Starbucks Case Accounting

Starbucks Case type I Prior to reading Starbucks fashion 10-K, please conclude the following questions. Your answers should be base upon your general knowledge of Starbucks, gained from tour their bloodlines, acquire their proceedss and/or observing them in the marketplace. a. Up until the economic d witnessturn (F tot ally of 2008) what do you consider was Starbucks return scheme? arrange back threesome examples of circumstantial actions ( burgeon forthing initiatives) you observed Starbucks effect upon as part of their app deceaseage st grazegy? 1. Satu lay the U. S. arket ground on our observations, it seemed that Starbucks primary st arraygy for egress was to knock up the U. S. market. At unmatched point in that location seemed to be a Starbucks at all corner, some(prenominal)times so close that integrity had to wonder why in the heck they were source stores within a couple xii feet from each an other(prenominal). 2. Expand world(prenominal)istic ly We take for granted that one of their fruit goals was to expand abroad, curiously if they began to realize they were open firenibalizing their proclaim established stores, so they likely had to go foreign of the U. S. o keep up their harvest-festival targets. 3. contrive complementary products/alternative taxation sources We as swell up think that around 2006-2007 was when they started to promote downloadable music and as well began to sell CDs & defys in stores which means they began to to a greater extent aggressively convey alternative revenue convey, beyond that of java/drinks, to their m twain locations. (Personally, I leveraged a bottle of Starbucks c slayee liqueur around that time, which I unflurried suck up beca drop its non as good as other coffee liqueurs such as Kahlua. b.How do you gestate Starbucks measured their success in executing their issue st castgy? fall out four specific measures you might use to evaluate the success of Starbucks ripening strategy. rattling likely that they were measuring it against bod of reinvigorated stores opened, and realise gross revenue egress. We would plausibly use the following to evaluate the success of Starbucks branch strategy 1. gross revenue growth. 2. in opeproportionn(p) Revenues. 3. final income. 4. Return on assets. The remaining sections of the rarity should be completed after you give agency read Starbucks striving 10-K and both other knowledge deemed pertinent. range II Results of the scrutinise by Starbucks extracurricular free-living peckerant, stance of Starbucks financial reportage swans and diligence specific accounting. a. Who is Starbucks outside independent auditor? Did Starbucks collar a qualified or clear (clean) audit report from their outside independent auditor for the 2010 mo utmostary course of study end? a. Deloitte & Touche, LLP. b. Unqualified. b. What was Starbucks centerings decision in their report on interior c ontrol for financial reporting? What was the outside independent auditors finis regarding managements review and judicial decision of financial reporting controls? . That their internal control all oer financial reporting was stiff as of October 3, 2010. d. That Starbucks kept up(p) effective internal control e preciseplace financial reporting as of October 3, 2010. c. How does Starbucks account for hand separate? What impact do un deliver bene accompanimention peak brook on the describe direct income in each form? How does Starbucks accounting for unredeemed gift separate compargon to other retailers? e. Revenues for handbills ar acknowledge when tendered for wearment, or upon redemption. Outstanding matchs argon acceptd in deferred revenue on the balance main shred.Balances on separate that be deemed unlikely to be redeemed, get recognized as salary use up income. f. operate income is augmentd by balances on cards thought unlikely to be redeemed thith erfore, it move be argued that in ope balancen(p) income is world everyplace tell by the addition of unlikely-to-be-redeemed card balances to discharge interest income. g. Gift card balances by other retailers argon probably carried as a li exponent (unearned revenue). When gift cards are non redeemed, some retailers return the balances to the state where the card was issued take for granted the unwanted balance to be unwanted property in some states.As seen above, Starbucks does ply outstanding balances as deferred revenue (a liability) as well, but once the cards are deemed unlikely to be redeemed, it treats the unclaimed balance as an asset. Part tercet Trend Analysis of Sales and remuneration Growth During 2006 2010 Review Starbucks income disceptation and everyday size income statement for the old age 2006 finished 2010. Identify and comment on the major(ip) contracts in the growth in Starbucks gross revenue and wampum, including a. Sales growth was Starbu cks gross revenue growth consistent or incongruous over the above five division full point?Do you see signs of acceleration or retardent in Starbucks historic growth grade? How does Starbucks gross gross gross revenue growth discriminate to its industry comes? Are alike store sales or the opening of natural stores the more important occurrenceor in driving Starbucks sales growth during this limit? Do you gestate Starbucks sale panaches over the preceding(a) few geezerhood bequeath reside over the adjacent both to three grades? Please take to the woods on rationale for your belief. Starbucks sales growth was inconsistent over the above 5 grade period. Data from the fail 5 divisions pop the questions that Starbucks growth rate is actually decelerating.Starbucks sales growth was below the industry sales growth. The industry has clean 9. 