Yum! Brands Financial Statement Analysis

Franchise and Operating Segments

Discuss about the Fair value measurement in financial reporte.

According to the note 1 of the financial statement, the yum! has over more than 43500 units out which the franchise are located out of U.S. The spread of the yum brands that is in more than 135 countries. The term as “Franchise” and “Franchisee” are used frequently used in the financial statements that refers to the third parties involved in the business. The third parties either takes part in the unit operations are they have entered into some legal agreement with the company (Khan, 2014). The information that is obtained from the note 1 of the financial statement is about the services that the traditional restaurants of the company provides, which include fine dining, variety of menu and home deliver facilities (Madawaki, 2012). They also distribute the food products at points like the subway, stadiums, colleges and Amusemenent Parks.

Yum! as on December 2016, had the following operating segments that are:

• The division of KFC includes operations which are worldwide following the KFC concept
• The division of Pizza hut includes operations widely used following the Pizza Hut concept.
• The division of taco bell operates worldwide following Taco bell concept.

The Indian division of this popular brand was segmented in January 2016. The brands were no longer operating segments. They became divisions. Although there were very little or impact on the consolidated financial statements (Weygandt, Kimmel & Kieso, 2015). The involvement of the Indian division into the brand segment there had been an increase in the revenue. The KFC, Pizza Hut and the Taco belt experienced an increase by $105 million, $8 million and $3 million, respectively. This is a great benefit as the brand had witnessed earlier a decrease in the operating profit in the previous year 2015 by around $16 million for KFC and around $3 million for Taco and also an increase for Pizza hut by $1 million.

The management of Yum Inc converted the Chine spin off into an independent publicly traded company on October 2016 which was named Yum China Holdings. On the date if distribution the shareholding were distributed as tax free distribution to the china holding for the income tax purposes in the USA (Financial Reports – Yum! Brands, 2018). The stock of Yum China trades on the New York Stock Exchange (“NYSE”). The company Yum Inc does not own any shares beneficially of Yum china. Just after the separation of Yum Inc and Yum China, a subsidiary company approached Yum china for Master license agreement which allowed the former to use the intellectual properties of Yum china and also gives the subsidiary company license to operate and develop KFC, Pizza Hut and Taco Bell business in China.(Financial Reports – Yum! Brands, 2018). Before the companies were separated, the operations which took place in mainland China were reported in the former Yum’s China Division. Due to the separation of Yum Inc and Yum china the assets which were invested and the liabilities which were incurred along with the results of operations are shown as Discontinued Operations in the financial statements. The consolidated balance sheet and statement of profit and loss along with cash flow statements depict the same which is shown in details in the note 4.

Yum! India Division and Revenue Increase

The note 2 of the financial statement deals with the various significant accounting policies used to make the accounts summary. According to the given notes, the company of YUM! States that all the accounting in the books are done according to the generally accepted accounting principles (GAAP) that requires a number of estimates and assumptions. The estimates have a great impact in the assessment of the assets and liabilities and disclosure of the contingent at the date of occurrence (Financial Reports – Yum! Brands, 2018). However, the estimate may differ with the actual results.

As shown in the consolidated financial statements, the transaction between companies have been eliminated. The entity controls the voting interest of the ownership. The YUM! Considers that not all the controls of the financial statements may involve any voting interest. This concept is known as the variable interest entity (VIE). The consolidation of VIE is done by its own primary beneficiary. The primary beneficiary refers to those entities that possesses the power to direct the activities of the VIE that most significantly affect its economic performance and has the obligation to absorb losses.

In most cases significant variable interests are often in entities which are operating restaurants under the franchise and license arrangements. There is no equity interest in any of the franchisee business and no financial support is to be provided to them. At the end of 2016, YUM has future lease payments due from franchisees, on a nominal basis, of approximately $250 million, and the company is liable for the payments. the power to direct the activities that most significantly impact their economic performances that the company consider ourselves the primary beneficiary of any such entity that might otherwise be considered a VIE (Financial Reports – Yum! Brands, 2018). The yum also participate in the advertising cooperation’s to collect and administer the funds. The funds help in various promotional and advertising programs to maximize the sales. The cooperatives are VIEs whom the YUM provides financial support. The report of the assets and liabilities of the cooperatives is consolidated as advertising cooperative assets in the financial statements and there is no reflect of the advertisement liabilities in the consolidated balance sheet.

The next segment deals with the fiscal year; the fiscal year that has ended on the last Saturday of 2017 has been divided into quarters. The U.S subsidiary follows this kind of calendar whereas the remaining international subsidiary follows the regular monthly calendar. In 2016, the fiscal year of YUM consisted of 53 weeks. This added $76 million to the total revenues and $27 million to the operating profit. However, on January of 2017, the board of directors agreed on renewing policies relating to fiscal year. From the last Saturday of the year to the beginning of the January of the following year, that is from 52-week period fiscal year to quarterly based fiscal year. The change in the fiscal year was primarily made  to combat the lag in reporting in the various subsidiary calendars. This process will help in improving the alignment of the global calendars and help in maintain a sound consistency with the U.S fiscal year.

