"[McDonald's] franchises and operates McDonald's restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries - From McDonald's 2020 annual report. In this assignment, you will prepare the company's balance sheet and income statement for its fiscal year ended December 31, 2021. McDonald's: Use as a template the 2020 financial statements on pages 38 and 40 in the McDonald's annual report, included in the canvas module for class two. An electronic (excel) version of these statements will also be available in the same module as this assignment. Use these statements to determine beginning balances and to help with formatting. All necessary information about the 2021 transactions is included below. Do NOT attempt to use other sources of information (such as the statement of cash flows or footnotes) in completing the case. a. Show the effect of each of the following fiscal 2021 "transactions." You may show these in any format which you find helpful, though I recommend journal entries as the easiest and clearest. Where appropriate, provide a brief explanation of your treatment (this is not necessary, but may help with partial credit). All dollar amounts are in millions. 1. The company purchased $2,655 of food and paper products on account from its suppliers. 2. Company-operated stores made $8,372 in sales to customers, all for cash. The food and paper cost of these items (to McDonald's) was $2,637. 3. Note that McDonald's receives two types of revenue from franchisees, although both are recorded on the same line of the income statement. Initial franchise fees are paid to McDonald's in advance, and recorded as revenue over time. During 2021, McDonald's recognized $702 in revenue for franchise fees that were received by McDonald's in previous years. McDonald's was also paid $787 in initial franchise fees during 2021, but only earned S40 of these during 2021. 4. Franchisees also pay McDonalds for services provided. These are paid to McDonald's after McDonald's provides the services. During 2021, McDonald's earned $11,284 in franchise fees from their franchisees during the year (by providing services). Franchisees paid $11,023 for services (some of which were provided in 2020 and some of which were provided in 2021). 5. Other revenues for the year were $389, and other restaurant expenses were $303, both in cash. 6. The company paid $2,619 to its suppliers during the year for food and paper previously purchased on account. 7. The company paid cash of $780 for advertising during the year. All of these campaigns were run during the year. The company's advertising firm estimates that approximately $610 million of the spending was related to current period sales, $100 million to sales in the next fiscal year, and the remaining $70 million relates to general improvement in the brand name which will benefit the company for the foreseeable future. 8. 12. 13. 14. 16. The company paid cash for current year salaries to employees of $2,894. In addition, in fiscal year 2021, the company paid $100 for wages earned in 2020. 9. Occupancy costs, all paid in cash, were $2,149 for company-operated restaurants and $2,398 for franchised restaurants. 10. The company capitalized $8 of interest as part of a significant construction project during fiscal 2021. The interest was paid in cash. 11. A consulting firm issued a report stating that the "McDonald's" brand name is worth $44,700. This was $3,200 higher than last year's estimate. During 2021, the company arranged a syndicated bank line of credit facility of $275 million. This line allows the company access to short-term financing. Although the company has paid a small fee (included elsewhere) to keep the line active, no loan is outstanding as of December 31, 2021. The company purchased property and equipment, mostly land and building for new stores, for $2,935 in cash. An additional $321 cash was spent preparing the property and equipment for use. The company disposed of property for cash proceeds of $240. The property disposed of had originally cost McDonald's $980, and, at the time of disposal, had accumulated depreciation of S740 associated with it. 15. The company management signed a new labor agreement with its employees. The two-year agreement takes effect on January 1, 2022 and calls for total wage increases of $410 per year. During December, 2021, the company signed a licensing agreement which gave the company a five-year right to use certain trademarks and slogans starting in fiscal 2022. The company paid $250 for these rights upon signing. 17. During the year the company settled certain non-current liabilities by paying $373 in cash. On July 14, 2018, the Board of Directors announced a stock repurchase program, which was expected to be executed over the next five years. During fiscal 2021, the company spent $4,000 cash to repurchase company shares. Hint: repurchased shares of our own stock are NOT considered to be assets, but are recorded as Treasury stock, a contra-shareholders' equity account. 19. The company declared $3,966 of dividends, and paid $3,524 in dividends. 