AF Assignment 1

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ANALYSIS FINANCIAL STATEMENT

Submitted by: Maam Naila


Submission by: Zoya Shafiq
BSC (Accounting & Finances)
Semester:07

Pre-Mid: Assignment 1

Date: 2 October 2020


Financial Statements

flows for Starbucks for the four fiscal years ending September 28, 2008.

Required Respond to the following questions relating to Starbucks

 Objectives

Identify the economics characteristics of the specialty coffee retail industry and Starbucks’
strategy for competing in this industry as background for the integrative case on Starbucks
used throughout the book.

Review the purpose, format, terminology, and accounting principles underplaying the balance
sheet, income statement, and statements of cash flows.

Introduce common-size and percentage-change income statements and balance sheets and the
insights such statements provide.

Establish an understanding of Starbucks’ business so that it can be used as a case throughout


a course to illustrate all of the steps of the six-step analysis and valuation framework. Our
experience suggest that Starbucks works well because it is a company that nearly all students
easily understand and find interesting.

 II. Teaching strategy- We have taught this case with two approaches. If an opportunity
exist to distribute the case prior to the first class, we give students the solutions to the
questions involving the balance sheet, income statement. We ask them to review these parts
on their own and to prepare solutions to the questions under the sections labeled. “Industry
and Strategy Analysis” and “Interpreting Financial Statement Relationships.” We devote the
first to discussing these two sections of the case. If we cannot distribute the case ahead of
time, we devote approximately three hours of class time to discuss the entire case.
Alternatively, you can choose to emphasize particular questions based on the amount of time
available and refer students to the solutions for the remaining parts
 Industry and Strategy Analysis

a. Apply Porter’s five forces framework to the specialty coffee retail industry.

b. How would you characterize the strategy of Starbucks? How does Starbucks create

value for its customers? What critical risk and success factors must Starbucks

manage?

Industry and strategy analysis:

a.   Porter’s five forces applied to the specialty coffee retail industry:

1. Buyer power:

Buyer power for specialty coffee is less than that for Commodity coffees because consumers
view specialty coffees as higher quality and more unique. These characteristics of specialty
coffees increase consumers’ willingness to pay more for such coffees and make them less
price-sensitive. Combining the specialty coffee with a pleasant café or coffee shop setting
(the “Starbucks Experience”) in which consumers purchase and enjoy the coffee decrease
consumers’ price sensitivity still further. Thus, buyer power appears to be relatively low.

2. Supplier Power:

Suppliers of the high-quality Arabica coffee beans used in specialty coffees have a bit more
power over theirs customers because of their customer’ need for such coffee beans.
Commodity coffee beans are not an attractive alternative for such customers. However,
specialty coffee beans are produced by suppliers around the world. Worldwide sourcing
means that there are many suppliers of similar specialty coffee beans, which give purchasers
such as Starbucks an ability to swtich suppliers to gain an advantage. Specialty coffee beans
are even traded on commodity market exchange. Moreover, cooperative or collusive
association of green coffee bean growers that controls the supply or the price of beans exists.
Thus, suppliers power is low.
3. Revalry among existing firm:

There are many direct competitors in the specialty coffee retail industry. The competitors
span a wide range of sizes and business approaches, including large-scale fast-food chains
( for example McDonald’s), doughnut chain ( for example, tim Hortons, Dunkin Donuts, and
Krispy Kreme), coffee shop chains ( for example, panera bread, Carbiou Coffee, and Peet’s
Coffee & Tea), and local coffee shops and cafes. The issue for Starbucks is whether the
Starbucks Experience sufficiently differentiates the firm from competitors whose specialty
coffees might be of equal quality Rivalry among firms appears to be high.

4. Threat of new Entrants:

No barriers to entry exist. Opening coffee shops requires very little capital, technology, or
expertise. In addition to new coffee shop chains springing up, established retail food chains
have the ability to add specialty coffees to their menus, as McDonald’s is doing aggressively
with the McDonald’s initiative. In addition, it is no common for gas station chains to offer
specialty coffee Kiosks in their convenience shops. Starbucks primary competitive advantage,
relative to new entrants, is the advantage of an established brand name. It also hasva scale
advantage because it has saturated the united states with retail stores and is growing its
business in other countries ( further evidence of the lack of barriers to entry). Thus, the thread
of new entrants appears to be high.