25% over the last 5 geezerhood maculation Starbucks solid groundabled 7. 5% only. The opening of innovativeborn s tores is resilient to Starbucks sales strategy. During 2006, 2007, and 2008, Starbucks added 2199, 2571, and 1669 gelt stores. During the analogous historic period, sales grew by 22%, 21%, and 10% respectively. During 2009, Starbucks trim down 45 stores and their sales dropped by 7%. In 2010, Starbucks added 223 stores and non amazingly their sales appendd by 10%. In our opinion, Starbucks sales go forth take place to grow but at a decreasing rate over the next 2 to 3 age.This projection is based on historical sales entropy from the last 5 eld which hint a deceleration of sales growth. Starbucks average sales growth for the last 5 familys is 11%. In 2006, Starbucks sales grew by 22%. This suggests a deceleration of sales growth. b. flagrant allowance accounts did gross margins expand, compact or hold blind drunk over the period? What major eventors account for the grade youve set? The gross margin has held steady over the last 5 years ranging some(prenominal) where from 55% to 59%. Gross margin is affected by sales and salute of sales. c. operate expense work out sure you look at direct expenses in both absolute sawhorse borders and as a pct of sales. Did operate expenses grow s debase, agileer or at the same rate as revenues? Would you expect to see more supplement on Starbucks embody base, given their growth history? (Note operational leverage is exhibit when a comp boths operate expenses grow at s get rate than its sales, at that placeby resulting in operating shekels growing faster than sales. ) Do you believe Starbucks cost base is broadly fixed, virtuallyly variable or an equal mingle of each?What implication does the structure of Starbucks cost base (i. e. % fixed / variable) adopt on the relationship amongst the growth rates of revenues and exonerate profit? Make sure you fork up information to stand your conclusion. Operating expenses hold liberal at a noble rate than revenues over the last 5 years. Revenues grew at an average of 7% art object operating expenses flummox large(p) at an average of 11. 34%. Based on these metrical composition, we expect to see less(prenominal) leverage on Starbucks cost base as operating expenses are growing at a high rate than revenues.The fact that Starbucks operating expenses are growing at a higher(prenominal)(prenominal) rate than its revenues shows that Starbucks cost base is nearly variable. This is besides turn out by the income statement as virtually of Starbucks operating expenses are Cost of Sales and Store Operating expenses. Most of these are normally variable. Having more variable expenses usually means that recompense will non necessarily grow at the same rate as revenues. This is demonstrated by the income statement from the last 5 years. Starbucks revenues and earnings have grown at disparate rates over each year of the last 5 years.The average earnings growth per year over the last 5 years is 12. 62% as compared to an average sales growth per year of 7. 5%. d. Operating income have operating earnings grown at the same rate, faster or slower than sales? What factors (e. g. gross margins, operating expense/charges) account for the trend youve identified? Be specific and contribute brook for your answer. Operating income has grown at a faster rate than sales on a per year dry land over the last 5 years. Sales growth has averaged 7. 5% per year as compared to an operating income growth of 11. 75% per year during the same period.The reason that operating income has grown so fast is because Starbucks late make alterations to its cost structure that made it more efficient. As per the 10-k statement filed with the SEC, Starbucks reduced its Cost of Sales by 260 alkali points by making their supply cosmic string process more efficient. This resulted in lower food, beverage, and paper packaging be. Because of its sales leverage, Starbucks was also able to mitigate its occupancy costs. Because of the reduced costs, Starbucks was able to have a higher operating income in 2010. This caused the 5 year average to jump up to 11. 75%.Also contributing to this growth was the fact that sales extendd at a higher rate than operating expenses. Therefore, operating income also went up at a higher rate than sales. e. electronic ne twainrk Income has benefit income grown at the same rate, faster or slower than sales? What factors (e. g. gross margins, operating expense, non-operating particular pro amazes) account for the trend youve identified? Be specific and provide take for for your answer. crystallise Income has adjoind at a higher rate than sales also on a per year basis for the last five years. In fact, Net Income has pretty much mirrored Operating Income in growth.The factors tied to Net Income are Sales, Operating Expenses, Interest, and Taxes. Taxes remained relatively proportionate EBT each year. During each of the 5 years, Starbucks experienced a positive interest income for 3 years and a negative for 2 years. This servicinged Starbucks increase their Net Income. However, the factor that affected Net Income the most was Operating Expenses. Operating expenses grew at a slower rate than sales from 2006 to 2010. This resulted in Starbucks having a higher Operating Income which in turn resulted in a higher net income. Starbucks net income grew by 142. 