Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 12

Calculate ROI for geographic segments; analyze results—McDonald’s Corp McDonald’s conducts operations worldwide and is managed in three primary geographic segments: America, Europe, and Asia/Pacific, Middle East and Africa (APMEA). A hybrid geographic/corporate segment (“Other Countries and Corpo­rate”) reports on the results of Canada and Latin America as well as any unallocated amounts. McDonald’s allocates resources to and evaluates the performance of its segments based on operating income. The asset totals disclosed by geography are directly managed by those regions and include accounts receivable, inventory, cer­tain fixed assets, and certain other assets. Corporate assets primarily include cash and cash equivalents, investments, deferred tax assets, and other assets. Refer to the following geographic segment data (in millions) from the 2008 annual report of McDonald’s Corp.:

			U.S.	Europe	APMEA	Other Countries&Corporate	Total Company
Net revenues	2008	$	8,078	$ 9,923	$ 4,231	$ 1,290	$ 23,522
	2007		7,906	8,926	3,599	2,356	22,787
	2006		7,464	7,638	3,053	2,740	20,895
Segment operating income	2008	$	3,060	$ 2,608	$ 818	$ (43)	$ 6,443
	2007		2,842	2,125	616	(1,704)	3,879
	2006		2,657	1,610	364	(198)	4,433
Depreciation and amortization expense	2008	$	401	$ 506	$ 193	$ 107	$ 1,207
	2007		403	473	178	113	1,214*
	2006		391	436	172	110	1,250*
Assets	2008	$	10,357	$ 10,533	$ 4,075	$ 3,497	$ 28,462
	2007		10,032	11,380	4,145	3,834	29,391
	2006		9,477	10,414	3,728	3,529	28,974**

*Depreciation and amortization expenses associated with “Businesses held for sale” and “Discontinued operations” were not allocated to the business seg­ments in 2007 and 2006; these amounts, which totaled $47 million in 2007 and $141 million in 2006, are included in the “Total Company” column only.

**Assets associated with “Businesses held for sale” and “Discontinued operations” were not allocated to the business segments in 2006; this amount, which totaled $1,826, is included in the “Total Company” column only.

Required:

a. Based on a cursory review of the data, can you identify any significant trends in the consolidated totals? Are there any notable trends in the data for specific business segments?

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b. Using the DuPont model to show margin and turnover, calculate ROI for each of the three primary geographic segments for 2008. Round your percentage answers to one decimal place.

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c. Looking only at the data presented here, which business segment appears to offer McDonald’s Corp. the greatest potential for high returns in the future?

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d. Comment about the difficulties you may encounter when attempting to interpret the “Other Countries&Corporate” segment results.

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e. Can you think of any ways in which McDonald’s could improve upon their clas­sification of geographic segment data?

Step 1 of 5

a)

Finding the major trends in consolidated sums:

Net revenues rose significantly each year in each of the three major segments plus for the firm in total representing that McD remains in a stable growth stage. The amount of segment operating income increased significantly every year for all the three major segments. This growth operating income pattern was more pronounced in APMEA and Europe than in the U.S. because the U.S. is expected to be a greatly saturated market for McD.

Depreciation and amortization expense is relatively stable from period to period, although it is usually increasing, mostly in Europe.

Assets augmented in 2007 than to 2006 within all three major segments, although then diminished in 2008 than to 2007 apart from the U.S. segment. The reductions in asset amount in 2008 were outstanding, comparatively to the downsizing attempts that the firm had undergone in 2007 and 2006.

Notable trends in particular business segments:

Net revenues plus segment operating income enlarged rather consistently every year in all key geographic segments. However, net revenue as well as operating income growth pattern differed segment to segment. The expansion patterns within APMEA and Europe are substantially more insistent than the respective movements shown in the data of U.S. segment. These are indications of a financially steady and growing firm.