Revenue Recognition for Mcdonald’s Corporation Essay Example

property income that it leases or subleases to franchisees. In addition, Burger King’s Annual Report states, “Royalties paid by franchisees are based on a percentage of franchise restaurant sales and are recorded as franchise revenues” (bk. com).

The sales percentage for Burger King is 4. 5% per month (franchiseadvantage. com). Because Burger King states it has more franchises than company owned restaurants in comparison to its major competitors, most f its revenues come from the franchises. (bk.com) It also does not state uncollectible accounts which would be from franchises. Therefore, it is difficult to determine the company’s stability.

Discussion For Relevance Of Accounting Policies

McDonald’s primary revenue source is cash. Due to small transaction amounts between customers and the corporation, credit sales are very uncommon.

Because credit sales are low, McDonalds has no future uncollectible accounts to estimate. McDonalds requires minimal financial assets because it is a cash business. Therefore, McDonalds uses the cash basis to record revenues.Investors and creditors have concerns about receiving an adequate return on their investments given their degree of risk. Using the cash basis of accounting, McDonald’s provides accurate and reliable revenue figures that assist its investors in making educated guesses regarding the company’s future financial state.

The after tax sales revenue, reported by McDonalds, helps its investors assess past performance (sales), predict future performance (based on historical trends), confirm or correct expectations, and provide feedback on earlier expectations. Investors can estimate future revenues based on historical after tax sales revenue. The risk of uncollectible accounts is extremely low due because McDonalds does not have to use any estimation. The cash basis method allows investors to maintain easy comparability with past years’ performance. McDonalds’ recognition

of continuing fees and royalties in the period they are earned provides investors with useful information to analyze the amount of cash generated from the ongoing operations of its franchises.

In regards to the four percent monthly sales percentage that franchises pay corporate McDonalds, investors can analyze the success of its franchises.

Conformity With Accounting Concepts

According to Generally Accepted Accounting Principles (GAAP), an item should meet four criteria to gain recognition as an asset, liability, expense, or in our case, revenue. The item should meet the definition of the financial element and should be measurable, relevant, and reliable. Revenues are inflows of assets of an entity or settlements of its liabilities during the appropriate earning period. The element must also be measurable with sufficient reliability and have relevance in user decisions.

Once the item meets this criteria and the company determines that the item should be recognized, the company must determine when to recognize it. The recognition of revenue depends on two factors: being realized or realizable and being earned. Revenues are realized when a company exchanges assets for cash or claims to cash. Revenues are realizable when assets received can be readily convertible to known amounts of cash or claims to cash.

Companies view revenues as earned when the entity has met all of its obligations to the corresponding benefits.Both McDonald’s and Burger King conform with GAAP in recognizing revenues. McDonald’s and Burger King both record product sales through their company-owned stores on a cash basis. However, they record their services and sales to franchisees on an accrual basis.

Although cash basis accounting fails to meet GAAP requirements, McDonald’s’ primary method is on an accrual basis. McDonald’s and Burger

King both recognize continuing fees and royalties. Burger King recognizes royalties on a percentage of franchise restaurant sales and records them as franchise revenues.They both realize the revenues in the period in which they are earned, in compliance with GAAP principles. Also, both entities record revenue from initial franchise fees to compliance with GAAP principles.

Conclusion

In conclusion, both McDonald’s Corporation and Burger King utilize the cash basis method when recognizing its revenues.

This policy simplifies revenue recognition in the fast food industry.