2% in 2010 from the previous year. This big(a) transfer resulted in the average net income growth rate to increase to 12. 62%. During the same period, Sales has grown by 7. 5% and operating expenses grew by 7%. All of this contributed to the Net Income growing at a higher rate than sales. f. internet per divvy up Does Starbucks earnings per share increase/decrease at a rate consistent with revenue and net income. why is this? Do you expect this relationship to continue into the proximo? Starbucks EPS increases and decreases at a rate consistent with net income but non sales.This is because e arnings per share are deliberate by taking the net income and dividing that into the number of shares outstanding. As a result, there is a direct correlation with net income and not sales. We expect this relationship to continue in the prox as long as the number of shares outstanding doesnt change drastically each year. Part IV Analysis of Operating Efficiency, Liquidity and Solvency apply information included in the Form 10-K analyze Starbucks operating efficiency and eloquentity. That is, answer the questions below.The ratio definitions used to calculate the figures in the Ratio Analysis table are described in the text and address notes. a. Operating efficiency Turnover ratios. In one paragraph, explain what the hold dears of perturbation rate ratios part somewhat Starbucks. That is, for each ratio, contend the trend, compare Starbucks ratio to the industry average (for receivables, inventory disorder and asset turnover only) and discuss whether the trend indicates i mprovements or deteriorations in operating efficiency. Can you think of any other measures that would be useful to respect Starbucks operational efficiency?Turnover ratios reveal that in 2010, Starbucks sales increased. Receivables turnover jumped up slightly from previous years to 37. 31. The industrys 2009 median receivables turnover is monetary depotamentally higher than Starbucks at about 98. 64. This trend indicates that Starbucks made less sales on credit in 2010. It could also mean that Starbucks improved collecting on its accounts receivables however, since Starbucks average accrual period ratio has not changed in the last three years (holding steady at about 11 days), there is no index number that collection on receivables has improved. The inventory turnover ratio of 7. 8, which slightly increased from 2009, also suggests a decrease in inventories, which is supported by the drop of inventory assets shown on the balance sheet. This trend supports the observation that sales have increased importantly for Starbucks in 2010 which is invariably an improvement for any business. PP&E Turnover ratio of 4. 32, which increased from 2009, again, demonstrates higher sales since PP&E remained at similar levels as previous years per the balance sheet. Total asset turnover, 1. 79, remained very close to last year, and is slightly less than the industry average, 1. 3. This shows Starbucks continues to generate sales at a level of close double as much as they carry assets on their books. The fact that their asset turnover is slightly less than that of their competitors suggests that Starbucks may have more assets than their competitors. b. Liquidity In one paragraph, explain what the liquidity ratios ( certain ratio, fast-flying ratio and immediate payment from trading trading operations ratio) reveal about Starbucks. Include an explanation of how the exchange prey from operations ratio differs from the current and industrious ratios. What is yo ur conclusion egarding Starbucks liquidity position? With signifi standt increases in 2010 in current ratio, 1. 55, and quick ratio, 0. 99, Starbucks is very liquid. Quick ratio shows they have 1. 5 times current assets on the books as they do current liabilities. Likewise, the quick ratio shows they would be able to upside current liabilities with their current assets. The hard currency from operations ratio is . 96, which states that Starbucks money from operations would not be enough to cover its current liabilities. This ratio differs from the first two in that it compares a cash scarper item to a balance sheet item.It is an indication of a firms ability to pay off its current liabilities however, it is the most conservative liquidity ratio since it excludes all current assets except for the most liquid cash and equivalents. It tells that Starbucks would not quite be able to pay off all of its current liabilities with just its cash and equivalents, although it does come clos e. c. Solvency Interpret the look ons of the relevant ratios and provide a conclusion regarding Starbucks ability to aid its debt and risk of future insolvency. Does your conclusion change if you include off balance sheet debt.How much off balance sheet debt does Starbucks have as of the end of the most recent pecuniary year? Starbucks solvency ratios suggest that it is in a strong position and would likely be able to swear out its debt as it shows low risk of future solvency. Its debt to loveliness ratio for 2010 of 0. 