The Rules of Financial Reporting and the Starbucks Corporation

The Rules of Financial Reporting and the Starbucks Corporation The Financial Accounting Standards Board's accepted accounting principles, or GAAP, set the accounting standards a company, such as Starbucks, must follow (Sullivan, n.d.). These principles are put forth to prevent fraud and clerical errors that “may compromise the accuracy of a company's financial statements” (para. 1). Internal controls can also reduce the loss and protect a company’s assets and identify underperforming employees in accordance with an organization’s policies and procedures (para. 1 & Center for Audit Quality, 2013). Additionally, a company’s system of Internal Control Over Financial Reporting (ICFR) consists of controls that provide assurance regarding reliable financial statements prepared under the GAAP guidelines (Center for Audit Quality, p. 2). “Internal control systems need to be monitored — a process that assesses the quality of the system’s performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations. It includes regular management and supervisory activities, and other actions personnel take in performing their duties” (p. 3). According to the Starbucks Fiscal 2016 Annual Report, “We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods 35 See Appendix E 36 Current industry average - Source: http://financials.morningstar.com/valuation/price-ratio.html?t=SBUX®ion=usa&culture=en-US Starbucks Financial Analysis specified in the SEC’s rules and forms” (p. 87). The company’s disclosure controls and procedures also ensure that the information disclosed under the Exchange Act is presented to management, the principal executive office, and the principal financial officer (p. 87). The annual report also indicates that management is responsible for establishing and maintaining internal control over financial reporting and that all is in accordance with the accepted accounting principles in the United States (p. 87). This includes “maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis” (p. 87). In the guidelines and opinions of Starbucks, it is reported that the company maintained effective internal control over financial reporting as of October 2, 2016—based on the Internal Control - Integrated Framework (2013) (p. 87)37. Besides these guidelines, Starbucks has also adopted a code of ethics (as defined by the SEC), which covers corporate governance, for the chief executive officer, chief operating officer, chief financial officer, controller, and other finance leaders38. Besides internal control procedures, segment information is also required by a publiclyheld entity, such as Starbucks. The main reason behind business segment reporting is to publically provide the performance of a company to its shareholders (“Business Segment Reporting,” n.d.). For management, it is used to evaluate each segment’s income, expenses, assets, and liabilities to assess profitability or risky activity (para. 1). “Segment reporting is the 37 Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission 38 This code is publicly available on our website at www.starbucks.com/about-us/company-information/corporate-governance. Starbucks Financial Analysis reporting of the operating segments of a company in the disclosures accompanying its financial statements…Under GAAP, an operating segment engages in business activities from which it may earn revenue and incur expenses, has discrete financial information available, and whose results are regularly reviewed by the entity's chief operating decision maker for performance assessment and resource allocation decisions” (“What is Segment Reporting,” para. 1 & 2). According to the Starbucks Fiscal 2016 Annual Report, the organization has three reportable operating segments—Americas (U.S., Canada, and Latin America), China/Asia Pacific, EMEA (Europe, Middle East, and Africa), and a Channel Development segment (including roasted whole bean and ground coffees, premium Tazo teas, Starbucks and Tazobranded single-serve products, a variety of ready-to-drink beverages, such as Frappuccino, Starbucks Doubleshot and Starbucks Refreshers beverages) (p. 2). Starbucks also possesses a non-reportable operating segment, which includes Teavana, Seattle’s Best Coffee and Evolution Fresh, and Starbucks Reserve Roastery & Tasting Rooms (p. 2). The segment information in the annual fiscal report includes the results of operations by segment (in millions): net revenues (company-operated stores, licensed stores, and foodservice and other), operating expenses (cost of sales including occupancy costs, store operating expenses, other operating expenses, depreciation and amortization expenses, and general and administrative expenses), and operating income (including income from equity investees where applicable). The reporting of estimates and assumptions is also required for an organization in order to improve accuracy of financial statements (McIntosh, n.d.). The estimate can be based on historical information, documentation, and/or personal calculations (para. 3). “Investors and analysts make decisions based on the financial statements. The accountant has an obligation to create these statements to the best of his/her ability. When the accountant knows that financial Starbucks Financial Analysis activities occurred, even if the dollar amount is unknown, s/he needs to reflect those activities. Estimating the value of those activities allows him/her to include that impact in the financial statements” (para. 1). Starbucks indicates that in preparing financial statements in accordance with accounting principles accepted by GAAP, it requires management to make estimates and assumptions that “affect the reported amounts of assets, liabilities, revenues and expenses” (“Starbucks Fiscal 2016 Fiscal Report,” p. 51). These include estimates pertaining to inventory reserves, goodwill impairments, self-insurance reserves, income from unredeemed stored value cards, stock-based compensation forfeiture rates, future asset retirement obligations and the potential income of future tax consequences of events (p. 51). Furthermore, Starbucks indicates that the