Separation of Yum! Inc and Yum China Holdings

The note 2 then describes the foreign currency policies. The foreign currency is the primary economic development of the entity. The determination of the functional currency is based on the economic factors, which does only limit up to cash flows and financial transactions but also includes the external assets and liabilities of the firm. The majority of the foreign currency net assets are in the countries where YUM operates. The profits and losses which arise from the impact of foreign currency have been included in other expenses section of the consolidates income statements.

The consolidated financial sections have changed the classification of items in the end of the fiscal year although the reclassifications have no effect in the net income. Then comes the financial operations, which refers to the small store level agreements by the third parties. The internal costs associated with the operations are charged in the general and administrative expenses. The YUM recognizes the revenue at the time of sales. The revenue includes the net sales, sales related taxes and various other incomes related to it.

The direct marketing cost of YUM includes the expenses based on percentage of sales. Deferred direct marketing costs which includes expenses which are prepaid nature, costs relating to advertisement and promotions which will be generated from the next fiscal year as per the plan of the management (Kotler, 2015). The advertising expenses of the company as the financial statements were $260 million, $255 million and $261 million in 2016, 2015 and 2014, respectively.

Research and development expenses, which are incurred, are shown as G&A expenses. Research and development expenses of $24 million, $24 million and $25 million were incurred in 2016, 2015 and 2014, respectively (Barge-Gil & López, 2014). share-based payments to personnel consists of stock option plans and stock appreciation rights (“SARs”), in the Financial Statements as cost of compensation is based on their fair value on the date of grant. This cost is recognized on straight-line basis over the service life of the cost.

Settlement costs are recognized only if there is a chance that they are probable and estimable. Anticipated legal fees which relates to self-insured workers’ compensation, liability relating to general issues and other similar liabilities which are deemed to be estimable.

Property, plant and equipment (“PP&E”) is tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The assets are not recoverable if their carrying value is less than the undiscounted cash flows the companies expect to generate from such assets (Capalbo, 2013). If the assets are not deemed recoverable, impairment is measured based on the excess of their carrying value over their fair value. Fair value is the price we would receive to sell an asset or pay to transfer a liability as per the principles. Assets and liabilities are recorded at fair value which is estimated with the help of quoted market price if available at all. If a quoted market price is not available for identical assets then the fair value is determined based upon the quoted market price of similar assets or the present value of expected future cash flows.

Significant Accounting Policies and Variable Interest Entity

The Cash equivalents represent funds that have been temporarily invested, including short-term, liquid debt securities. Cash and overdraft balances that meet the criteria for right of set off are presented net on our Consolidated Balance Sheet (Gertler, Martinez & Rubio-Codina, 2012).

The Company’s receivables are primarily generated from ongoing business relationships with our franchisees because of franchise and lease agreements (Nijmeijer, Fabbricotti & Huijsman, 2014). Trade receivables consisting of royalties from franchisees, including Yum China, are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts and notes receivable on our Consolidated Balance Sheet (Kerle & Gullifer, 2013).

The Goodwill and Intangible Assets from time-to-time, the Company acquires restaurants from one of our Concept’s franchisees or acquires another business. Goodwill from these acquisitions represents the excess of the cost of a business acquired over the net of the amounts assigned to assets acquired, including identifiable intangible assets and liabilities assumed (Sharma, 2012). Goodwill is not amortized and has been assigned to reporting units for purposes of impairment testing. YUM’s reporting units are our business units in the KFC, Pizza Hut and Taco Bell Divisions.

In the case of Yum Inc, the Management’s Discussion and Analysis of financial conditions reveals the important estimates and developments which have occurred in the business. As per the management’s discussions there are three operating segments which are the KFC divisions, Pizza Hut Divisions which has a world-wide operations and Taco Bell Division (Moldovan, 2014). It is clear that the business of Yum’s is still in its expansion phase as the company has introduced plans to drive global expansions of the company’s three major brands. The major strategies which are adopted by the company is focused approach, use of franchises businesses in global countries and efficiency in the level of services as provided by the brands. The brands will be applying the focused approach and will be focusing on building distinctive brands, developing Unmatched Franchise Capabilities, driving bold restaurant developments and adopted the culture of the country in which the brand is operation. Moreover, the company plans to increase the number of franchises business in existing countries as well as open franchises in new countries (Alon, Ni & Wang, 2012). The efficiency policy of the company requires all the brands to provide effective and efficient services to the customers worldwide. The purpose of such MD&A is to allow the stakeholders to understand the performance of the company with the help of financial statement as well. The major estimates which the management has adopted as an performance indicator for the company are given below:

1. The company is trying to revamp the financial profile of the brands globally which also includes improving the cost structure and also bringing about efficiency in business policies. It is estimated that the company will be reducing the annual capital expenditures which is currently excessive as per the opinion of the management (Cho, Freedman & Patten, 2012). The management estimates to bring down the annual capital expenditure to about $ 100 million. By 2019.
2. The company plans to reduce the general and administration expenses by a cumulative figure of $ 300 million over the next few years as per the management’s estimates.
3. The company plans on improving the capital structure including the earnings before interest, taxes, depreciation and amortization (Ballings et al., 2015).
4. Moreover, the company is in its expansion phase and the policy of increasing the number of Franchises globally is the technique which the company has adopted. The management of the company estimates that the company will be earning $ 2 billion in excess of what the company is currently earning which will be net of taxes through franchising of the businesses.

