Starbucks corporation account question and answers
Starbucks Corporation - 2007Learning Objectives:• Find requested information in financial statements and the associated notes (and thusbecome familiar with the information reported in financial statements and associatednotes).• Generate common-size financial statements.• Calculate and interpret return on assets.• Apply DuPont analysis.Starbucks Corporation’s financial statements are located on the course LMES website.To complete some requirements, you will need to use the notes to Starbucks’ financialstatements.
1. Overview of financial statements.a. What four financial statements do companies typically prepare for externalreporting purposes? What name does Starbucks use for each of these statements? 4 financial statements The name Starbucks use Consolidated Balance Sheets Balance Sheet As of September 30, 2007, and October 1, 2006 Consolidated Statements of Earnings Income Statement for the fiscal years ended September 30, 2007, October 1, 2006, and October 2, 2005 Consolidated Statements of Cash Flows Statement of Owner’s Equity for the fiscal years ended September 30, 2007, October 1, 2006, and October 2, 2005 Consolidated Statements of Cash Flows Statement of Cash Flows for the fiscal years ended September 30, 2007, October 1, 2006, and October 2, 2005b. What does “consolidated” mean? Emerged (connected) statement of United State’s and Internations’sfinantial sheetc. How often do listed companies in the United States, such as Starbucks, typicallyprepare financial statements for external reporting purposes? 4 times per year(Quarterly)What about listedcompanies in Hong Kong such as Hutchison Whampoa? 2 times per year(Biannual)d. How does Starbucks define segments for financial reporting purposes?ListStarbucks’ segments. Which operating segment had the highest ratio of revenuesto identifiable assetsfor fiscal year 2007?List of Starbucks’ segments 1) United States : 7,348,993 ( 78% ) / 2,454,619 = 2.99 2) International : 1,696,159 ( 18% ) / 1,116,054 = 1.5 3) Global Consumer Product Group : 366,345 ( 3.8%) / 91,614 = 3.99Segment of highest ratio of revenues : CPG
2. Auditors.a. What accounting firm issued Starbucks audit opinion (i.e., what accounting firmis Starbucks’ external auditors)? DELOITTE & TOUCHE LLP ( Seattle, Washington)– p.74One of the four largest international professional services networks in accountancy andprofessional services, which handle the vast majority of audits for publicly traded companies aswell as many private companies, creating an oligopoly in auditing large companies.b. Briefly state in your own words what Starbucks’ audit opinion means. That is,use everyday language to explain how a reader of Starbucks’ financial statementsshould interpret what the audit opinion says.The financial statements are credible, fairly written based on the guidance of US accounting rule.c. Why is the audit opinion dated several months after Starbucks’ year-end?To review the financial sheetd. Why are audit opinions issued by external auditors?To make the credibility of the financial sheets high
3. Consolidated statement of earnings (i.e., income statement).a. Consider the statement found page 39. Which of the following types of accountsare reported on an income statement: assets, liabilities, shareholders’ equity,revenues, expenses, gains, and losses?assets, liabilities, shareholders’ equity,revenues, expenses, gains, and losses?b. Based on the income statements for fiscal years 2007 and 2006, did Starbucksexperience a significant change in any of it operating expenses from fiscal year2006 to fiscal year 2007? If so, list the operating expenses that experienced asignificant change. Cost of sales and including occupancy costs, Depreciation and amortization expense,Store operating expensesc. Starbucks provide a common-size(백분비) income statements for Starbucks for fiscalyears 2007 and 2006 (page 22).Explain the logic of this spreadsheet. The ratioassociated with “General and administrative expenses” is 5.2%. Recalculate thisratio.Using consolidated income sheet, calculated % of revenues,Operating income = total net revenues – total operating expenses + income from equity invest Net earnings = operating income – taxes 489,249 / 9,411,497 = 5.2%d. Based on the common-size income statements for fiscal years 2007 and 2006, didStarbucks experience a significant change in any of it operating expenses fromfiscal year 2006 to fiscal year 2007? If so, list the operating expenses thatexperienced a significant change. Cost of sales and including occupancy costs
4. Consolidated balance sheet.a. Which of the following types of accounts are reported on a balance sheet: assets,liabilities, shareholders’ equity, revenues, expenses, gains, and losses? assets,liabilities, shareholders’ equity, revenues, expenses, gains, and losses?b. On its October 1, 2007 balance sheet, Starbucks reported $2,890,433 thousand for“Property, plant and equipment, net.”List the sub-accounts (and their respectiveOctober 1, 2007 balances) that comprise the $2,890,433 thousand for “Property,plant and equipment, net.” Where did you find this information?The sub-accounts of “Property, plant and equipment, net”: 1) Land, 2) buildings, 3) leasehold improvements, 4) store equipment, 5) roasting equipment, 6) furniture, fixtures, and other 7) less accumulated depreciation and amortization 8) work in progressFound in Page 56. Note 7c. Construct common size-balance sheets for Starbucks for fiscal years endedOctober 1, 2007 and October 2, 2006. Common-size balance sheets scale eachline item by total assets. That is, in a common-size balance sheet, each balancesheet line item is stated as a percentage of total assets. Thus, to construct acommon-size balance sheet, divide each balance sheet line item by total assets.State each line item as a percentage, and round to two decimals.