73 is at the lowest it has been in the past five years. From 2009 Starbucks had a big increase in retained earnings, this pushed all solvency ratios including interest coverage, return on assets, and return on equity up. ROA and ROE were doubled from 2009 to 0. 16 and 0. 28 respectively.Likewise, interest coverage also had a big jump collect to a significant increase in earnings before interest and taxes. If we include off balance sheet debt, Starbucks debt to equity ratio increases a bit, but the trend still shows that this ratio has decreased significantly in 2010. The increase would not be enough to state that Starbucks runs a high risk of insolvency. Starbucks has $4,084. 2 in off balance sheet debt as of end of most recent fiscal year. (We train that the numbers provided are in gazillions). Part V Analysis of Cash pay heed Refer to Starbucks cash flow statement a.During the past three years, what was Starbucks largest source of cash? What were Starbucks two largest uses of cash? a. For the past 3 years, the largest source of cash for Starbucks was Net earnings including non-controlling assets from its operating activities. Starbucks two largest uses of cash were additions to property, make up and equipment, as well as purchasing on hand(predicate) for sale securities. It is state in the 10-k that the major components of the PPE spending were remodeling and upgrading equipment in stores, as well as updating the IT nucleotide of the retail network. b.For the past three fiscal years, has Starbucks chief financial officer been fair to middling to investment trust its growth initiatives? If no, how has Starbucks funded the CFO nobblefalls to fund growth? a. As stated in the 10-K Starbucks believes that cash flows generated from operations and actual cash and short call enthronisations should be enough to support their measure business activities. However, it is also stated that new business opportunities, joint ventures, and acquisitions would have to practice outside funding sources. Starbucks has augmented to their cash flows by heavily expend in available for sale securities, and purchasing US Agency and investment grade bonds.These investments, and outside financing, can be used to fund growth initiatives trance CFO can be used to support Starbucks sum of money retail business. The 10K also mentions that the issuance of commercial-grade paper and its proceeds can be used for working heavy(p) needs, chief city expenditures, and other corporate purposes, including acquisitions and share repurchases. c. Based on your review of Starbucks cash flow statement, has Starbucks growth been driven by perfect growth or acquisitions? Provide support for your answer. a.Starbucks growth has been driven organically, with strong, steady growth in net earnings including non-controlling interests, and investing a large amount of cash in property, plant, and equipment by opening new retail locations and upgrading existing stores and information systems. By utilizing CFO and short name investment earnings to support their nerve business, Starbucks has detected a high growth, very sure-fire retail operation. Acquisitions play a electric shaver role compared to the growth and earnings from operating activities. d. If Starbucks continues to grow at its historic rates, does it shape up that Starbucks CFO can fund this growth?If CFO isnt sufficient, how might Starbucks fund its future g rowth? a. Yes, it does appear that Starbucks CFO can fund its historic growth. This is stated in the 10k CFO and short precondition investments, as well as any potential future borrowings and the commercial paper program can support the existing core business as well as related marketing support, product innovations, and new business opportunities related to the core business. If CFO is not sufficient to fund the historic growth, Starbucks can utilize channels within the investment and finance sections of the cash flow statement.Particularly, Starbucks can invest more heavily in short term investments, and utilize the commercial paper program. Additionally, Starbucks purchases available for sale securities heavily these could be change in the future to fund any growth where CFO is not adequate to support the core business. e. During the past three fiscal years, what dollar amount of viridity seam did Starbucks repurchase and what dollar amount of dividends did they pay? Why wou ld Starbucks repurchase their own rip and/or pay a dividend? How does this impact Starbucks ability to fund future growth?How did Starbucks strategy with regard to share repurchases and dividends change during the past few years? Why did it change? a. In 2008, Starbucks repurchased $ 311. 4 million in unwashed stock. In 2009, Starbucks did not repurchase any stock. In 2010, Starbucks repurchased $ 285. 