In case of McDonald’s, the company has more than 36,899 restaurants in over 120 countries and the company also follows extensively the policy of franchising (Annual Reports | McDonald’s., 2018). The company is continuously engaged in refining the pricing strategies of the brands which are suitable and still stay competitive in foreign markets. The major portion the revenues which are earned by the company comes from the restaurant business and franchising fees from franchisee operating in global countries (Gillis & Castrogiovanni, 2012). As per the segments of revenue generations are taken the largest segment is USA and the company has growing markets in china, Italy, korea, Russia and other countries as well. The key estimates which the management of the company has decided on are given below:

1. The management plans to open and operate more franchises so that the overall revenue of the company can growth further. The management wants to be franchised with over 95% of the business as per the long-term objective of McDonalds.
2. The company is expecting to achieve its goal of refranchising restaurant up by 4000 in a few year time. This goal has been pursued by the company since the year 2015 and since then the company is engaged in developing and franchise business and acquiring long term licenses of operations in foreign countries.
3. The company is also expecting to take advantage of the cost savings plan which the management has initiated. The company plans to reduce the G&A levels by $ 500 million by the end of 2018 from a G&A base of 2.6 billion in 2015. The company also plans to improve the span of control and redesign the organization to eliminate layers.
4. The company plans to provide better cash returns to the shareholders of the company as it has already achieved its target to return to it is shareholders an amount of $ 30 billion as cash return (Palazzo, 2012).

Fiscal Year and Foreign Currency Policies

In case of Yum Inc, the most important accounting policies which affect the financial statements as well as the overall business of the company are given below:

1. Foreign Currency: As a major portion of the company’s revenue is generated by the earnings from global countries, hence the foreign currency measurement is an important consideration. The currency of various countries where the brands operates are determined on the basis of number of economic factors which are not limited to cash flow and financial transactions (Corazza, & Malliaris, 2015). The measurement of any assets or liability which arises outside of US are measure on the basis of functional currency of that entity. The income and expenses which occurs in foreign markets are translated in US dollars for recording and preparing the financial statements of the company. Gains and losses arising from the impact of foreign currency exchange rate fluctuations on transactions in foreign currency are included in Other (income) expense in our Consolidated Statements of Income (Scott, 2015). The concept of foreign currency is important due to regular application of the concept in measuring and preparation of the financial statement of the company. In addition to this, most of the revenues of the company is acquired through franchising in foreign countries which is why the accounting policy of foreign exchange is crucial for the business.
2. Revenue Recognition: The revenues of the company are recognized from company owned restaurants when the payment is tendered at the time of sales (Dyson, 2015). The Company presents sales net of sales-related taxes. Income from the franchisees includes initial fees, continuing fees, renewal fees and rental income from restaurants as per the policy of the company as they lease or sublease them. The revenue recognition concept is very important to any company as such information discloses what are the sources of revenue for the brands and how the same is to be recognized by the business. The shareholders always notice the revenue sources of the company and in many circumstances the investments decisions are based on the revenue disclosures as shown by the company.
3. Franchise Operations: The franchise operations are mostly used by business in overall operations of the business. As the company uses franchising as an option for operating therefore proper accounting of the same is also to be done. The franchising policy of the company involves the franchisee to pay an initial and non-refundable fee upon opening a store of brand (Baena, 2012). The company also charges a continuing fee based on the percentage of sales which the franchise can achieve which depends on the markets conditions in the country where the business is currently operating. The internal costs which are provided to the franchisee are charged under general and administration costs of the company.

In case of McDonalds, the major accounting policies which are followed by the company are given below:

1. Revenue Recognition: The Company’s revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates (Peterson, 2012). McDonald’s acquires a major portion of the total revenue generated by the company through franchising activities. Sales which are achieved by business are recognized on the basis of cash basis. The company presents sales net of sales tax and other sales related taxes. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales and may include initial fees. The revenue recognition concept is an important concept which is the basis on which the company shows the different sources of revenue which the company earns in a year.
2. Foreign Currency Transactions: As a major portion of the company’s revenue is generated by the earnings from global countries, hence the foreign currency measurement is an important consideration (Judge, 2015). The basis of measuring the income which the business generates is on the basis of local currency in global markets and later on during the time of consolidation such incomes are converted into US dollars which are then recorded accordingly in the financial statements.
3. Consolidation: The management prepares consolidated statements of final accounts at the year’s end recording all the revenues which are earned by the company and its franchises during the year. The financial statements of 2016 show that the company has prepared financial statements in a consolidated manner. Nowadays most of the companies follow consolidated basis of preparation of the financial statements (Ting, 2012).

The major similarities which is there between Yum Inc and McDonald’s accounting policies are in Foreign currency transactions and franchising operations. In revenue recognition both the companies recognize revenue on the basis of cash received. Both the companies also use the franchising option and generate revenues and therefore both the businesses have to follow same franchising basis for preparation of financial statements.

