Question

Starbucks Corporation Case Studies – Accounting for Business Decisions

Review the 2016-2018 10-Ks (Annual Report of 2018 - available in google search), Part 1, Items 1, 1A, 2, 3, and Part II, Items 7 and 8. Part I contains a discussion on the business model, risk factors, properties, and legal issues. Part II contains Management’s Discussion and Analyses, the financial statements and the notes to the financial statements. All these statements are referred to as management assertions. Parts I and II contain discussions on many types of risk that the business may be exposed to. You should read through all these areas. Once your team has read through Parts I and II, you are to answer a set of questions at the end of this section of deliverable two. The following narrative elaborates on each area you are to read.

Part 1, Item 1. Business. In this discussion, Starbucks discusses its business model, how it segments it financial information, and how it categorizes and earns revenue.

Part 1, Item 1A. Risk Factors. In this discussion, Starbucks discusses the risks that it has identified as material and has decided to share with the public. Although a company such as Starbucks has to disclose risks, the SEC madates a separate section to discuss risks. However, risks can be identified by reading other areas of the Annual Report and observations of its store operations.

Starbucks identifies the following 15 material risks:

Item 1A. Risk Factors

You should carefully consider the risks described below. If any of the risks and uncertainties described in the cautionary factors

described below actually occurs, our business, financial condition and results of operations, and the trading price of our

common stock could be materially and adversely affected. Moreover, we operate in an increasingly competitive and rapidly

changing environment. New factors emerge from time to time and it is not possible to predict the impact of all these factors on

our business, financial condition or results of operations.

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 ornot 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.

You are required to:

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

1. Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the balance sheet and why?

2. Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the income statement and why?

3. Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the Cash Flow Statement and why?

4. Risk number 10 above states “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.” Which ratios would be adversely affected if increases in cost or supply chain disruptions occurred for arabica beans? Explain why.

5. Compare your readings of management’s assertions and your findings of your vertical, horizontal, ratio and chart analysis. Discrepancies may exist between what the ratios are indicating and what management is telling you. Is management telling the public one thing, but the financial information indicates another? Explain to the best of your ability.

Answer 1

Q.1. Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the balance sheet and why?

Answer 1. The risk which is described as under may impact Balance sheet heavily :

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.

Starbucks information system have numbers of details such as personal, financial or other information that is entrusted to Starbucks by their customers and employees. Such information can also be proprietary and other confidential information related to Starbuck's business, such as business plans, product development initiatives and designs.

Apart from business loss due to leakage of above secret information, such security breaches also could result in a violation of applicable U.S. and international privacy and other laws. e.g. GDPR (General Data Protection Regulation) implemented in Europe have provision of penalty levy equal to 4% annual worldwide revenue.

The cost of corrective action would call for significant commitment from company in terms of resources and capital investment as well. In view of above this risk is capable of bringing significant financial obligation on company

Q.2. Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the income statement and why?

Q.3. Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the Cash Flow Statement and why?

Ans 2 & 3 :

The risk mentioned below can most adversely impact income statement & Cash flow as well :

We are highly dependent on the financial performance of our Americas operating segment

68% of consolidated revenue is derived from Americas Operating Segment in FY 2018. If the Americas operating segment revenue trends slow or decline, other segments may be unable to make up any significant shortfall and hence business and financial results could be adversely affected

Americas segment is relatively mature and produces the large majority of our operating cash flows, such a slowdown or decline could result in reduced cash flows for funding the expansion of our international business and other initiatives and for returning cash to shareholders.

Q.4. Risk number 10 above states “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.” Which ratios would be adversely affected if increases in cost or supply chain disruptions occurred for arabica beans? Explain why.

Ans.4 :

Arabica coffee beans would be one of the most important raw material for Coffee. Hence increase in cost of raw material would have adverse impact on increase in Cost of goods sold to sales ration, Gross Profit Ratio, Net profit ratio and all other profitability related ratio since by large the operating costs are fixed cost and any change in variable costs would have heavy impact on profitability.

The supply chain disruptions can result into increase in cost of coffee beans and it will have similar impact as described above. On other hand supply chain disruption might also result into non-availability of raw material and it can have direct impact on volume of revenue itself and any impact on revenue might have material impacts on all profitability ratios.

Q. 5. Compare your readings of management’s assertions and your findings of your vertical, horizontal, ratio and chart analysis. Discrepancies may exist between what the ratios are indicating and what management is telling you. Is management telling the public one thing, but the financial information indicates another? Explain to the best of your ability.

There appears no discrepancies between financial statement and what is covered under "Management’s Discussion and Analysis of Financial Condition and Results of Operations"

The revenue is rising by 10% in fiscal 2018 & operating margin is reduced to 15,7% in Fiscal year 2018 as compared to 18.5% in fiscal year 2017.