Revenue Recognition for Mcdonald's Corporation

b. Describe what it means for a business to "recognize" revenues. What specific accounts and financial statements are

McDonald's has successfully created a brand/name for itself as the leading fast food retailer in the world. It is somewhat of impossibility for one to not come across a McDonald's with over 30,000 local restaurants in over 100 countries (McDonald's, 2011). Those restaurants are owned either by a franchise owner or a corporation; a percentage of all the earnings from a franchise owner, including a percentage from their annual revenue go to McDonald's.

2. On the basis of the response to Question 1, discuss the revenue recognition accounting literature

Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. That paragraph states that revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash.

Almost sixty-four percent of its stock holders held are institutions. Places such as, Bank of America, Northern Trust Corp, Wellington Management Co and many others that are interested in this company’s growth. Since opening in the middle of 1960’s, McDonald’s any one can recognize its trademark golden arches. We as Americans cannot turn a street corner without seeing a different McDonalds down the road. They are located everywhere, but that just means more profit for the company and its stockholders. The company owns and leases out real estate primarily in connection with its restaurant business. It generally owns the land and buildings or secures out long-term leases for the restaurant sites.

The key difference of revenues and expenses recognition is obvious. According to IFRS, the income statement records the increasing of future economic benefit as revenues, such as sales, interests, dividends, and rents, and the recognition of revenues and expenses are combined directly in the same transaction (Matching principle). But ASPE standards state that the income statement only records the existing or realizing performance as revenues. Same situation in the expenses, in IFRS’s income statement, they are recognized by a decrease in the asset or an increase in the liability for future position. In addition, under ASPE, we do not recognize an expense as a provision unless the benefit does qualifies as an asset (CICA, 2011, Section 1000).

Based on these guidelines, revenue should not be recognized until it is realized or realizable and

According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.

Under GAAP, it is possible to use cash-basis or accrual basis accounting for revenue recognition. Under cash basis, revenue is recognized with payment is received. Under accrual basis, revenue is recognized when it becomes economically significant. GAAP has specific requirements for various industries on when an event qualifies to be recognized as revenue.

b. Describe what it means for a business to "recognize" revenues. What specific accounts and financial statements are

McDonalds Company functions in a global restaurant industry, where it franchises and operates restaurants. The revenue of the company consist of fees from franchised restaurants and also from the sales generated from the company operated restaurants. Management of the company examines results on constant currency basis which excludes the effect of the foreign currency and considers average exchange rate of the prior year to calculate. Company do not record any transaction related to the sale or purchase of the franchisees business in the consolidated financial statements. The company operates on diversified geographic segment and equity method where investment 50% or less i.e. Australia, China and Japan. Company regularly checks the fair

Timing of revenue recognition is a crucial part in revenue recognition. According to US GAAP, revenue should be recognized when it is realized/realizable and earned (FASB, 1984, Para. 83).

The revenue recognition principle is a foundation of accrual accounting and one of the main principles of GAAP. The revenue recognition principle is a set of guidelines that helps accountants to identify when a revenue event has taken place and how to appropriately record cash exchanges before, during, and after the revenue event. According to the revenue recognition principal, revenue must (1) be realized or realizable and (2) earned, in order to be recognized. According to the SEC revenue is realized when (1) Persuasive evidence of an arrangement exists, (2) Delivery has occurred or services have been rendered, (3) The seller’s price to the buyer is fixed or determinable, and (4) Collectability is reasonably assured. It is essential

Throughout its restaurants across the globe, McDonald's Corporation consists of various operations that are associated with the overall strategy of the company. Some of

Free Cash Flow- McDonald’s FCF increased from 2007’s $1.16 billion to almost $2 billion, which is a huge increase indicating the company has enough to cash flow from operations to purchase property, plant, and equipment and pay dividends to shareholders.