 2014, the decrease was primarily due to the negative impact of the supplier issue in China and weaker results in Russia.
Source: McDonald’s Corporation 2015 Form 10-K.
The following is McDonald’s statement of comprehensive income, also from its 2015 Form 10-K.
Consolidated Statement of Comprehensive Income
McDonald’s has two sources of revenue: sales at company-owned stores and rent and royalty
revenues from franchised stores. Because McDonald’s has a substantial number of foreign
units—only about a third of the company’s revenues are from its U.S. operations—fluctuations
in exchange rates significantly affect the company’s results, as reported in U.S. dollars.
Required:
1. Examine the Statement of Comprehensive Income. How did exchange rates fluctuate in 2015, 2014, and 2013? (The phrase “exchange rates” here refers to a basket of exchange rates of the foreign countries in which McDonald’s operates, versus the U.S. dollar. Obviously, not every exchange rate will have behaved the same way. This question is Asking about a weighted-average exchange rate against the U.S. dollar.)
2. Decompose the change in revenue into the effects of (a) growth in the revenue as reported in the local currency and (b) the effect of changes in exchange rates. You should have a total of 16 (2 × 4 × 2) such analyses, one for each combination of the following:
• Revenue types (company-owned, franchised)
• Market types (U.S., international lead markets, high growth markets, foundational markets/corporate)
• Year (2015 vs. 2014, 2014 vs. 2013) Both of the components [(a) and (b)] in each of the 16 analyses should be stated in U.S. dollars and they should sum to the total change in revenues as reported in U.S. dollars for that particular combination of revenue type, market type, and year. For example, the two components of the analysis for company-owned stores in the international lead markets for 2015 vs. 2014 should sum to −$645 million ($4,798 million minus $5,443 million).
3. Discuss the results in Requirement 2 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.
4. Using the information from the MD&A, determine the margin percentages (margin dollars divided by revenues) broken out in the following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets/corporate).
• By year (2015, 2014, 2013).
Each percentage you report should relate to one of each of the three categories listed, for a total of 2 × 4 × 3 = 24 percentages.
5. Determine 16 (2 × 4 × 2) “constant currency” margin percentages broken out in the Following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets & corporate).
• By year (2015, 2014).
To find the “constant currency” margin percentage: Use the McDonald’s disclosure to determine what the 2014 revenue and margin dollars would have been for each of the eight combinations of revenue type and market had exchange rates not changed from 2013 to 2014, holding all else constant. Then compute the margin percentages for 2014 using the revenues and margin dollars you computed. Similarly, determine what the 2015 revenue and margin dollars would have been for each combination of revenue type and market had exchange rates not changed from 2014 to 2015, holding all else constant. Then compute the margin percentages for 2015 using the revenues and margin dollars you computed. Note that in doing this analysis, you should look only at pairs of years, not all three at once. In other words, when looking at the 2015 constant currency margin percentage, you assume the exchange rate was the same as in 2014, not that it was still the same as in 2013.
6. Discuss the results in Requirements 4 and 5 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.](../images/the-following-is-an-excerpt-from-mcdonalds-corporations-2015-management-discussion-and-223153-4.jpg)
• U.S.: In 2015, the decrease in the franchised margin percent was due to higher occupancy costs. In 2014, the decrease was primarily due to negative comparable sales and higher occupancy costs.
• International Lead Markets: In 2015, the franchised margin percent reflected the benefit from positive comparable sales performance and the negative impact from higher lease expense and refranchising. In 2014, the decrease was due to weaker results in Germany and the negative impact from refranchising, primarily in Germany and Australia, partly offset by positive results in the U.K.
• High Growth Markets: In 2015, the decrease in the franchised margin percent was primarily due to the impact from refranchising. In 2014, the decrease was primarily due to negative comparable sales across the segment. The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.
COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2015, Company-operated margin dollars decreased $370 million or 13% (1% in constant currencies). In 2014, Company-operated margin dollars decreased $415 million or 13% (11% in constant currencies), reflecting weak results across all segments.