application of critical accounting policies encompasses “those that management believes are both most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain” (p. 41). In addition, the reporting of investments and fair value are also required by an organization. “Fair value accounting is a financial reporting approach in which companies are required or permitted to measure and report on an ongoing basis certain assets and liabilities (generally financial instruments) at estimates of the prices they would receive if they were to sell the assets or would pay if they were to be relieved of the liabilities” (Ryan, 2008). In other words, companies report losses when the fair value of assets decrease or liabilities increase (p. 1). Fair value measurement is put into place so that businesses like Starbucks can “estimate as best as possible the prices at which the positions they currently hold would change hands in orderly transactions based on current information and conditions” (p. 3). According to Ryan (2008), for an enterprise to accomplish this, they must incorporate information about future cash Starbucks Financial Analysis flows and current risk-adjusted discount rates into their fair value measurements (p. 3). “In principle, fair value accounting should be the best possible measurement attributed for inducing firms’ managements to make voluntary disclosures and for making investors aware of the critical questions to ask managements” (p.5). For Starbucks, fair value is the price they would receive to sell an asset or to pay to transfer a liability between market participants (“Starbucks Fiscal 2016 Fiscal Report,” p. 52). Accordingly, Starbucks determines the fair value based on the following using level 3 inputs. The first level is the use of quoted prices in active markets for the same assets to determine value (p. 52). When these prices are not available (level 2), it will be “based upon factors such as the quoted market price of similar assets or a discounted cash flow model using readily observable market data” (p. 52). In the third level, the fair value of auction rates securities is determined with an internal valuation model consisting of interest rate curves, credit and liquidity spreads, and effective maturity (p. 52). Lastly, the reporting of leases is also required by an organization. “Under international financial reporting standards, a lease is an arrangement where the lessor agrees to allow the lessee to use an asset for a stated period of time in exchange for one or more payments” (“Lease,” n.d.). A company that leases an asset under the operating lease arrangement, must classify each payment as a rental expense (debiting the rental expense account and crediting the lease payable account) (“Operating lease,” n.d.). “Once the periodic lease obligation is paid, the company records credit to the cash account and debit to the lease payment account” (para. 5). Starbucks leases “retail stores, roasting, distribution and warehouse facilities and office space for corporate administrative purposes under operating leases” (p. 57). Most of Starbucks’ “lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent Starbucks Financial Analysis escalation clauses and/or contingent rent provisions. We recognize amortization of lease incentives, premiums and minimum rent expenses on a straight-line basis beginning on the date of initial possession, which is generally when we enter the space and begin to make improvements in preparation for intended use” (p. 57). From time to time, Starbucks is also involved in the construction of their leases buildings (stores) (p. 58). When they are claimed as the owner of the buildings and do not qualify for sales recognition, Starbucks will record the cost of the buildings in “property, plant and equipment” (p. 58). “The offsetting lease financing obligations are recorded in other long-term liabilities, with the current portion recorded in in accrued occupancy costs within accrued liabilities on our consolidated balance sheets. These assets and obligations are amortized in depreciation and amortization and interest expense, respectively, on the consolidated statements of earnings based on the terms of the related lease agreements” (p. 58). Also in the Fiscal 2016 Annual Report, Starbucks has recognized the new guidance under the FASB in which leases are required to recognize a lease liability—the discounted obligation to make future minimum lease payments and a right-of-use asset on the balance sheet (p. 60). “Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance will require modified retrospective application at the beginning of our first quarter of fiscal 2020, with optional practical expedients, but permits adoption in an earlier period” (p. 60). Starbucks predicts that this new guidance will result in an increase in the assets and liabilities on the consolidated balance sheets and an impact on the consolidated statements of earnings. Key Findings Starbucks Financial Analysis In conclusion, the findings of the above analysis lead to a learning experience that stems from the Starbucks’ financial statements and performance about determining the overall health of companies. Additionally, the findings of the study may provide general suggestions for financial improvements pertaining to Starbucks and serve as an example for the Coffee Connection. Over a two-year period, Starbucks’ net revenues increased and so did the costs of goods sold, which may indicate that the overall performance of the company is trending positively and sales objectives are being achieved. Therefore, the Coffee Connection may want to follow suit in order to be as successful as its competitor. Performing a horizontal and vertical analysis can reveal changes over time in financial line items, the direction a business is taking, a relationship of a financial statement to its base and allows for studies in key financial statistics. In performing these types of analysis for Starbucks, they showcase consistency pertaining to accounts receivables (indicating no unusual activity in this area) and a possible trend in terms of bad debt. If bad debt does trend too highly, management at either