BALANCE SHEETS – FISCAL 2007 COMPARED TO FISCAL 2006 Sep 30, 2007 % of Oct 1, 2006 % ofFiscal Year Ended In thousands, Total Assets, In thousands, Total Assets, ASSETSCurrent assets: Cash and cash equivalents $281,261 5.26% $312,606 7.06% Short-term investments — available-for-sale securities 83,845 1.57% 87,542 1.98% Short-term investments — trading securities 73,588 1.38% 53,496 1.21% Accounts receivable, net 287,925 5.39% 224,271 5.06% Inventories 691,658 12.94% 636,222 14.37% Prepaid expenses and other current assets 148,757 2.78% 126,874 2.86% Deferred income taxes, net 129,453 2.42% 88,777 2.00% Total current assets 1,696,487 31.75% 1,529,788 34.54%Long-term investments — available-for-sale securities 21,022 0.39% 5,811 0.13%Equity and other investments 258,846 4.84% 219,093 4.95%Property, plant and equipment, net 2,890,433 54.09% 2,287,899 51.66%Other assets 219,422 4.11% 186,917 4.22%Other intangible assets 42,043 0.79% 37,955 0.86%Goodwill 215,625 4.03% 161,478 3.65% TOTAL ASSETS $5,343,878 100.00% $4,428,941 100.00% LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities: Commercial paper and short-term borrowings $710,248 13.29% $700,000 15.81% Accounts payable 390,836 7.31% 340,937 7.70% Accrued compensation and related costs 332,331 6.22% 288,963 6.52% Accrued occupancy costs 74,591 1.40% 54,868 1.24% Accrued taxes 92,516 1.73% 94,010 2.12% Other accrued expenses 257,369 4.82% 224,154 5.06% Deferred revenue 296,900 5.56% 231,926 5.24% Current portion of long-term debt 775 0.01% 762 0.02% Total current liabilities 2,155,566 40.34% 1,935,620 43.70%Long-term debt 550,121 10.29% 1,958 0.04%Other long-term liabilities 354,074 6.63% 262,857 5.93% Total liabilities 3,059,761 57.26% 2,200,435 49.68%Shareholders’ equity: Common stock ($0001 par value) 738 0.01% 756 0.02% Other additional paid-in-capital 39,393 0.74% 39,393 0.89% Retained earnings 2,189,366 40.97% 2,151,084 48.57% Accumulated other comprehensive income 54,620 1.02% 37,273 0.84% Total shareholders’ equity 2,284,117 42.74% 2,228,506 50.32% TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $5,343,878 100.00% $4,428,941 100.00%
d. Based on your common-size balance sheets, did Starbucks experience asignificant change in any of its assets or liabilities from October 2, 2006 toOctober 1, 2007? If so, list the assets and/or liabilities that experiencedsignificant changes. Property, plant and equipment, net Long-term debt Retained earningse. Starbucks’ shareholder equity reports $54,620 as “Accumulated othercomprehensive income”? Where can you find the details of this amount? Page.60f. What was the total shareholders’ equity at the end of 2006 and 2007? Can youreconcile the two numbers? Where did you find the information? 2,284,117 in 2007 and 2,228,506 in 2006g. Explain how the balance in Retained Earnings changed from 2,151,084 to2,189,366.p.42 balance in 2006 2,151,084+ net earning in 2007 672,638- repurchase of common stock (634,356)------------------------------------------------------------------------------ $2,189,366
5. Consolidated statement of cash flows.a. What are the three major sections of Starbucks cash flow statement? Operating activities, Investing activities, Financing activitiesb. How much cash did Starbuck generate from operating activities during fiscal year2007? Was this amount more or less than the amount of net income the companygenerated? Cash : 1,331,221 Net income : 672,638 More : 658,583c. What were Starbucks’ three largest non-operating cash flows during fiscal year2007?Repayments of commercial paper (16,600,841) Proceeds from issuance of commercial paper 17,311,089 Repayments of short-term borrowings (1,470,000)6. Ratio analysis.a. Use the component approach (explained below) to calculate Starbucks’ return onassets (ROA) for fiscal years 2007 and 2006 (i.e., calculate asset turnover andprofit margin, and then use those two to calculate ROA).On its October 3 2005balance sheet, Starbucks reported $3,513,693 thousand for its totalassets.ROA is a ratio commonly used to assess a company’s profitability. This ratiocompares the profit the company generated during the period to the resourcesavailable to the company during the period. There are several different ways tocalculate this ratio. We will calculate it as follows.NOPATROA =Average Total Assets