There are certain aspects of the notes to accounts which are present in the financial report of both the companies which are needed to be further analyzed in order to obtain a clear understanding of the disclosures made by the company (Dhaliwal et al., 2012). The treatment of income taxes by both the companies is an complex area due to the facts that various factors are involved such as deferred tax assets and deferred tax liabilities. There are certain elements of advance tax payments as well as income tax payable (Laux, 2013). Moreover, the rate of taxation which is charged by both of the companies is also to be analyzed as per the financial statement to get a clear understanding of the income tax disclosures.

In the case of Yum Inc, the accounting policies which relates to the disclosures of impairment and disposal of property and equipment will be requiring certain understanding of the impairment test and a brief understanding of the carrying amount and the recoverable amount of the assets on the basis of which the impairment test is to be conducted. The impairment losses which arises during the impairment testing and the disclosure requirements of the same is to be understood which requires a detailed analysis. Another complex concept which is used in the financial statement of Yum Inc is the fair value measurement concept. The fair value measurement concept of the company for assets is a complex area which is needed to be determined (Alexander, Bonaci & Mustata, 2012).

In the case of McDonald’s the concept of lease accounting which is used by the company is also an complex area which the business needs to consider and analyze in details. The first thing to determine is to what is the nature of the lease which is taken by the company that is whether the lease is an operating lease or financial lease (Singh, 2012). Secondly the accounting method which the company uses for recognizing the leases revenues and assets. Generally most of the company’s use standard issued by IASB on lease accounting and determine the treatments which are associated with the same. Then there is the treatment of income tax which also involves a lot of variables which are to be considered by the shareholders in order to understand such transactions in their full sense.

As per the statement of profit and loss of Yum Inc, Refranchising gains is a type of non-recurring income or expenses which the company is needed to take care and disclose in the financial statement (Ragas & Culp, 2014). The company has experience such types of gains or losses over the years and yet such transactions are non-recurring in nature and therefore should be adjusted accordingly. As per the notes to accounts of the company, in 2016 the company recognized a net gain of $ 11 million related to reclassification of accumulated translation adjustments associated with pizza hut Australia. Then balance sheet of the company shows that the certain assets which are from discontinued operations which are of current as well as non-current nature. Then there is deferred income taxes in the assets side of the balance sheet of 2016. Deferred tax assets refer to those which arises due difference in tax treatments in accounting. In addition to this the liabilities side of the balance sheet contains the income tax payable which refers to the outstanding tax which the company is required to pay and still is outstanding. This can be adjusted with any tax assets which the company has. Then, there is current liabilities from discontinued operations which are from business which are still not operating for the company.

In the case of McDonalds, the statement of profit and loss for the years 2016 does not show any non-recurring item. All the items appearing in the statement of profit and loss account of regular nature. The balance sheet of the company shows a transaction which is related to asset which is held by the business for sale purposes which is not a regular item and the same should be adjusted in ledger accounts. Deferred income taxes which appear in the liabilities side of the financial statement which arises due difference in tax treatments in accounting. This is not a transaction of regular nature and hence the same should be adjusted with the tax assets which arises.

Refranchising gains is a type of non-recurring income or expenses which the company is needed to take care and disclose in the financial statement (Harrington, Smith & Trippeer, 2012). The company has experience such types of gains or losses over the years and yet such transactions are non-recurring in nature and therefore should be adjusted accordingly. It is one of the unique items which appear in the statement of profit and loss of the company as shown in the financial statement of Yum Inc.

In the case of McDonald’s there is no such transactions which are of unique nature, however the company shows asset which is held for sales in the balance sheet of the company which is not a regular transaction as can be seen from the analysis of previous year financial statement.

Statement Showing Calculations of ratio for Yum Inc
Particulars	2016	2015	2014	2013	2012	2011
ROE Traditional approach	-0.28624	1.419319	0.679379	0.503693444	0.74141133	0.723532639
ROE Du point approach	-0.28624	1.334365	0.655237	0.489457156	0.70883267	0.688413361
Gross Profit Margin	0.02%	0.02%	0.02%	0.01%	0.01%	0.01%
EBITDA Margin	30%	23%	18%	13%	13%	13%
Operating Profit Margin	26%	22%	23%	14%	17%	14%
Net profit margin	39%	30%	23%	10%	13%	12%
SG&A to sales	1.942143	1.926768	1.947146	1.825286123	1.7927829	1.804094373
Tax expense / sales	0.077143	0.07461	0.081723	0.043544349	0.04538156	0.029743872
Tax expense / earnings before taxes	0.245827	0.257732	0.267831	0.313990974	0.25034965	0.195298373
Accounts receivable turnover and days receivable	11.35135	12.55331	13.87673	34.73291925	38.1709677	37.11413969
Inventory turnover and days inventory	116.6667	114.6316	26.41056	37.59327731	38.9884679	37.1774744
Net long-term asset turnover	0.766703	0.54038	0.539605	1.286256469	1.31317279	1.233076749
PP&E turnover	1.944444	1.855986	1.001112	2.508185692	2.78423529	2.694952994
Current ratio	1.082542	0.546485	0.682704	0.746578366	0.87248629	0.947346939
Quick ratio	0.784514	0.206349	0.374533	0.393818985	0.49223035	0.605714286
Cash ratio	0.514244	0.101393	0.239735	0.252980132	0.35466179	0.488979592
Operating cash flow ratio	1.482759	3.631737	3.548443	3.493891798	3.05927835	1.870617696
Liabilities to equity ratio	-5656	911	1547	2166	2154	1823
Debt to equity ratio	-1.61368	4.053664	2.084788	1.340960072	1.30581447	1.731210856
Net debt to equity ratio	-1.61368	4.053664	2.084788	1.340960072	1.30581447	1.731210856
Debt to capital ratio	2.629502	0.802124	0.675829	0.572824837	0.56631376	0.633862029
Net debt to net capital ratio	2.629502	0.802124	0.675829	0.572824837	0.56631376	0.633862029
Interest coverage ratio (earnings basis)	5.29316	9.943262	10.60839	7.279352227	15.3959732	11.63461538
Cash flow adequacy ratio	-1.12734	-1.22402	-2.68807	-1.45072464	-1.7341125	-1.82491857
Cash reinvestment ratio	5.630058	8.872146	31.62791	16.25465839	-16.301676	16.4969697
Cash flow from operations / Sales	0.286667	0.278466	0.455474	0.179005722	0.20062537	0.205728449
Dividend pay-out ratio	0.459543	0.564578	0.636537	0.563703025	0.3406387	0.364670205