20. The company recognized income tax expense and recorded a deferred tax liability. The following journal entry summarizes this event: Income tax provision (+E, -SE) $1,824 Deferred income taxes (+L) $ 135 Income taxes (+L) $1,689 Note: Income Tax Provision is the company's tax expense and Income taxes represents the amount payable to the IRS - assume that of the 1,689, McDonalds expects to pay 1,527 during 2022, and the rest in 2023 or later. We will discuss the meaning of deferred income taxes in the spring elective course, but for now just treat it as an additional type of (non-current) taxes payable. 21. The company made a cash payment for income taxes payable amounting to $1,456. 18. 22. On December 31, 2021, the company paid $570 for a one-year casualty and property insurance policy that covers fiscal year 2022. 23. During fiscal 2021, McDonald's repaid (with cash) S2,500 of its long-term debt. McDonald's issued (i.e., borrowed) an additional S6,300 in long-term debt during the year. At the end of the year, McDonald's has $270 in long-term debt that is due during fiscal 2022 24. The company incurred interest of S1,429 on its debt, but paid only $1,388 in cash. 25. McDonald's employees took a physical count of inventory on December 31, 2021. The cost of inventory in the company's possession on that date was $60. (Note: Any difference between the physical inventory and book value of inventory should be treated as an adjustment to the Food and Paper expense) 26. The last payday for the company was December 25, 2021. Employees at company-operated locations had earned, but the company had not yet paid, $154 of additional wages through December 31, 2021. On December 31, 2020, the casualty and property insurance premium of $480 covering fiscal 2021) was paid. 28. Depreciation and amortization expenses (all included as part of SG&A) were $1,823 for the fiscal year. 29. The company tests its property and equipment for impairment whenever events or circumstances indicate. During the year, $234 in impairment charges were recorded as part of Other operating (income) expense, net. 30. The company had non-operating expense, net, of $30 during the year. These expenses were paid in cash. Note that as McDonald's is a very complex firm, and likely has significantly more than 30 transactions in a typical year, you should not be surprised to find that some accounts are not impacted at all by the above somewhat stylized transactions. 27. b. Prepare i) a balance sheet as of December 31, 2021 ii) an income statement for the fiscal year ended December 31, 2021 (up through the "Net Income" line - you don't need to worry about the earnings per share section) Whichever method you use for the transactions, be clear how the transactions flow into the financial statements. That is, I should be able to backtrack from your balance sheet and income statement to the transactions in parts a. I will deduct points, even for correct answers, if I cannot follow the process. An electronic copy of the starting financial statements will be available on canvas to use as a starting point. In general, I don't really care about format, but for this assignment, I suggest that you follow McDonald's 2020 financial statements in this regard. B McDonald's Consolidated Balance Sheet December 31, 2020 $3,449.1 2,110.3 51.1 632.7 6.243.2 ASSETS Current Assets Cash and equivalents Accounts and notes receivable Inventories, at cost, not in excess of market Prepaid expenses and other current assets Total current assets Other assets Investments in and advances to affiliates Goodwill Miscellaneous Total other assets Lease right-of-use assets Property and equipment Property and equipment, at cost Accumulated depreciation and amortization Net property and equipment Total assets 1.297.2 2.773.1 3,527.4 7.597.7 13,827.7 41,476.5 (16,518.3) 24,958.2 $52.626.8 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable Lease liability Income taxes Other taxes Accrued interest Accrued payroll and other liabilities Current maturities of long-term debt Total current liabilities Long-term debt Long-term lease liability Long-term income taxes Deferred revenues - initial franchise fees Other long-term liabilities Deferred income taxes Shareholders' equity Preferred stock, no par value Common stock. $0.01 par value Additional paid-in capital Retained earnings Accumulated other comprehensive income Common stock in treasury, at cost Total shareholders' equity Total liabilities and shareholders' equity $741.3 $701.5 741.1 2270 388.4 1,138.3 2.243.6 6,181.2 35,196.8 13.321.3 1.970.7 702.0 1,054.1 2.025.6 16.6 7.903.6 53,908.1 (2,586.8) (67,066.4) (7.824.9) $52.626.8 1 McDonald's Consolidated Statement of Income 2 3 Year Ended December 31, 2020 4 REVENUES 5 Sales by Company-operated restaurants $8,139.2 6 Revenues from franchised restaurants $10,726.1 7 Other revenues 342.5 8 Total revenues 19,207.8 9 OPERATING COSTS AND EXPENSES 10 Company-operated restaurant expenses 11 Food & paper 2,564.2 12 Payroll and employee benefits 2,416.4 13 Occupancy & other operating expenses 2,000.6 14 Franchised restraurants-occupancy expenses 2,207.5 15 Other restaurant expenses 267.0 16 Selling, general & administrative expenses 17 Depreciation and amortization 300.6 18 Other 2,245.0 19 Other operating (income) expense, net (117.5) 20 Total operating costs and expenses 11,883.8 21 Operating income 7,324.0 22 Interest expense-net of capitalized interest of $6.0 1,218.1 23 Nonoperating (income) expense, net (34.8) 24 Income before provision for income taxes 6,140.7 25 Provision for income taxes 1,410.2 26 Net income $4,730.5 "[McDonald's] franchises and operates McDonald's restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries - From McDonald's 2020 annual report. In this assignment, you will prepare the company's balance sheet and income statement for its fiscal year ended December 31, 2021. McDonald's: Use as a template the 2020 financial statements on pages 38 and 40 in the McDonald's annual report, included in the canvas module for class two. An electronic (excel) version of these statements will also be available in the same module as this assignment. Use these statements to determine beginning balances and to help with formatting. All necessary information about the 2021 transactions is included below. Do NOT attempt to use other sources of information (such as the statement of cash flows or footnotes) in completing the case. a. Show the effect of each of the following fiscal 2021 "transactions." You may show these in any format which you find helpful, though I recommend journal entries as the easiest and clearest. Where appropriate, provide a brief explanation of your treatment (this is not necessary, but may help with partial credit). All dollar amounts are in millions. 1. The company purchased $2,655 of food and paper products on account from its suppliers. 2. Company-operated stores made $8,372 in sales to customers, all for cash. The food and paper cost of these items (to McDonald's) was $2,637. 3. Note that McDonald's receives two types of revenue from franchisees, although both are recorded on the same line of the income statement. Initial franchise fees are paid to McDonald's in advance, and recorded as revenue over time. During 2021, McDonald's recognized $702 in revenue for franchise fees that were received by McDonald's in previous years. McDonald's was also paid $787 in initial franchise fees during 2021, but only earned S40 of these during 2021. 4. Franchisees also pay McDonalds for services provided. These are paid to McDonald's after McDonald's provides the services. During 2021, McDonald's earned $11,284 in franchise fees from their franchisees during the year (by providing services). Franchisees paid $11,023 for services (some of which were provided in 2020 and some of which were provided in 2021). 5. Other revenues for the year were $389, and other restaurant expenses were $303, both in cash. 6. The company paid $2,619 to its suppliers during the year for food and paper previously purchased on account. 7. The company paid cash of $780 for advertising during the year. All of these campaigns were run during the year. The company's advertising firm estimates that approximately $610 million of the spending was related to current period sales, $100 million to sales in the next fiscal year, and the remaining $70 million relates to general improvement in the brand name which will benefit the company for the foreseeable future. 8. 12. 13. 14. 16. The company paid cash for current year salaries to employees of $2,894. In addition, in fiscal year 2021, the company paid $100 for wages earned in 2020. 9. Occupancy costs, all paid in cash, were $2,149 for company-operated restaurants and $2,398 for franchised restaurants. 10. The company capitalized $8 of interest as part of a significant construction project during fiscal 2021. The interest was paid in cash. 11. A consulting firm issued a report stating that the "McDonald's" brand name is worth $44,700. This was $3,200 higher than last year's estimate. During 2021, the company arranged a syndicated bank line of credit facility of $275 million. This line allows the company access to short-term financing. Although the company has paid a small fee (included elsewhere) to keep the line active, no loan is outstanding as of December 31, 2021. The company purchased property and equipment, mostly land and building for new stores, for $2,935 in cash. An additional $321 cash was spent preparing the property and equipment for use. The company disposed of property for cash proceeds of $240. The property disposed of had originally cost McDonald's $980, and, at the time of disposal, had accumulated depreciation of S740 associated with it. 15. The company management signed a new labor agreement with its employees. The two-year agreement takes effect on January 1, 2022 and calls for total wage increases of $410 per year. During December, 2021, the company signed a licensing agreement which gave the company a five-year right to use certain trademarks and slogans starting in fiscal 2022. The company paid $250 for these rights upon signing. 17. During the year the company settled certain non-current liabilities by paying $373 in cash. On July 14, 2018, the Board of Directors announced a stock repurchase program, which was expected to be executed over the next five years. During fiscal 2021, the company spent $4,000 cash to repurchase company shares. Hint: repurchased shares of our own stock are NOT considered to be assets, but are recorded as Treasury stock, a contra-shareholders' equity account. 19. The company declared $3,966 of dividends, and paid $3,524 in dividends. 