Company-operated margins
![The following is an excerpt from McDonald’s Corporation’s 2015 Management Discussion and Analysis. The MD&A, which is included in the Form 10-K annual report to the SEC, provides insight into the financial statements, with a focus on explaining changes from one period to the next.
REVENUES
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales, minimum rent payments and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
In 2015, constant currency revenue growth was driven by positive comparable sales and the benefit from expansion. In 2014, constant currency revenue was flat compared to the prior year, reflecting the impact of negative comparable sales, partially offset by expansion.
Revenues
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about 70% of the combined restaurant margins in 2015, 2014 and 2013. In 2015, franchised margin dollars decreased $297 million or 4% (increased 4% in constant currencies). The constant currency increase was due to positive comparable sales performance, expansion and refranchising. In 2014, franchised margin dollars decreased $32 million or 0% (increased 1% in constant currencies), reflecting a benefit from expansion and refranchising, offset by negative comparable sales performance. In connection with the Company’s long-term financial targets, the Company plans to refranchise about 4,000 restaurants for the four-year period ending 2018. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.
Franchised margins
• U.S.: In 2015, the decrease in the franchised margin percent was due to higher occupancy costs. In 2014, the decrease was primarily due to negative comparable sales and higher occupancy costs.
• International Lead Markets: In 2015, the franchised margin percent reflected the benefit from positive comparable sales performance and the negative impact from higher lease expense and refranchising. In 2014, the decrease was due to weaker results in Germany and the negative impact from refranchising, primarily in Germany and Australia, partly offset by positive results in the U.K.
• High Growth Markets: In 2015, the decrease in the franchised margin percent was primarily due to the impact from refranchising. In 2014, the decrease was primarily due to negative comparable sales across the segment. The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.
COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2015, Company-operated margin dollars decreased $370 million or 13% (1% in constant currencies). In 2014, Company-operated margin dollars decreased $415 million or 13% (11% in constant currencies), reflecting weak results across all segments.
Company-operated margins
• U.S.: In 2015, the decrease in the Company-operated margin percent was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition. In 2014, the decrease was due to the impact of negative comparable guest counts and higher commodity and labor costs, partly offset by higher average check.
• International Lead Markets: In 2015, the increase in the Company-operated margin percent was due to higher comparable sales and the result of refranchising efforts, partly offset by higher labor and occupancy costs. In 2014, the increase was primarily due to positive results
in France, partly offset by weaker results in Germany.
• High Growth Markets: In 2015, the decrease in the Company-operated margin percent was Primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from the 2014 supplier issue. In 2014, the decrease was primarily due to the negative impact of the supplier issue in China and weaker results in Russia.
Source: McDonald’s Corporation 2015 Form 10-K.
The following is McDonald’s statement of comprehensive income, also from its 2015 Form 10-K.
Consolidated Statement of Comprehensive Income
McDonald’s has two sources of revenue: sales at company-owned stores and rent and royalty
revenues from franchised stores. Because McDonald’s has a substantial number of foreign
units—only about a third of the company’s revenues are from its U.S. operations—fluctuations
in exchange rates significantly affect the company’s results, as reported in U.S. dollars.
Required:
1. Examine the Statement of Comprehensive Income. How did exchange rates fluctuate in 2015, 2014, and 2013? (The phrase “exchange rates” here refers to a basket of exchange rates of the foreign countries in which McDonald’s operates, versus the U.S. dollar. Obviously, not every exchange rate will have behaved the same way. This question is Asking about a weighted-average exchange rate against the U.S. dollar.)
2. Decompose the change in revenue into the effects of (a) growth in the revenue as reported in the local currency and (b) the effect of changes in exchange rates. You should have a total of 16 (2 × 4 × 2) such analyses, one for each combination of the following:
• Revenue types (company-owned, franchised)
• Market types (U.S., international lead markets, high growth markets, foundational markets/corporate)
• Year (2015 vs. 2014, 2014 vs. 2013) Both of the components [(a) and (b)] in each of the 16 analyses should be stated in U.S. dollars and they should sum to the total change in revenues as reported in U.S. dollars for that particular combination of revenue type, market type, and year. For example, the two components of the analysis for company-owned stores in the international lead markets for 2015 vs. 2014 should sum to −$645 million ($4,798 million minus $5,443 million).