Statement Showing Calculations of ratio for Mcdonalds
Particulars	2016	2015	2014	2013	2012	2011
ROE Traditional approach	-2.12607	0.639019	0.370159	0.348907	0.357326	0.38242
ROE Dupoint approach	-2.12607	0.639019	0.370159	0.348907	0.357326	0.38242
Gross Profit Margin	100.00%	100.00%	100.00%	100.00%	100.00%	100.00%
EBITDA Margin	23%	20%	19%	22%	22%	22%
Operating Profit Margin	31%	28%	29%	31%	31%	32%
Net profit margin	31%	27%	26%	30%	29%	30%
SG&A to sales	1.098509	1.095207	1.07178	1.037851	1.032442	1.022976
Tax expense / sales	0.142498	0.122899	0.14388	0.13874	0.140529	0.137163
Tax expense / earnings before taxes	0.317434	0.309105	0.354612	0.319166	0.32358	0.31316
Accounts receivable turnover and days receivable	10.37582	11.89289	14.45967	14.89559	13.80468	13.50022
Inventory turnover and days inventory	259.6774	207.4	172.9586	161.525	151.6096	153.3345
Net long-term asset turnover	0.493007	0.434604	0.530005	0.515318	0.525695	0.828103
PP&E turnover	0.444062	0.437444	0.464378	0.467697	0.483294	0.511864
Current ratio	1.397976	3.26837	1.523163	1.593091	1.446358	1.254702
Quick ratio	0.777759	3.045079	1.198115	1.299211	1.090594	1.045936
Cash ratio	0.352738	2.604901	0.756177	0.882871	0.686462	0.665593
Operating cash flow ratio	4.953082	0.850836	3.238991	2.544288	2.981936	3.175022
Liabilities to equity ratio	-2204.3	7087.9	12853.4	16009.7	15293.6	14390.2
Debt to equity ratio	-11.74	3.403279	1.166205	0.882577	0.891386	0.843206
Net debt to equity ratio	-11.74	3.403279	1.166205	0.882577	0.891386	0.843206
Debt to capital ratio	1.09311	0.772897	0.538363	0.468813	0.471287	0.457467
Net debt to net capital ratio	1.09311	0.772897	0.538363	0.468813	0.471287	0.457467
Interest coverage ratio (earnings basis)	8.752825	11.19458	13.79112	16.79306	16.65621	17.30864
Cash flow adequacy ratio	-1.51847	-1.47763	-1.7105	-1.78419	-1.73377	2.441609
Cash reinvestment ratio	-41.6338	-60.9445	-47.0501	-35.3918	-19.233	-13.2585
Cash flow from operations / Sales	0.396182	0.39659	0.370422	0.377272	0.374471	0.4054
Dividend pay-out ratio	0.652555	0.713201	0.675964	0.557582	0.530047	0.474224

The ROE under traditional method for Yum Inc shows that the return on equity has decreased for the company over the years, however the ROE ratio has improved from previous years figures (Heikal, Khaddafi & Ummah, 2014). In the case of McDonalds, the company is experiencing negative returns as shown in the table above which is mainly due to the deficit in the shareholders fund. The company is earning loses which is needed to be improved as per the analysis of the financial statement.

The ROE under Du-point analysis show that the return on equity for Yum Inc remains unchanged and depicts the same result as shown in the ROE computation under traditional approach (Sheela & Karthikeyan, 2012). The return on equity under Du-point analysis for McDonalds show negative returns which indicates the losses which the company is earning and the huge amount of deficits of the shareholder’s fund as shown in the balance sheet of the company for the year 2016.

