Financial Statements and Ethics Mcdonald's

Financial Statements and Ethics McDonald's Corporation remains one of the largest operators and franchisers of fast food restaurants in the world. Over the last two tears, the corporation's profitability has been on a steady increase. In this text, I analyze McDonald's Corporation's financial statements in an attempt to determine the nature of the company's performance over the last two years.

McDonald's: Financial Statement Analysis Profitability Analysis In seeking to analyze the firm's performance in terms of profitability over the last two years, it would be prudent to utilize a number of profitability ratios including return on equity, net profit margin, and return on assets.

Profitability ratios in the words of Brigham and Houston (2009) "reflect the net result of all of the financing policies and operating decisions." In basic terms, ROE is an important measure of how much profit shareholders earn for each dollar they have invested in the stock of a given company. In that regard, a high return on equity is always preferable. Looking at McDonald's Corporation's ROE (see table 1); it is clear that the company was able to generate more returns on stockholders equity in 2011 than 2010.

Thus when it comes to profit generation, the increasing ROE is in this case an indicator of McDonald's Corporation's improved ability to generate profits with the funds supplied by investors. It is however important to note that although the company registered an increase in its ROE in the period under consideration, its net profit margin dropped slightly (see table 1). This is an indicator that the profit McDonald's rakes in for each dollar it generates in sales decreased marginally within the period under consideration.

This ratio according to Brigham and Houston (2009) "measures net income per dollar of sales…" Yet another important ratio in this case is return on assets. This ratio in the words of Baker and Powell (2009) "measures the net income generated from each dollar invested in total assets." In that regard, the higher ROA ratio in 2011 than in 2010 (see table 1) is an indicator that in 2011, McDonald's Corporation's assets were used more effectively in profit generation than in 2010.

Liquidity Analysis When it comes to the analysis of McDonald's Corporation's ability to settle its obligations if and when they fall due, I will utilize two key liquidity ratios including quick ratio, and current ratio. To begin with, the current ratio according to Mowen, Hansen, and Heitger (2011) comes in handy in the measure or analysis of a firm's ability to utilize its short-term assets to pay or settle its short-term liabilities.

It is however important to note that in some instances, the inventory figure could be inclusive of items that cannot be quickly liquidated. For this reason, some analysts deem it fit to utilize the acid test ratio as opposed to or in place of the current ratio. The former deducts the inventory figure from the current assets value. In the years under consideration, both the current ratio and the quick ratio of McDonald's decreased (see table 1).

In that regard, the company's ability to settle its debts in the short run seems to have been impaired within the period under consideration. It is however important to note that with a current ratio and quick ratio of more than 1, McDonald's can still comfortably settle its short-term debts or obligations were they to suddenly become due.

Asset Utilization Analysis In seeking to analyze how effective McDonald's is in the utilization of its assets, I will take into consideration two main ratios including accounts receivable turnover ratio and the inventory turnover ratio. The accounts receivable ratio according to Baker and Powell (2009) "measures how many times a firm's accounts receivable are generated and collected during the year." As the authors further point out, a high receivables turnover ratio should be seen as an indicator of efficient management of accounts receivables.

During the period under consideration, McDonald's accounts receivables turnover ratio fell from 20.42 to 20.23. The change in this case is largely negligible. For this ratio to be useful, it should be compared to the industry average. The inventory turnover ratio on the other hand is an indicator of the number of times an entity sells and replaces inventory over a specified period. Therefore, as Baker and Powell (2009) point out, a high ratio in this case would be a sign that a firm's inventory.