3. Discuss the results in Requirement 2 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.
4. Using the information from the MD&A, determine the margin percentages (margin dollars divided by revenues) broken out in the following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets/corporate).
• By year (2015, 2014, 2013).
Each percentage you report should relate to one of each of the three categories listed, for a total of 2 × 4 × 3 = 24 percentages.
5. Determine 16 (2 × 4 × 2) “constant currency” margin percentages broken out in the Following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets & corporate).
• By year (2015, 2014).
To find the “constant currency” margin percentage: Use the McDonald’s disclosure to determine what the 2014 revenue and margin dollars would have been for each of the eight combinations of revenue type and market had exchange rates not changed from 2013 to 2014, holding all else constant. Then compute the margin percentages for 2014 using the revenues and margin dollars you computed. Similarly, determine what the 2015 revenue and margin dollars would have been for each combination of revenue type and market had exchange rates not changed from 2014 to 2015, holding all else constant. Then compute the margin percentages for 2015 using the revenues and margin dollars you computed. Note that in doing this analysis, you should look only at pairs of years, not all three at once. In other words, when looking at the 2015 constant currency margin percentage, you assume the exchange rate was the same as in 2014, not that it was still the same as in 2013.
6. Discuss the results in Requirements 4 and 5 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.](../images/the-following-is-an-excerpt-from-mcdonalds-corporations-2015-management-discussion-and-223153-5.jpg)
• U.S.: In 2015, the decrease in the Company-operated margin percent was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition. In 2014, the decrease was due to the impact of negative comparable guest counts and higher commodity and labor costs, partly offset by higher average check.
• International Lead Markets: In 2015, the increase in the Company-operated margin percent was due to higher comparable sales and the result of refranchising efforts, partly offset by higher labor and occupancy costs. In 2014, the increase was primarily due to positive results
in France, partly offset by weaker results in Germany.
• High Growth Markets: In 2015, the decrease in the Company-operated margin percent was Primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from the 2014 supplier issue. In 2014, the decrease was primarily due to the negative impact of the supplier issue in China and weaker results in Russia.
Source: McDonald’s Corporation 2015 Form 10-K.
The following is McDonald’s statement of comprehensive income, also from its 2015 Form 10-K.
Consolidated Statement of Comprehensive Income
![The following is an excerpt from McDonald’s Corporation’s 2015 Management Discussion and Analysis. The MD&A, which is included in the Form 10-K annual report to the SEC, provides insight into the financial statements, with a focus on explaining changes from one period to the next.
REVENUES
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales, minimum rent payments and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
In 2015, constant currency revenue growth was driven by positive comparable sales and the benefit from expansion. In 2014, constant currency revenue was flat compared to the prior year, reflecting the impact of negative comparable sales, partially offset by expansion.
Revenues
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about 70% of the combined restaurant margins in 2015, 2014 and 2013. In 2015, franchised margin dollars decreased $297 million or 4% (increased 4% in constant currencies). The constant currency increase was due to positive comparable sales performance, expansion and refranchising. In 2014, franchised margin dollars decreased $32 million or 0% (increased 1% in constant currencies), reflecting a benefit from expansion and refranchising, offset by negative comparable sales performance. In connection with the Company’s long-term financial targets, the Company plans to refranchise about 4,000 restaurants for the four-year period ending 2018. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.
Franchised margins
• U.S.: In 2015, the decrease in the franchised margin percent was due to higher occupancy costs. In 2014, the decrease was primarily due to negative comparable sales and higher occupancy costs.
• International Lead Markets: In 2015, the franchised margin percent reflected the benefit from positive comparable sales performance and the negative impact from higher lease expense and refranchising. In 2014, the decrease was due to weaker results in Germany and the negative impact from refranchising, primarily in Germany and Australia, partly offset by positive results in the U.K.
• High Growth Markets: In 2015, the decrease in the franchised margin percent was primarily due to the impact from refranchising. In 2014, the decrease was primarily due to negative comparable sales across the segment. The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.
COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2015, Company-operated margin dollars decreased $370 million or 13% (1% in constant currencies). In 2014, Company-operated margin dollars decreased $415 million or 13% (11% in constant currencies), reflecting weak results across all segments.
Company-operated margins
• U.S.: In 2015, the decrease in the Company-operated margin percent was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition. In 2014, the decrease was due to the impact of negative comparable guest counts and higher commodity and labor costs, partly offset by higher average check.
• International Lead Markets: In 2015, the increase in the Company-operated margin percent was due to higher comparable sales and the result of refranchising efforts, partly offset by higher labor and occupancy costs. In 2014, the increase was primarily due to positive results
in France, partly offset by weaker results in Germany.
• High Growth Markets: In 2015, the decrease in the Company-operated margin percent was Primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from the 2014 supplier issue. In 2014, the decrease was primarily due to the negative impact of the supplier issue in China and weaker results in Russia.
Source: McDonald’s Corporation 2015 Form 10-K.
The following is McDonald’s statement of comprehensive income, also from its 2015 Form 10-K.
Consolidated Statement of Comprehensive Income
McDonald’s has two sources of revenue: sales at company-owned stores and rent and royalty
revenues from franchised stores. Because McDonald’s has a substantial number of foreign
units—only about a third of the company’s revenues are from its U.S. operations—fluctuations
in exchange rates significantly affect the company’s results, as reported in U.S. dollars.
Required:
1. Examine the Statement of Comprehensive Income. How did exchange rates fluctuate in 2015, 2014, and 2013? (The phrase “exchange rates” here refers to a basket of exchange rates of the foreign countries in which McDonald’s operates, versus the U.S. dollar. Obviously, not every exchange rate will have behaved the same way. This question is Asking about a weighted-average exchange rate against the U.S. dollar.)
2. Decompose the change in revenue into the effects of (a) growth in the revenue as reported in the local currency and (b) the effect of changes in exchange rates. You should have a total of 16 (2 × 4 × 2) such analyses, one for each combination of the following:
• Revenue types (company-owned, franchised)
• Market types (U.S., international lead markets, high growth markets, foundational markets/corporate)
• Year (2015 vs. 2014, 2014 vs. 2013) Both of the components [(a) and (b)] in each of the 16 analyses should be stated in U.S. dollars and they should sum to the total change in revenues as reported in U.S. dollars for that particular combination of revenue type, market type, and year. For example, the two components of the analysis for company-owned stores in the international lead markets for 2015 vs. 2014 should sum to −$645 million ($4,798 million minus $5,443 million).
3. Discuss the results in Requirement 2 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.
4. Using the information from the MD&A, determine the margin percentages (margin dollars divided by revenues) broken out in the following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets/corporate).
• By year (2015, 2014, 2013).
Each percentage you report should relate to one of each of the three categories listed, for a total of 2 × 4 × 3 = 24 percentages.
5. Determine 16 (2 × 4 × 2) “constant currency” margin percentages broken out in the Following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets & corporate).
• By year (2015, 2014).
To find the “constant currency” margin percentage: Use the McDonald’s disclosure to determine what the 2014 revenue and margin dollars would have been for each of the eight combinations of revenue type and market had exchange rates not changed from 2013 to 2014, holding all else constant. Then compute the margin percentages for 2014 using the revenues and margin dollars you computed. Similarly, determine what the 2015 revenue and margin dollars would have been for each combination of revenue type and market had exchange rates not changed from 2014 to 2015, holding all else constant. Then compute the margin percentages for 2015 using the revenues and margin dollars you computed. Note that in doing this analysis, you should look only at pairs of years, not all three at once. In other words, when looking at the 2015 constant currency margin percentage, you assume the exchange rate was the same as in 2014, not that it was still the same as in 2013.
6. Discuss the results in Requirements 4 and 5 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.](../images/the-following-is-an-excerpt-from-mcdonalds-corporations-2015-management-discussion-and-223153-6.jpg)
McDonald’s has two sources of revenue: sales at company-owned stores and rent and royalty
revenues from franchised stores. Because McDonald’s has a substantial number of foreign
units—only about a third of the company’s revenues are from its U.S. operations—fluctuations
in exchange rates significantly affect the company’s results, as reported in U.S. dollars.