Cash Flow Statement
Particulars	2016	2015	2014	2013	2012	2011
Cash Flows – Operating Activities from Continuing Operations
Net Income	$   1,619.00	$   1,293.00	$ 1,021.00	$ 1,064.00	$ 1,608.00	$ 1,335.00
Income from discontinued operations, net of tax	$    -625.00	$    -357.00
Depreciation and amortization	$      309.00	$      322.00	$     739.00	$     721.00	$     665.00	$     628.00
Closures and impairment (income) expenses	$        14.00	$        15.00	$     535.00	$     331.00	$       37.00	$     135.00
Refranchising (gain) loss	$    -141.00	$        23.00	$      -33.00	$    -100.00	$      -78.00	$       72.00
Contributions to defined benefit pension plans	$      -41.00	$      -98.00
Deferred income taxes	$        27.00	$    -102.00	$    -172.00	$      -24.00	$       28.00	$    -137.00
Excess tax benefit from share-based compensation	$      -83.00	$      -47.00	$      -42.00	$      -44.00	$      -98.00	$      -66.00
Share-based compensation expense	$        80.00	$        46.00	$       55.00	$       49.00	$       50.00	$       59.00
Changes in accounts and notes receivable	$      -46.00	$      -35.00	$      -21.00	$      -12.00	$      -18.00	$      -39.00
Changes in inventories —	$             –	$        -3.00	$      -22.00	$       18.00	$         9.00	$      -75.00
Changes in prepaid expenses and other current assets	$          6.00	$      -13.00	$      -10.00	$      -21.00	$      -14.00	$      -25.00
Changes in accounts payable and other current liabilities	$        17.00	$        93.00	$       60.00	$    -102.00	$         9.00	$     144.00
Changes in income taxes payable	$        16.00	$        15.00	$    -143.00	$       14.00	$     126.00	$     109.00
Other, net	$        52.00	$        61.00	$       84.00	$     108.00	$       50.00	$     101.00
Net Cash Provided by Operating Activities from Continuing Operations	$   1,204.00	$   1,213.00	$ 2,051.00	$ 2,002.00	$ 2,374.00	$ 2,241.00
Cash Flows – Investing Activities from Continuing Operations
Capital spending	$    -422.00	$    -461.00	$ -1,033.00	$ -1,049.00	$ -1,099.00	$    -940.00
Acquisitions			$      -28.00	$      -99.00	$    -543.00	$      -81.00
Proceeds from refranchising of restaurants	$      346.00	$      219.00	$     114.00	$     260.00	$     364.00	$     246.00
Changes in Restricted Cash					$     300.00	$    -300.00
Other, net	$        52.00	$        53.00	$       11.00	$         2.00	$      -27.00	$       69.00
Net Cash Used in Investing Activities from Continuing Operations	$      -24.00	$    -189.00	$    -936.00	$    -886.00	$ -1,005.00	$ -1,006.00
Cash Flows – Financing Activities from Continuing Operations
Proceeds from long-term debt	$   6,900.00	$             –		$     599.00		$     404.00
Repayments of long-term debt	$    -324.00	$    -261.00	$      -66.00	$    -666.00	$    -282.00	$    -666.00
Revolving credit facilities, three months or less, net	$    -701.00	$      285.00	$     416.00
Short-term borrowings, by original maturity
More than three months – proceeds	$   1,400.00	$      609.00	$         2.00	$       56.00
More than three months – payments	$ -2,000.00	$             –	$        -2.00	$      -56.00
Three months or less, net	$             –	$             –
Repurchase shares of Common Stock	$ -5,402.00	$ -1,200.00	$    -820.00	$    -770.00	$    -965.00	$    -752.00
Excess tax benefit from share-based compensation	$        83.00	$        47.00	$       42.00	$       44.00	$       98.00	$       66.00
Dividends paid on Common Stock	$    -744.00	$    -730.00	$    -669.00	$    -615.00	$    -544.00	$    -481.00
Employee Stock option proceeds			$       29.00	$       37.00	$       62.00
Debt issuance costs	$      -86.00	$             –
Net transfers from discontinued operations	$      289.00	$      235.00
Other, net	$      -92.00	$      -43.00	$      -46.00	$      -80.00	$      -85.00	$      -43.00
Net Cash Used in Financing Activities from Continuing Operations	$    -677.00	$ -1,058.00	$ -1,114.00	$ -1,451.00	$ -1,716.00	$ -1,472.00
Effect of Exchange Rate on Cash and Cash Equivalents	$      -25.00	$        11.00	$         6.00	$        -5.00	$         5.00	$       21.00
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents—Continuing Operations	$      478.00	$      -23.00	$         5.00	$    -203.00	$    -422.00	$    -228.00
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents – Beginning of Year	$      334.00	$      357.00	$     573.00	$     776.00	$ 1,198.00	$ 1,426.00
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents – End of Year	$      812.00	$      334.00	$     578.00	$     573.00	$     776.00	$ 1,198.00
Cash Provided by Operating Activities from Discontinued Operations	$      829.00	$      931.00
Cash Used in Investing Activities from Discontinued Operations	$    -287.00	$    -493.00
Cash Used in Financing Activities from Discontinued Operations	$    -292.00	$    -234.00

As per the table above which shows the Cash flow statement of Yum Inc, the company has been earning cash from operations which show a positive cash inflow for the year.  The cash flow statement shows that the net profit of the company is on an increasing trend and the net income for the current year is $ 1619 million which is much more than previous year’s figures. This shows that the company is improving and the operational efficiency of the company is improving. The cash inflows from discontinued operations which is shown in years 2016 and 2015 relates to the businesses of the company which has discontinued. As per the Cash from Investing Activities, the business has made certain capital expenditures during the year and also received proceeds from refranchising businesses which is $ 349 million which is much more than previous year figure. The financing activities of the business consists of proceeds of loan and repayments of loans. The company has taken a loan of $ 6900 in the year 2016. The company has buyback common shares during the year which was $ 5402 million and the company has declared a dividend and paid the same. The cash and cash equivalent balance has also increased from previous year.