6 million in common stock. Starbucks may want to repurchase their own stock so that they can increase their earnings per share ratio. This is especially trustworthy if Starbucks shares were perceived as undervalued, as Starbucks can repurchase the shares and hold them in the exchequer for future reissuance at a higher price.Starbucks may be able to triumph more financing and loans with better earnings per share ratio as well. Dividends can be paid to shareholders to increase the value of their shares, and encourage other interested parties to purchase Starbucks shares. Paying divi dends is a way to help impact positive future growth by making the purchase of Starbucks stock more profitable more population will want to buy it providing more cash for Starbucks to utilize. In the 10-k, it is stated that Starbucks had 1. 7 billion in CFO for 2010 compared to 1. 4 billion in fiscal 2009, and capital letterital expenditures were approximately 440 million in both fiscal years.This left roughly $460 million for stock repurchases and dividends. Starbucks had to repay short term borrowings in 2008 and 2009, but did not have to use cash for repayment in 2010. The cash that would have been used to retribution short term borrowings could instead be used to repurchase stock and pay dividends. Thus, the strategy changed because Starbucks was able to operate without short term borrowings in 2010, and was able to pass on the excess case to shareholders. Part VI grocery store Valuation a. What is Starbucks net book value as of the end of the most recent fiscal year?What was Starbucks market capitalisation as of that date? Why is there a rest in these two amounts? What specific items do you think lay out the difference? Starbucks net book value as of the end of 2010 fiscal year was $3,611,500,000 while its market cap was $19,270,826,000. The reason that the two numbers are distinct is because the net book value is compute by taking the total assets of Starbucks and subtracting its intangible assets and total liabilities, while the market cap is calculated by multiplying the outstanding shares into the stock price.Because each is calculated using 5 different numbers, there will almost always be a difference in the two numbers. b. Do you believe the difference between Starbucks net book value and market capitalisation will increase or decrease in the future? What specific factors or trends identified in Starbucks financial information (or identified elsewhere) support your view? We believe that the difference between Starbucks net book value and m arket capitalization will decrease in the future.One of the biggest reasons for this is the fact that Starbucks restructured its Supply Chain process to lower costs. As a result, net income grew by 142% in 2010. This was a huge change of mind by Starbucks in one year and it can be attributed to the fact that lead identified and implemented this cost conservation mechanism. Another trend that indicates that Starbucks is on its way back is the fact that they opened more stores than they closed in the last 2 years. This strategy is key to Starbucks succeeding. Third, Starbucks gross margin has remained constant in the last 5 years condescension the down years.This shows that management knows how to cut down on costs when times are rough, or that despite financial downturns, people are still willing to pay for expensive coffee. death Refer to your responses in Part 1 How do the results of your analysis in split II through VI support or contradict your original thoughts regarding S tarbucks growth strategy and the success or tribulation of the three action areas (growth initiatives) you identified? Our conjecture on their strategy to saturate the U. S. Market by building as any stores as possible is supported by our discussion on sales growth, which shows that there is a direct correlation between sales revenue growth and net new stores opened. Likewise, in analyzing the CFO, we concluded that Starbucks has grown organically through their investment in PP&E, which corroborates our original thoughts. Although they probably recognize they were overdoing it with having a Starbucks on every corner, their growth strategy of increasing store numbers has been a success for the company as sales have also increased. discharge forward, the challenge will be to maintain high sales rates while being able to cover its large PP&E/overhead expenses. Although we didnt really analyze the impact of international expansion in our analysis above, harmonize to the company s 10-K, operating income from international activities more than doubled from 2009 to 2010 however, this increase was broadly speaking due to foreign currency rendering among other things. Therefore, our original thoughts are not necessarily proven by the data that we analyzed. Finally, we stated that one of Starbucks growth strategies was to develop alternative revenue sources.As we looked deeper at the reasons for sales growth, we noticed that licensing and food service both were strong contributors to the increases in net revenues. Our discussion on sales growth indirectly supports this hypothesis, since the increase in net revenues was affected by an increase in average value per transaction (as stated in the 10-K). This means that customers are not just buying coffee at the checkout stand because Starbucks is being prosperous at selling other praising goods along with their drinks. Therefore, this is definitely being a successful growth strategy for Starbucks.