Required:
1. Examine the Statement of Comprehensive Income. How did exchange rates fluctuate in 2015, 2014, and 2013? (The phrase “exchange rates†here refers to a basket of exchange rates of the foreign countries in which McDonald’s operates, versus the U.S. dollar. Obviously, not every exchange rate will have behaved the same way. This question is Asking about a weighted-average exchange rate against the U.S. dollar.)
2. Decompose the change in revenue into the effects of (a) growth in the revenue as reported in the local currency and (b) the effect of changes in exchange rates. You should have a total of 16 (2 × 4 × 2) such analyses, one for each combination of the following:
• Revenue types (company-owned, franchised)
• Market types (U.S., international lead markets, high growth markets, foundational markets/corporate)
• Year (2015 vs. 2014, 2014 vs. 2013) Both of the components [(a) and (b)] in each of the 16 analyses should be stated in U.S. dollars and they should sum to the total change in revenues as reported in U.S. dollars for that particular combination of revenue type, market type, and year. For example, the two components of the analysis for company-owned stores in the international lead markets for 2015 vs. 2014 should sum to −$645 million ($4,798 million minus $5,443 million).
3. Discuss the results in Requirement 2 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.
4. Using the information from the MD&A, determine the margin percentages (margin dollars divided by revenues) broken out in the following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets/corporate).
• By year (2015, 2014, 2013).
Each percentage you report should relate to one of each of the three categories listed, for a total of 2 × 4 × 3 = 24 percentages.
5. Determine 16 (2 × 4 × 2) “constant currency†margin percentages broken out in the Following ways:
• By revenue type (company-owned versus franchised stores).
• By market (U.S., international lead markets, high-growth markets, foundational markets & corporate).
• By year (2015, 2014).
To find the “constant currency†margin percentage: Use the McDonald’s disclosure to determine what the 2014 revenue and margin dollars would have been for each of the eight combinations of revenue type and market had exchange rates not changed from 2013 to 2014, holding all else constant. Then compute the margin percentages for 2014 using the revenues and margin dollars you computed. Similarly, determine what the 2015 revenue and margin dollars would have been for each combination of revenue type and market had exchange rates not changed from 2014 to 2015, holding all else constant. Then compute the margin percentages for 2015 using the revenues and margin dollars you computed. Note that in doing this analysis, you should look only at pairs of years, not all three at once. In other words, when looking at the 2015 constant currency margin percentage, you assume the exchange rate was the same as in 2014, not that it was still the same as in 2013.
6. Discuss the results in Requirements 4 and 5 and relate them to foreign currency translation rules. Include in your response a discussion of whether your results would have been similar or different if McDonald’s had used the temporal method.