20. The company recognized income tax expense and recorded a deferred tax liability. The following journal entry summarizes this event: Income tax provision (+E, -SE) $1,824 Deferred income taxes (+L) $ 135 Income taxes (+L) $1,689 Note: Income Tax Provision is the company's tax expense and Income taxes represents the amount payable to the IRS - assume that of the 1,689, McDonalds expects to pay 1,527 during 2022, and the rest in 2023 or later. We will discuss the meaning of deferred income taxes in the spring elective course, but for now just treat it as an additional type of (non-current) taxes payable. 21. The company made a cash payment for income taxes payable amounting to $1,456. 18. 22. On December 31, 2021, the company paid $570 for a one-year casualty and property insurance policy that covers fiscal year 2022. 23. During fiscal 2021, McDonald's repaid (with cash) S2,500 of its long-term debt. McDonald's issued (i.e., borrowed) an additional S6,300 in long-term debt during the year. At the end of the year, McDonald's has $270 in long-term debt that is due during fiscal 2022 24. The company incurred interest of S1,429 on its debt, but paid only $1,388 in cash. 25. McDonald's employees took a physical count of inventory on December 31, 2021. The cost of inventory in the company's possession on that date was $60. (Note: Any difference between the physical inventory and book value of inventory should be treated as an adjustment to the Food and Paper expense) 26. The last payday for the company was December 25, 2021. Employees at company-operated locations had earned, but the company had not yet paid, $154 of additional wages through December 31, 2021. On December 31, 2020, the casualty and property insurance premium of $480 covering fiscal 2021) was paid. 28. Depreciation and amortization expenses (all included as part of SG&A) were $1,823 for the fiscal year. 29. The company tests its property and equipment for impairment whenever events or circumstances indicate. During the year, $234 in impairment charges were recorded as part of Other operating (income) expense, net. 30. The company had non-operating expense, net, of $30 during the year. These expenses were paid in cash. Note that as McDonald's is a very complex firm, and likely has significantly more than 30 transactions in a typical year, you should not be surprised to find that some accounts are not impacted at all by the above somewhat stylized transactions. 27. b. Prepare i) a balance sheet as of December 31, 2021 ii) an income statement for the fiscal year ended December 31, 2021 (up through the "Net Income" line - you don't need to worry about the earnings per share section) Whichever method you use for the transactions, be clear how the transactions flow into the financial statements. That is, I should be able to backtrack from your balance sheet and income statement to the transactions in parts a. I will deduct points, even for correct answers, if I cannot follow the process. An electronic copy of the starting financial statements will be available on canvas to use as a starting point. In general, I don't really care about format, but for this assignment, I suggest that you follow McDonald's 2020 financial statements in this regard. B McDonald's Consolidated Balance Sheet December 31, 2020 $3,449.1 2,110.3 51.1 632.7 6.243.2 ASSETS Current Assets Cash and equivalents Accounts and notes receivable Inventories, at cost, not in excess of market Prepaid expenses and other current assets Total current assets Other assets Investments in and advances to affiliates Goodwill Miscellaneous Total other assets Lease right-of-use assets Property and equipment Property and equipment, at cost Accumulated depreciation and amortization Net property and equipment Total assets 1.297.2 2.773.1 3,527.4 7.597.7 13,827.7 41,476.5 (16,518.3) 24,958.2 $52.626.8 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable Lease liability Income taxes Other taxes Accrued interest Accrued payroll and other liabilities Current maturities of long-term debt Total current liabilities Long-term debt Long-term lease liability Long-term income taxes Deferred revenues - initial franchise fees Other long-term liabilities Deferred income taxes Shareholders' equity Preferred stock, no par value Common stock. $0.01 par value Additional paid-in capital Retained earnings Accumulated other comprehensive income Common stock in treasury, at cost Total shareholders' equity Total liabilities and shareholders' equity $741.3 $701.5 741.1 2270 388.4 1,138.3 2.243.6 6,181.2 35,196.8 13.321.3 1.970.7 702.0 1,054.1 2.025.6 16.6 7.903.6 53,908.1 (2,586.8) (67,066.4) (7.824.9) $52.626.8 1 McDonald's Consolidated Statement of Income 2 3 Year Ended December 31, 2020 4 REVENUES 5 Sales by Company-operated restaurants $8,139.2 6 Revenues from franchised restaurants $10,726.1 7 Other revenues 342.5 8 Total revenues 19,207.8 9 OPERATING COSTS AND EXPENSES 10 Company-operated restaurant expenses 11 Food & paper 2,564.2 12 Payroll and employee benefits 2,416.4 13 Occupancy & other operating expenses 2,000.6 14 Franchised restraurants-occupancy expenses 2,207.5 15 Other restaurant expenses 267.0 16 Selling, general & administrative expenses 17 Depreciation and amortization 300.6 18 Other 2,245.0 19 Other operating (income) expense, net (117.5) 20 Total operating costs and expenses 11,883.8 21 Operating income 7,324.0 22 Interest expense-net of capitalized interest of $6.0 1,218.1 23 Nonoperating (income) expense, net (34.8) 24 Income before provision for income taxes 6,140.7 25 Provision for income taxes 1,410.2 26 Net income $4,730.5