Yum Brands

Chapter 1 - Case:

YUM! BRANDS

What’s your favorite fast food? If it’s not a hamburger, it may be a pizza, a taco, or fried chicken. YUM! Brands operate Pizza Hut, Taco Bell, KFC, A&W, and Long John Silver’s restaurants.

As you can see, YUM! Brands sell lots of pizza, tacos, and drumsticks—$9,561 million in 2006 (lines 1–3 of YUM! Brands’ income statement). On these revenues YUM! Brands earned net income of $824 million in 2006.

What do we really mean by these terms revenues and net income which are foreign to you now. “Welcome to the world of accounting!”

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YUM! Brands managers make lots of decisions. Which is selling faster is it pizza, fried chicken, or tacos? Is pizza bringing in profits? Should YUM! Brands expand into Asia? What helps us to get information on these?

Take a look at YUM! Brands’ income statement. Focus on net income (line 14). Net income is profit, the excess of revenues over expenses. You can see that YUM! Brands earned an $824 million profit in 2006. That’s good news because it means that YUM had $824 million more revenue (income) than expenses for the year. YUM’s income statement conveys more good news. Net income for 2006 exceeded the net income for 2005. What does this situation signify and how do investors react for this kind of a situation?

Suppose you have $5,000 to invest. What information would you need before investing in YUM! Brands? But did the company really sell that many pizzas, tacos, and drumsticks? Were profits really $824 million? Who reports these figures and what is the role of YUM’s top management and what are they responsible for?

Can you see the conflict of interest here? A company’s real performance may differ from what gets reported to the public How does society deal with this conflict of interest?

Consider David C. Novak, Chairman of the Board of YUM! Brands, Inc. Mr. Novak owns a home and several automobiles. He may owe money on some personal loans. Do all these assets and liabilities...