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> You have the following information related to Chalmers Corporation’s pension plan: a. Defined benefit, noncontributory pension plan. b. Plan initiation, January 1, 20X3 (no credit given for prior service). c. Retirement benefits paid at
> Puhlman Inc. provides a defined benefit pension plan to its employees. It’s a smoothrecognition of its gains and losses when computing its market-related value to compute expected return. Additional information follows: During 20X1, the
> Turner Inc. provides a defined benefit pension plan to its employees. The company has 150employees. The remaining amortization period at December 31, 20X0, for prior service cost is 5 years. The average remaining service life of employees is 11 years at
> Berle Corp. has a defined benefit pension plan that features the following data: January 1, 20X1 (beginning of fiscal year): The CFO of Berle Corp. devises a plan to inflate artificially net income by using an estimate for expected return on plan assets
> Selected pension information extracted from the retirement benefits note that appeared in Green’s 20X1 annual report follows. (These numbers have been modified but are based on theactivities of a real company whose name has been disguis
> On January 1, 20X1, Cello Co. established a defined benefit pension plan for its employees. At January 1, 20X1, Cello estimated the service cost for 20X1 to be $45,000. At January 1, 20X2,it estimated 20X2 service cost to be $49,000. On the plan inceptio
> The following information pertains to Sparta Company’s defined benefit pension plan for 20X1: Service cost for 20X1 was $90,000. The Sparta pension plan did not receive any employercontributions or pay any benefits during the year. Spar
> In 20X1, Phillips Company reported $10,000,000 of pre-tax book income and also had $10,000,000 of taxable income. It incurred a $1,000,000 book expense that it deducted on itstax return. Assuming a 21% tax rate, this deduction results in a $210,000 tax b
> Mozart Inc.’s $98,000 taxable income for 20X1 will be taxed at the 21% corporate tax rate. Fortax purposes, its depreciation expense exceeded the depreciation used for financial reportingpurposes by $27,000. Mozart has $45,000 of purchased goodwill on it
> Bryan Trucking Corporation began business on January 1, 20X1, and consists of the parententity, domiciled and operating in Country X, and a subsidiary operating in Country Y. Bryanis required, as a listed company in Country X, to prepare financial statem
> On January 1, 20X1, the Dolan Company purchased a new office building in Las Vegas for $6,100,000, which it holds for rentals and capital appreciation. Dolan estimated the buildingwould have a useful life of 25 years and a residual value of $1,100,000. D
> Metge Corporation’s worksheet for calculating taxable income for 20X1 follows: The enacted tax rate for 20X1 is 21%, but it is scheduled to increase to 25% in 20X2 and subsequent years. All temporary differences are originating differen
> Nelson Inc. purchased machinery at the beginning of 20X1 for $90,000. Management used thestraight-line method to depreciate the cost for financial reporting purposes and the sum-of the years’ digits method to depreciate the cost for tax purposes. The lif
> For financial statement reporting, Lexington Corporation recognizes royalty income accordingto GAAP. However, royalties are taxed when collected. At December 31, 20X0, deferred royaltyincome of $400,000 was included in Lexington’s balance sheet. All of t
> Early in 2017, Altuve Corporation forecasted that it would report a deferred tax liability of $70million at December 31, 2017, representing the additional tax that would be due to U.S. authorities if its un repatriated foreign earnings were to be repatri
> The following information pertains to Ramesh Company for 20X1: The company has one permanent difference and one temporary difference between book andtaxable income. Required: 1. Calculate the amount of temporary difference for 20X1 and indicate whether
> In early 2017, Quintana Corporation prepared the following forecast of its earnings for 2017and 2018: Quintana’s pre-tax income forecasts include $40 million of nontaxable income in 2017 and $30million of nontaxable income in 2018. Thes
> Current tax law limits the amount of interest expense that corporations may deduct to the sumof (a) taxable interest income and (b) 30% of taxable income (excluding taxable interestincome) before any deductions for interest, depreciation, amortization, o
> Bortles Corporation’s U.S. operations have been in “steady state” for several years, whereby itspre-tax income has been constant (at $400 million each year) and its originating temporarydifferences and reversing temporary differences exactly offset. At D
> Trevathan Corporation has only one source of temporary differences—warranties. At December 31,2016, 2017, and 2018, the amounts of cumulative temporary differences were as follows: Temporary differences related to warranties arise becau