Cash Flow Statement
Particulars	2016	2015	2014	2013	2012	2011
Operating activities
Net income	$     4,686.50	$    4,529.30	$  4,757.80	$  5,585.90	$  5,464.80	$  5,503.10
Adjustments to reconcile to cash provided by operations
Charges and credits:
Depreciation and amortization	$     1,516.50	$    1,555.70	$  1,644.50	$  1,585.10	$  1,488.50	$  1,415.00
Deferred income taxes	$      -538.60	$         -1.40	$      -90.70	$       25.20	$     134.50	$     188.40
Share-based compensation	$        131.30	$       110.00	$     112.80	$       89.10	$       93.40	$       86.20
Other	$          96.90	$       177.60	$     369.50	$       26.80	$      -92.00	$       78.70
Changes in working capital items:
Accounts receivable	$      -159.00	$     -180.60	$       27.00	$       56.20	$      -29.40	$    -160.80
Inventories, prepaid expenses and other current assets	$          28.10	$         44.90	$        -4.90	$      -44.40	$      -27.20	$       52.20
Accounts payable	$          89.80	$       -15.00	$      -74.70	$      -60.70	$     124.10	$       35.90
Income taxes	$        169.70	$       -64.40	$         3.30	$    -154.40	$      -74.00	$     198.50
Other accrued liabilities	$          38.40	$       383.00	$      -14.30	$       11.90	$    -116.60	$       18.70
Cash provided by operations	$     6,059.60	$    6,539.10	$  6,730.30	$  7,120.70	$  6,966.10	$  7,415.90
Investing activities
Capital expenditures	$   -1,821.10	$  -1,813.90	$ -2,583.40	$ -2,824.70	$ -3,049.20	$ -2,729.80
Purchases of restaurant businesses	$      -109.50	$     -140.60	$    -170.50	$    -181.00	$    -158.50	$    -196.40
Sales of restaurant businesses	$        975.60	$       341.10	$     489.90	$     440.10	$     394.70	$     511.40
Sales of property	$          82.90	$       213.10
Other	$      -109.50	$       -19.70	$      -40.90	$    -108.20	$    -354.30	$    -166.10
Cash used for investing activities	$       -981.60	$   -1,420.00	$ -2,304.90	$ -2,673.80	$ -3,167.30	$ -2,580.90
Financing activities
Net short-term borrowings	$      -286.20	$       589.70	$     510.40	$    -186.50	$    -117.50	$     260.60
Long-term financing issuances	$     3,779.50	$  10,220.00	$  1,540.60	$  1,417.20	$  2,284.90	$  1,367.30
Long-term financing repayments	$      -822.90	$  -1,054.50	$    -548.10	$    -695.40	$    -962.80	$     624.00
Treasury stock purchases	$ -11,171.00	$  -6,099.20	$ -3,198.60	$ -1,777.80	$ -2,615.10	$  3,363.10
Common stock dividends	$   -3,058.20	$  -3,230.30	$ -3,216.10	$ -3,114.60	$ -2,896.60	$  2,609.70
Proceeds from stock option exercises	$        299.40	$       317.20	$     235.40	$     233.30	$     328.60	$     334.00
Excess tax benefit on share-based compensation	$               –	$         51.10	$       70.90	$       92.60	$     142.30	$     112.50
Other	$          -3.00	$       -58.70	$      -12.80	$      -11.80	$      -13.60	$      -10.60
Cash provided by (used for) financing activities	$  -11,262.40	$       735.30	$ -4,618.30	$ -4,043.00	$ -3,849.80	$  8,660.60
Effect of exchange rates on cash and equivalents	$      -103.70	$     -246.80	$    -527.90	$       58.70	$       51.40	$      -97.50
Cash and equivalents increase (decrease)	$   -6,288.10	$    5,607.60	$    -720.80	$     462.60	$         0.40	$      -51.30
Cash balance of businesses held for sale at end of year	$      -174.00	$              –
Cash and equivalents at beginning of year	$     7,685.50	$    2,077.90	$  2,798.70	$  2,336.10	$  2,335.70	$  2,387.00
Cash and equivalents at end of year	$     1,223.40	$    7,685.50	$  2,077.90	$  2,798.70	$  2,336.10	$  2,335.70

As per the cash flow statement of McDonald’s shows that the company has been earning increasing amount of profits. The net income of the company as shown in the above table for the year 2016 is $ 4686.50 million which is much more than the figure as shown in 2015. The cash from operating activities show a positive trend which shows operational efficiency of the company. During the year the company has incurred certain capital expenditures as shown in the table above. The cash flow statement of the company shows that the company has made certain acquisitions and sales of business during the years. The cash from financing activities section of the cash flow statement shows that the company has taken both short term and long-term loans which will be used for the financing activities of the business. The company has also made loan repayments which is of $ 822.90 million as per the cash flow statement of the company for 2016. The company has made treasury stock purchases during the year which is shown at $ 11171 million which is a major reason for the negative cash flows from financing activities. The cash and cash equivalents of McDonalds has decreased from the previous year figures which is due to the major buyback of treasury stocks which the company made during the year.