• NOPAT means “Net Operating Profit After Tax.” It measures how muchprofit the company generated during the period, independent of thecompany’scapital structure (i.e., independent of how much of the company’s assets arefinanced by debt versus shareholders’ equity).NOPAT is calculated asfollows.NOPAT = Net income + Interest expense (1 – Tax rate)You can estimate the tax rate using the following formula (you will find theamounts for the items in the formula on Starbucks’ income statement).Estimated tax rate = Income taxes ÷ Earnings before income taxes• Average total assets measures the resources available to the company duringthe period. Average total assets are calculated as follows.Average total assets = (Start-of-period total assets + End-of-period total assets) ÷ 2To better understand a company’s ROA, you can decompose ROA into twocomponents: (1) asset turnover and (2) profit margin, as follows.ROA = Asset turnover x Profit margin• Asset turnover measures a company’s efficiency and effectiveness at using itsassets to generate gross wealth (i.e., revenue). This ratio tells us how manysales dollars the company generates per dollar of assets. It is calculated asfollows.Asset turnover = Sales ÷ Average total assets
• Profit margin measures a company’s efficiency and effectiveness at managingits expenses. This ratio tells us how much of each sales dollar the companykeeps after covering all its expenses except interest. It is calculated as follows.Profit margin = NOPAT ÷ SalesThus, the component approach for calculating ROA uses the following formula.Sales NOPATROA = Average TotalAssetsx Salestax rate tax/earning 0.363251682 2007 0.358369665 20061-tax rate 0.636748318 2007 0.641630335 2006net income(net earning) p.22 672,638 2007 2006 564,259interest expence p.58 2007 38,200 2006 8,400avg total asset (2006+2007)/2 2007 4,886,410 (2005+2006)/2 2006 3,971,317NOPAT net income + interest expense(1-tax rate) 2007 696,962 2006 569,649 NOPAT / AVG ASSET 0.1426327ROA 0.14344075
b. Use the full DuPont model (explained below) to calculate Starbucks return onequity (ROE) for fiscal years 2007 and 2006 (i.e., calculate each component of theDuPont modal and then use them to calculate ROE).On its October 3, 2005balance sheet, Starbucks reported $3,513,693 thousand for its totalassets and$2,090,262 thousand for its total common shareholders’ equity.ROE is another ratio commonly used to assess a company’s profitability. Thisratio compares the profit the company generated during the period for commonshareholders to the resources invested in the company by common shareholders.ROE is calculated using the following formula:ROE = Net income ÷ Average common shareholders’ equityThe DuPont model is a tool for analyzing ROE. Specifically, the DuPont modeldecomposes ROE into components. There are several variations of the DuPontmodel. The variation we will use is as follows.ROE = Leverage x ROA x Interest efficiency• Leverage measures the company’s capital structure. This ratio tells us howmany dollars of assets the company has relative to each dollar of commonshareholders’ equity. It is calculated as follows.Leverage = Average total assets ÷ Average common shareholders’ equity• As discussed above, ROA is comprised of two components: (1) asset turnoverand (2) profit margin• Interest efficiency measures a company’s efficiency and effectiveness atmanaging its interest expense. This ratio tells us how much of each NOPATdollar the company keeps after covering its interest expenses (and income taxexpense related to the interest). It is calculated as follows.
Interest efficiency = Net income ÷ NOPATThus, the full DuPont model is as follows.ROE = Leverage x Asset turnover x Profit margin x Interest efficiencyAverage TotalAssets Sales NOPAT Net income= Average CommonShareholders’EquityxAverageTotal Assetsx Sales x NOPATROE NET INCOME / AVG EQUITYnet income(net earning) p.22 672,638 2007 564,259 2006average common stock share holders equity 2,256,312 2007 2,159,384 2006ROE NET INCOME / AVG EQUITY 0.29811398 2007 0.26130554 2006