> The disclosure rules for business combinations complicate financial analysis. Trend analysis becomes difficult because comparative financial statements are not retroactively adjusted to include data for the acquired company for periods prior to the acqui
> Devers Corporation began operations in 20X1 and had the following partial income statements, which are complete only down to pre-tax income. Devers had no book-tax differences except for the effects of its net operating loss carryforward. The corporate t
> Cishek Corporation sold $100 million of gift cards in 20X1. The gift cards may be used to purchase goods from Cishek in the future. The gift cards never expire, and Cishek expects that none of the gift cards will go unused. Cishek projects the gift cards
> Goff Corporation has only one temporary difference, which is related to the use of accelerateddepreciation for income tax purposes and straight-line depreciation for financial reporting. Goff had the following amounts of cumulative temporary difference a
> Boers Corporation and Bernstein, Inc. both project pre-tax income of $100 million in 20X1. Both also expect there to be no change in their cumulative temporary differences during the year. However, the two companies are in very different deferred tax pos
> Flower Company started doing business on January 1, 20X0. For the year ended December 31, 20X1, it reported $450,000 pre-tax book income on its income statement. Flower is subject toa 21% corporate tax rate for this year and the foreseeable future. Addit
> In 20X1, MB Inc. is subject to a 21% tax rate. For book purposes, it expenses $1,500,000 ofexpenditures. MB intends to deduct these expenditures on its 20X1 tax return despite tax lawprecedent that makes it less than 50% probable that the deduction will
> Moss Inc. follows GAAP for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. It reported $250,000 of pre-tax incomeunder GAAP, but it will report the corresponding taxable income in the foll
> On July 1, 20X1, Burgundy Studios leases camera equipment from Corning stone Corporation. Corning stone had to make significant changes to the equipment to meet Burgundy’s needs, andit would be significantly costly to modify the equipment for alternative
> On December 31, 20X1, Thomas Henley, financial vice president of Kingston Corporation, signed a no cancelable three-year lease for an excavator. The lease calls for annual payments of $41,635 per year due at the end of each of the next three years. The l
> Using the data in P13–6, prepare the journal entries required by Coleman Inc. on January 1, 20X1, assuming that (a) Trask does not guarantee the residual value and (b) Trask doesguarantee it. Coleman paid $325,000 to acquire the office equipment several
> The following information is based on a real company whose name has been disguised. Opus One operates in a single business segment, the retailing and servicing of home audio, car audio, and video equipment. Its operations are conducted in Texas through 2
> On January 1, 20X1, Trask Co.signs an agreement to lease office equipment from Coleman Inc. forthree years with payments of $193,357 beginning December 31, 20X1. The equipment’s fair value is$500,000 with an expected useful life of four years. At the end
> On January 1, 20X1, Bare Trees Company signed a three-year non cancelable lease with Dreams Inc. The lease calls for three payments of $62,258.09 to be made at each year-end. The leasepayments include $3,000 of executory costs related to service. The lea
> On January 1, 20X1, Bill Inc. leases manufacturing equipment from Beatrix Corporation. The lease covers seven years and requires annual lease payments of $51,000, beginning on January 1, 20X1. The unguaranteed residual value at the end of seven years is
> On January 1, 20X1, Seven Wonders Inc. signed a five-year non cancelable lease with Moss Company. The lease calls for five payments of $277,409.44 to be made at the end of each year. The leased asset has a fair value of $1,200,000 on January 1, 20X1. Sev
> Mason Company has a machine with a cost and fair value of $100,000. On January 1, 20X1, itleases the machine for a 10-year period to Drake Company. The machine has a 12-year expectedeconomic life. Payments are received at the beginning of each year. The
> On January 1, 20X1, Bonduris Company leases warehouse space in Oakland, CA. The lease isfor six years with payments to be made at the beginning of each year. The lease calls for Bonduris to pay $15,000 on January 1, 20X1. The lease calls for subsequent l
> On January 1, 20X1, Dwyer Company leases space for a donut shop. The lease is for five yearswith payments to be made at the beginning of each year. The lease calls for Dwyer to pay $10,000 on January 1, 20X1; $11,000 on January 1, 20X2; $12,500 on Januar
> On October 1, 20X1, Brady Consulting leases unmodified equipment from Damon Corporation. The lease covers four years and requires lease payments of $73,046, beginning on September 30, 20X2. The unguaranteed residual value is $200,000. On October 1, 20X1,
