Question

Accounting for Business Decisions – Starbucks

You are to submit an individual one to two-page report answering the following from an accounting perspective, not a marketing/management perspective:

You are required to:

1. Of all the risks (risks are listed at the bottom) that Starbuck’s management discloses, which one do you think could most adversely affect the Balance Sheet and Income Statement at the store level and why? Demonstrate your understanding by showing an effect one on at least one of the ratios you produced in deliverable one. Ratio Analysis, Balance Sheet, Income Statement is presented below.

STARBUCKS CORPORATION Ratio Analysis Ratios 2016 2017 2018 Acid test ratio 0.67 0.84 1.69 Acid Test Ratio (Cash and Cash Equivalents + Accounts Receivable + Short-Term = Investments Current Liabilities Solvency ratios: Debt to total assets Debt service coverage 59% 0.56 62% 0.48 95% 0.52 Debt to total assets Debt Service Coverage ratio = Total Liabilities/Total Assets = Cash Flow from Operations/Total Liabilities 60% 2096 Profitability ratios: Gross profit margin Operating profit margin Profit margin Return on assets Asset turnover 13% 60% 18% 13% 20% 1.56 59% 16% 18% 23% 1.28 Gross Profit margin Operating profit margin Profit margin ratio Return on assets ratio Asset turnover ratio = Gross Profit/Net Sales = Operating Income/Net Sales = Net Income/Net Sales = Net Income/(Beginning Assets+Ending Assets)/2 = Net Sales/(Beginning Assets+Ending Assets)/2 Data Source Extracted from Balance Sheet Extracted from Cash Flow Statement Extracted from Income Statement Numerator and Denominator Components: Current Assets Current Liabilities Cash and Cash Equivalents Accounts Receivable Short-term Investments Inventory Net Income Operating Income Net Sales Revenue Cost of Sales Gross Profit = Total Net Revenue-Cost of Sales including Occupancy costs Cash Flow from Operating Activities Total Long-term Liabilities Total Assets Total Liabilities $ 4,757.90 4,546.8 2,128.8 129 768.8 134.4 1,378.5 2,817.7 4,171.9 21,315.9 8,509.0 $ 5,283.40 4,220.7 2,462.3 2.462. 3 870.4 228.6 1,364.0 2,884.7 4,134.7 22,386.8 9,034.3 $ 12,494.20 5,684.2 8 ,756.3 693.1 181.5 1,400.5 4,518.3 3,883.3 24,719.5 10,174.5 12,806.9 4,697.9 3,875.0 14,312.5 8,421.8 13,352.5 4.251.8 4,687.9 14,365. 6 8,908. 6 14,545.0 11,937.8 17,296.4 2 4,156.4 2 2,980.6

2. Starbuck’s normally displays its refrigerated inventory openly. What items do you believe have the highest and lowest gross profit margin? If a person steals one of the high gross profit margin inventory items, how many more does Starbucks have to sell to make up the cost of the stolen item? How many for the lowest gross profit margin inventory items? Demonstrate your understanding by provide calculations to support your claim.

3. a) Starbucks has many fixed assets in its stores. For example, they have various machines to make drinks or cook food. Identify one of those pieces of equipment, conduct internet research to estimate a replacement cost if it were destroyed today, assuming it is January 1st (cost). How many years do you estimate it will be functional and useful to help Starbucks produce revenue (estimated useful life)? In that time period in the future, how much do you think Starbucks can sell it for (salvage value)?

b) Once you have the cost of a machine, an estimated useful life and a salvage value, calculate the item’s depreciation expense for its first year. Extrapolate your results over all Starbucks stores and determine the affect on the balance sheet and income statements by comparing if the item were to be depreciated using the straightline verse double-declining balance methods, over the estimated cost, estimated useful life and estimated salvage values you choose. You must show calculations. To answer this question, you may have to conduct research to determine the make/model machines they use. If you can’t figure it out, use a close substitute.

4. From everything you read, analyzed and understand to date about Starbucks, what would you change that would help it increase revenue, control its expenses, or make its assets more efficient? Show how that beneficial change would affect at least one ratio in the next year that financial statements would be produced.

Risk Factors

1. Economic conditions in the U.S. and international markets could adversely affect our business and financial results.
2. Our success depends substantially on the value of our brands and failure to preserve their value, either through our actions or those of our business partners, could have a negative impact on our financial results.
3. Incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling, whether or not accurate, as well as adverse public or medical opinions about the health effects of consuming our products, could harm our business.
4. The unauthorized access, use, theft or destruction of customer or employee personal, financial or other data or of Starbucks proprietary or confidential information that is stored in our information systems or by third parties on our behalf could impact our reputation and brand and expose us to potential liability and loss of revenues.
5. We rely heavily on information technology in our operations and growth initiatives, and any material failure, inadequacy, interruption or security failure of that technology could harm our ability to effectively operate and grow our business and could adversely affect our financial results.
6. We may not be successful in implementing important strategic initiatives or effectively managing growth, which may have an adverse impact on our business and financial results.
7. We face intense competition in each of our channels and markets, which could lead to reduced profitability.
8. We are highly dependent on the financial performance of our Americas operating segment.
9. We are increasingly dependent on the success of certain international markets in order to achieve our growth targets.
10. Increases in the cost of high-quality arabica coffee beans or other commodities or decreases in the availability of high quality arabica coffee beans or other commodities could have an adverse impact on our business and financial results.
11. Our financial condition and results of operations are sensitive to, and may be adversely affected by, a number of factors, many of which are largely outside our control.
12. Interruption of our supply chain could affect our ability to produce or deliver our products and could negatively impact our business and profitability.
13. Failure to meet market expectations for our financial performance and fluctuations in the stock market as a whole will likely adversely affect the market price and volatility of our stock.
14. The loss of key personnel or difficulties recruiting and retaining qualified personnel could adversely impact our business and financial results.
15. Failure to comply with applicable laws and changing legal and regulatory requirements could harm our business and financial results.