5. Thread of Substitutes:

There are numerous beverage substitutes to specialty coffees, which make the threadof
substitutes high. Substitute beverages span a ide range, including soft drinks ( Coca-Cola and
PepsiCo), teas, waters, juices, sports drinks, beer and wine. However, there are fewer
substitutes for the Starbucks Experience, which is a competitive advantage relative to the
threat of substitutes. Nevertheless, the thread of substitutes appears to be high.

B: Starbucks combines the sale of specialty coffees and other high-quality beverages with
friendly and competent service in a unique setting in which customers can enjoy the
beverages. This combination has allowed the firm to create the Starbucks experience, which
differentiates it from direct competitors. Its market saturation in the united states has
premitted the firm to establish a brand name, which it is now exporting to other countries. Its
use ti licensing arrangements has fostered the rapid growth. Starbucks is now leveraging its
brand name by selling coffee beand and ground coffees through grocery stores, warehouse
clubs, and food distributors. It also is leveraging its brand name by forming partnerships with
other eatablished brand name firm to sell various high-quality beverages. Starbucks appears
to be aggressively pursuing multiple avenues to maintain its growth, discourage new entrants,
and leverage its brand name.

Balance Sheet

c. Describe how Cash differs from Cash Equivalents.

d. Why do investments appear on the balance sheet under both current and noncurrent
assets?

e. Accounts receivable are reported net of allowance for uncollectible accounts. Why?

Identify the events or transactions that cause accounts receivable to increases and
decrease. Also identify the events or transactions that cause the allowance account to

increase and decrease.

f. How does the account Accumulated Depreciation on the balance sheet differ from

Depreciation Expense on the income statement?

g. Deferred income taxes appear as a current asset on the balance sheet. Under what

circumstances will deferred income taxes give rise to an asset?

h. Accumulated Other Comprehensive Income includes unrealized gains and losses

from marketable securities and investments in securities as well as unrealized gains

and losses from translating the financial statements of foreign subsidiaries into U.S.

dollars. Why are these gains and losses not included in net income on the income

statement? When, if ever, will these gains and losses appear in net income?

Balance sheet:

c: Cash includes cash on hand and in checking accounts. Cash equivalents include amount
that a firm can easily convert into cash. Cash equivalents usually have a maturity date of lass
than three months at the time of purchase so that changes in interest rate have an insignificant
effect on their market value. Cash equivalents might include investments in U.S treasury
bills, commercial paper, and money market funds.

d: Securities that a firm intends to sell within one year of the balance sheet date appear in
short-term investments, securities that a firm expects to hold for more than one year appear in
the noncurrent asset long term investments. You can use this question to introduce the
concept of trading, available for sale and held-to-maturity security categories, but be aware
that this discussion usually requires some time to explain how and why accounting differs for
each category. You can defer such discussion to later in the course.

e: The accounts receivable arises because starbucks recognize revenue earlier than the time it
collects cash. It is useful to query students on hich specific line of the starbucks business
create accounts receivable. They will quickly realize that the majority of receivables do not
arise from company-operated retail store revenues, the vast majority of which are in cash ( or
cash equivalent credit card sale). The receivables arise primarily from starbucks specialty
business, which includes revenues from licensees and revenues from sale to foodservice
accounts and distributions to grocery stores. Because starbucks is not likely to collect 100%
of the amount reported as receivables, it must recognize an expense for estimated
uncollectible accounts and reduce gross accounts receivable to the amount it expects to
collect in cash. Starbucks reports the balance in the allowance for uncollectible accounts as
subtraction from gross accounts receivable on the balance sheet. Starbucks increase the
balance in the allowance account for estimated uncollectible accounts arising from credit
sales each year. It reduces the balance in the allowance account for actual customers accounts
deemed uncollectible.

f: The accumulated depreciation accounts reports to cumulative depreciation recognized since


the firm acquired depreciable assets that appear on the balance sheet. Depreciation expense
reports only the amount of depreciation recognized for a particular accounting period.