> On January 1, 20X1, Merchant Co. sold a tractor to Swanson Inc. and simultaneously leased itback for five years. The tractor’s fair value is $300,000, but its carrying value on Merchant’sbooks prior to the transaction was $200,000. The tractor has a seve
> On January 1, 20X1, Overseas Leasing Inc. (the lessor) purchased five used oil tankers from Seven Seas Shipping Company at a price of $99,817,750. Overseas immediately leased the oiltankers to Pacific Ocean Oil Company (the lessee) on the same date. The
> The income statement for the year ended December 31, 20X1, as well as the balance sheets asof December 31, 20X1, and December 31, 20X0, for Lucky Lady Inc. follow. This informationis taken from the financial statements of a real company whose name has be
> Assume that on January 1, 20X1, Trans Global Airlines leases two used Boeing 737s from Aircraft Lessors Inc. The eight-year lease calls for payments of $10,000,000 at each year-end. On January 1, 20X1, the Boeing 737s have a total fair value of $60,000,0
> Moore Company sells and leases its computers. Moore’s cost and sales price per machine are $1,200 and $3,000, respectively. At the end of three years, the expected residual value is $400,which is guaranteed by the lessee. Moore leases 20 of these machine
> Refer to the information in P13–10. Assume that at the commencement of the lease, collectability of the payments is not probable and the lessor uses the straight-line depreciation method. Required: 1. Prepare the necessary journal entries for Railcar fo
> On January 1, 20X1, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,749,520. Railcar leased the boxcars to the Reading Railroad Company (the lessee) on the same date. The lease is for eig
> Bunker Company negotiated a lease with Gilbreth Company that begins on January 1, 20X1. The lease term is three years, and the asset’s economic life is five years. The equipment wascustomized, and it would be of little use to the lessor at the end of the
> Clovis Company recently issued $500,000 (face value) bonds to finance a new constructionproject. The company’s chief accountant prepared the following bond amortization schedule: Required: 1. Compute the discount or premium on the sale
> You have the following information for Brophy, Inc. Required: 1. How much interest expense did the company record during Year 2 on the 7% debentures? How much of the original issue discount was amortized during Year 2? 2. How much interest expense did th
> The following information appeared in the 20X4 annual report of Rumours, Inc.: Rumours, Inc. issued $10 million, 10% coupon bonds on January 1, 20X1, due on December 31,20X5. The prevailing market interest rate on January 1, 20X1, was 12%, and the bonds
> In 20X5, Kahn Financial Group used the fair value option for some of its own debt. During thefirst quarter of 20X5, the fair value of its debt declined by $2.7 billion. Its reported net incomefor the quarter was $1.6 billion. Required: 1. Suppose Kahn F
> On January 1, 20X1, Tango-In-The-Night, Inc., issued $75 million of bonds with an 8% couponinterest rate. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on January 1, 20X1,
> Mattel, Inc., develops and manufacturers toys that it sells globally. Presented below are excerptsfrom its Form 10-K for the year ended December 31, 2018. NOTE 10—DERIVATIVE INSTRUMENTS Mattel seeks to mitigate its exposure to foreign c
> Avenet Inc., a U.S. company, is a global provider of electronic parts, enterprise computing and storage products, and supply chain and logistics services for the electronic components industry. The company’s 2009 annual report contained the following not
> On January 1, 20X1, Mason Manufacturing borrows $500,000 and uses the money to purchasecorporate bonds for investment purposes. Interest rates were quite volatile that year and sowere the fair values of Mason’s bond investment (an asset
> On January 1, 20X1, Newell Manufacturing purchased a new drill press that had a cash purchase price of $6,340. Newell decided instead to pay on an installment basis. The installmentcontract calls for four annual payments of $2,000 each beginning in one y
> On January 1, 20X1, Fleetwood Inc. issued bonds with a face amount of $25 million and astated interest rate of 8%. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on January
> On July 1, 20X1, Heflin Corporation (a fictional company) issued $20 million of 12%, 20-yearbonds. Interest on the bonds is paid semiannually on December 31 and June 30 of each year,and the bonds were issued at a market interest rate of 8%. Required: 1.
> On January 1, 20X0, Korman, Inc., issued $1.0 billion of 3% zero coupon subordinated debentures, which were issued at a price of $553.68 per $1,000 principal amount at maturity. Thebonds were priced to yield 3% per annum, computed on an annual basis. The
> On January 1, 20X1, Chain Corporation issued $5 million of 7% coupon bonds at par. The bondsmature in 20 years and pay interest semiannually on June 30 and December 31 of each year. On December 31, 20Y1, the market interest rate for bonds of similar risk
