McDonald’s Corp. (MCD)

Financial Reporting Quality: Aggregate Accruals

Difficulty: Advanced

Earnings can be decomposed into cash and accrual components. The accrual component (aggregate accruals) has been found to have less persistence than the cash component, and therefore (1) earnings with higher accrual component are less persistent than earnings with smaller accrual component, all else equal; and (2) the cash component of earnings should receive a higher weighting evaluating company performance.

Balance-Sheet-Based Accruals Ratio
Cash-Flow-Statement-Based Accruals Ratio

Balance-Sheet-Based Accruals Ratio

McDonald’s Corp., balance sheet computation of aggregate accruals

USD $ in thousands

		Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013
	Operating Assets
	Total assets
	Less: Cash and equivalents
	Operating assets
	Operating Liabilities
	Total liabilities
	Less: Current maturities of long-term debt
	Less: Long-term debt, excluding current maturities
	Operating liabilities

	Net operating assets¹
	Balance-sheet-based aggregate accruals²
	Ratio
	Balance-sheet-based accruals ratio³
	Benchmarks
	Balance-Sheet-Based Accruals Ratio, Competitors
	Booking Holdings Inc.
	Delta Air Lines Inc.
	Marriott International Inc.
	Starbucks Corp.
	Balance-Sheet-Based Accruals Ratio, Sector
	Travel & Leisure
	Balance-Sheet-Based Accruals Ratio, Industry
	Consumer Services

Based on: 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-24).

2017 Calculations

¹ Net operating assets = Operating assets – Operating liabilities
= hidden – hidden = hidden

² Balance-sheet-based aggregate accruals = Net operating assets ₂₀₁₇ – Net operating assets ₂₀₁₆
= hidden – hidden = hidden

³ Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × hidden ÷ [( hidden + hidden ) ÷ 2] = hidden

Ratio	Description	The company
Balance-sheet-based accruals ratio	Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets.	Using the balance-sheet-based accruals ratio, McDonald’s Corp. deteriorated earnings quality from 2016 to 2017.

Cash-Flow-Statement-Based Accruals Ratio

McDonald’s Corp., cash flow statement computation of aggregate accruals

USD $ in thousands

		Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013
	Net income
	Less: Cash provided by operations
	Less: Cash (used for) provided by investing activities
	Cash-flow-statement-based aggregate accruals
	Ratio
	Cash-flow-statement-based accruals ratio¹
	Benchmarks
	Cash-Flow-Statement-Based Accruals Ratio, Competitors
	Booking Holdings Inc.
	Delta Air Lines Inc.
	Marriott International Inc.
	Starbucks Corp.
	Cash-Flow-Statement-Based Accruals Ratio, Sector
	Travel & Leisure
	Cash-Flow-Statement-Based Accruals Ratio, Industry
	Consumer Services

Based on: 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-24).

2017 Calculations

¹ Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × hidden ÷ [( hidden + hidden ) ÷ 2] = hidden

Ratio	Description	The company
Cash-flow-statement-based accruals ratio	Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets.	Using the cash-flow-statement-based accruals ratio, McDonald’s Corp. deteriorated earnings quality from 2016 to 2017.

	McDonald’s Corp.	Other companies (not purchased previously)
Financial Statements
Common-Size Financial Statements
Ratios
Relative Valuation
Discounted Cash Flow (DCF) Valuation
Economic Value Added (EVA)
Long-term Trends
Analysis
Financial Reporting Quality

	All companies
Financial Statements
Common-Size Financial Statements
Ratios
Relative Valuation
Discounted Cash Flow (DCF) Valuation
Economic Value Added (EVA)
Long-term Trends
Analysis
Financial Reporting Quality