g: Deferred tax assets arise when a temporary difference between net income and taxable
income provide a future tax benefit to the firm. This occurs 1 when a firm recognizes revenue
earlier of tax reporting than for financial reporting (subsequent recognition of the revenue for
financial reporting will not give rise to a tax payment) or 2 when a firm recognizes expenses
earlier for financial reporting than for tax reporting (subsequent recognition of the expense
for tax reporting will reduce income tax payments). Deferred tax liabilities arise when a
temporary difference will require a firm to make a tax payment in the future in the future.
This occurs 1 when a firm recognizes revenue earlier for financial reporting than for tax
reporting ( subsequent recognition of the revenue for tax reporting will require the firm to pay
taxes) or 2 when a firm recognizes an expense earlier for tax reporting than for financial
reporting ( subsequent recognition of the expense for financial reporting does not give rise to
a tax deduction, thereby increasing taxable income and taxes payables). Note that the
classification of deferred taxes on the balance sheet for a particular revenue or expense
depends on 1 the like hood of temporary difference giving rise to a deferred tax asset or a
deferred tax liability and 2 the timing of the likely reversal of the temporary difference (less
than one year or longer than one year.

Income Statement

i. Starbucks reports three principal sources of revenues: company-operated stores,

licensing, and foodservice and other consumer products. Using the narrative
information provided in this case, describe the nature of each of these three sources of

revenue.

j. What types of expenses does Starbucks likely include in (1) Cost of Sales,

(2) Occupancy Costs, and (3) Store Operating Expenses?

k. Starbucks reports Income from Equity Investees in its income statement. Using the

narrative information provided in this case, describe the nature of this type of

income.

Income statement

Revenues from company owned stores represent the revenues from sales of coffee
beverages, food and other products in retail stores that Starbucks own and manages.
Revenues from licensing represent various fees that Starbucks receives from the retail
store that it does not own or manage. Starbucks likely receive a royalty based on revenues
of these stores. It also receives revenues for inventory and products sold to the licenses
and for various services provided. Revenues from food service represent amounts
received from the sales of products to grocery stores, warehouse clubs and food services
distributors. Note that Starbucks income from its partnership and joint ventures with
Pepsico and Unilever and others appears as as ‘’Income from Equity Investee’’ .

j) Cost of sales likely include the cost of the raw materials such as coffee beans , teas,
dairy products, sugar, paper products, and similar items that makes Starbucks products.
Occupancy costs include rent, property taxes, insurances, utilities, and maintenance cost
of its company owned stores. Stores operating expenses includes compensation of its
employees working in the company owned stores as well as advertising and other
marketing expenses.

k) Income of Equity investee shows the Starbucks share of earnings of partnership with
PepsiCo and Unilever. In addition, Starbucks is involved in numerous joint ventures to
own and operate Starbucks stores in countries outside United States. It also represents
Starbucks share of the bottom line of income statements of the partnerships not the top
line which is partnership’s revenue. Starbucks reports its investments in these
partnerships under ‘ Equity and Other Investments’ in the non- current assets section of
the balance sheet.

Statement of Cash Flows


l) l. Why does net income differ from the amount of cash flow from operating
activities?
m) m. Why does Starbucks add the amount of depreciation and amortization expense
to
n) net income when computing cash flow from operating activities?
o) n. Why does Starbucks show an increase in inventory as a subtraction when
computing cash flow from operations?

Statement of Cash Flows

L) Firms use accrual basis of accounting in measuring net income. Firms usually recognize
revenues at the time of sales of goods and services, not necessarily when they receive
cash from the customers. Firms attempt to match their expenses with the time period
during which they consume economic resources, regardless when they expand cash. The
accrual basis gives a better indication of a firms operating performance than cash basis
because of the matching inputs and outputs. Cash Flows from the operating activities in
the statement of cash flow report the amount of cash received from customers net of
amount paid to supplier of goods and services.
m) Depreciation and amortization expenses reduce net income but do not require cash
expenditures in the year of their recognition ( the cash effect occurred in the year a firm
acquired the deprivable and amortizable asset, the firm classified the cash outflow as an
investing activity in the statement of cash flows at the time).The addition add backs to
the net income the amount subtracted in calculating earnings for year in effect zeroing
out its effect on cash flow from operating activities.
n) Net income on the first line of the statement of cash flow statement includes a subtraction
for the cost of sales during each year. Starbucks likely purchases a different amount of
inventory than it uses or sells. An increase in the inventories means that Starbucks
purchased more than it used or sold. Thus the cash outflow for the purchases potentially
exceeds cost of sales and requires a subtraction from net income for the additional cash
required. Whether additional cash was in fact required in any year depends on the change
in accounts payable.
PLAGRISUM REPORT

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