References

Alexander, D., Bonaci, C. G., & Mustata, R. V. (2012). Fair value measurement in financial reporting. Procedia Economics and Finance, 3, 84-90.

Alon, I., Ni, L., & Wang, Y. (2012). Examining the determinants of hotel chain expansion through international franchising. International Journal of Hospitality Management, 31(2), 379-386.

Annual Reports | McDonald’s. (2018). Corporate.mcdonalds.com. Retrieved 13 March 2018, from https://corporate.mcdonalds.com/corpmcd/investors-relations/financial-information/annual-reports.html

Baena, V. (2012). Market conditions driving international franchising in emerging markets. International Journal of Emerging Markets, 7(1), 49-71.

Ballings, M., Van den Poel, D., Hespeels, N., & Gryp, R. (2015). Evaluating multiple classifiers for stock price direction prediction. Expert Systems with Applications, 42(20), 7046-7056.

Barge-Gil, A., & López, A. (2014). R&D determinants: Accounting for the differences between research and development. Research Policy, 43(9), 1634-1648.

Capalbo, F. (2013). Impairment of Assets.

Cho, C. H., Freedman, M., & Patten, D. M. (2012). Corporate disclosure of environmental capital expenditures: A test of alternative theories. Accounting, Auditing & Accountability Journal, 25(3), 486-507.

Corazza, M., & Malliaris, A. T. G. (2015). Multi-fractality in foreign currency markets.

Dhaliwal, D. S., Radhakrishnan, S., Tsang, A., & Yang, Y. G. (2012). Nonfinancial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility disclosure. The Accounting Review, 87(3), 723-759.

Dyson, R. A. (2015). Case studies in the new revenue recognition guidance. The CPA Journal, 85(3), 22.

Financial Reports – Yum! Brands. (2018). Yum.com. Retrieved 13 March 2018, from https://www.yum.com/investors/financial-information/financial-reports/

Gertler, P. J., Martinez, S. W., & Rubio-Codina, M. (2012). Investing cash transfers to raise long-term living standards. American Economic Journal: Applied Economics, 4(1), 164-92.

Gillis, W., & Castrogiovanni, G. J. (2012). The franchising business model: an entrepreneurial growth alternative. International Entrepreneurship and Management Journal, 8(1), 75-98.

Harrington, C., Smith, W., & Trippeer, D. (2012). Deferred tax assets and liabilities: tax benefits, obligations and corporate debt policy. Journal of Finance and Accountancy, 11, 1.

Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.

Judge, A. (2015). The determinants of foreign currency hedging by UK non-financial firms.

Kerle, P., & Gullifer, L. (2013). The future of trade receivables securitization in Europe. Journal of Structured Finance, 19(1), 71.

Khan, M. A. (2014). Restaurant franchising: Concepts, regulations and practices. CRC Press.

Kotler, P. (2015). Framework for marketing management. Pearson Education India.

Laux, R. C. (2013). The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), 1357-1383.

Madawaki, A. (2012). Adoption of international financial reporting standards in developing countries: The case of Nigeria. International Journal of Business and management, 7(3), 152.

Moldovan, R. (2014). Post-implementation reviews for IASB and FASB standards: A comparison of the process and findings for the operating segments standards. Accounting in Europe, 11(1), 113-137.

Nijmeijer, K. J., Fabbricotti, I. N., & Huijsman, R. (2014). Making franchising work: A framework based on a systematic review. International Journal of Management Reviews, 16(1), 62-83.

Palazzo, B. (2012). Cash holdings, risk, and expected returns. Journal of Financial Economics, 104(1), 162-185.

Peterson, K. (2012). Accounting complexity, misreporting, and the consequences of misreporting. Review of accounting studies, 17(1), 72-95.

Ragas, M. W., & Culp, R. (2014). Accounting and Financial Statements. In Business Essentials for Strategic Communicators (pp. 49-63). Palgrave Macmillan, New York.

Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Sharma, N. (2012). Intangible Assets: A Study of Valuation Methods. BVIMR Management Edge, 5(1).

Sheela, S. C., & Karthikeyan, K. (2012). Financial performance of pharmaceutical industry in India using dupont analysis. European Journal of Business and Management, 4(14), 84-91.

Singh, A. (2012). Proposed lease accounting changes: Implications for the restaurant and retail industries. Journal of Hospitality & Tourism Research, 36(3), 335-365.

Ting, D. M. (2012). U.S. Patent No. 8,327,421. Washington, DC: U.S. Patent and Trademark Office.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.