company may want to authorize tighter credit to its customers. In examining a horizontal and vertical analysis of the changes in Starbucks’ fixed assets, intangible assets, depreciation, and amortization over time (2015 – 2016), it reveals that all of the factors and figures above have remained within the same range within the past few years and therefore do not reveal unusual activity that is troubling or worth investigating. There may be an increase in fixed assets, but as the company may be growing, more equipment, furniture, improvements, etc. may be needed. Additionally, horizontal and vertical analysis has shown increasing debt for Starbucks in the areas of short and long term. Again, this may be an indicator of a cash shortage and lack of funds to pay off debt in the near future. Therefore, this analysis can serve as a warning that debt needs to be watched closely due to the fact that a course of Starbucks Financial Analysis action may happen if it is to spiral out of control too quickly. As for financing activities, the Coffee Connection should also consider following Starbucks’ procedures as they were able to create more cash flow, manage all interests soundly, and therefore is able to sell bonds at their face value. In studying the key financial statement ratios (liquidity, solvency, and profitability) for Starbucks, they can reveal the current and future financial health of the company. In comparing liquidity ratios to the industry average, Starbucks remains to be healthy in this arena, and this is an indicator of good short-term financial strength. Although a quick ratio analysis indicates that Starbucks should strive for a ratio above 1, but all in all, they are still well above the industry average of .55 and therefore, do not have as much trouble paying current liabilities. As for asset management, Starbucks’ inventory did turnover at a lower rate than the compared industry average. This can be a lesson in bettering the sales of products more efficiently, keeping a better watch over the possibility of having too many expired/perished products, and purchasing too much inventory. With this noted, there is room for improvement in this area that could therefore result in a savings for the company. On other hand, the accounts receivable ratios for Starbucks were higher than the industry average and indicate that they are collecting their credit accounts on a timely basis. This is a healthy area in which the Coffee Connection should take note and consider following the same procedures. As for solvency ratios, Starbucks’ debt to asset ratio comes in on the high side in comparison to other establishments within the same industry. Being considerably high within the industry, this could possibly mean greater risk that cash flows from operations will be insufficient to cover interest and principle payments. The debt to assets ratio has also increased slightly from 2015 to 2016 and Starbucks should watch this as only time will tell if the situation Starbucks Financial Analysis will deteriorate in the future. The debt to equity ratio for Starbucks is also higher than the reported average, but it may not be an indication of anything detrimental at the moment. It is advised that if it is to rise for a company, it should be watched by investors. The times interest earned ratio is also well above the industry average and Starbucks also has a better chance to pay the interest expense or debt service or is paying too much of the debt with its earnings. Hopefully, it is the case of the former and not the latter, and Starbucks may want to monitor its debt a little more closely. Also, the profit margin ratios, which were higher than the industry average, decreased from 2015 to 2016 indicating that sales should be turned around to rise faster than product costs and/or operating expenses. Likewise, the gross profit on sales ratio from 2015 to 2016 were also higher than the industry average, but slightly increased over this period of time—indicating that Starbucks is able to sell goods at the intended selling price. The return on assets ratio reveals a decrease and a lower than industry average, which means that assets may not be utilized effectively. The return on equity ratio increased for Starbucks from 2015 to 2016, and it was well above the reported industry average by almost double, which indicates that performance achievement is free of extreme risk. The market value ratios were mostly higher than the industry average. The earnings per share ratio for Starbucks were a little less than $2 in both 2015 and 2016. It is reported (in the annual fiscal report) that this ratio tends to be much higher compared to others in the same consumer sector/restaurant industry. This was also the trend with the reported P/E ratio, which was also slightly above the industry average and therefore indicating a current healthy financial state and growth potential. Starbucks Financial Analysis As for the rules of financial reporting for the Starbucks Corporation, the company seems to adhere to the accepted GAAP guidelines—all reports are also processed in a timely manner. Therefore, everything indicated in the fiscal 2016 annual report should be truthfully accurate free of fraud and/or clerical error. This also includes financial information from the company’s three reportable operating segments (see above). Additionally, Starbucks indicates that in preparing financial statements, it requires management to make assumptions regarding but not limited to assets, liabilities, revenues, and expenses. When examining the reports and the associated calculations, the numbers are relatively close year over year. The reporting of investments and fair value are also required on behalf of Starbucks. This mainly pertains to the sale of an asset or to transfer a liability between market participants and is determined using 3 level inputs (see above) that are fully disclosed. The reporting of leases is also required on Starbucks’ behalf, which entail but not limited to retail stores, roasting, distribution, and warehouse and office facilities. Overall, all lease obligations are reported in the appropriate places on the fiscal report. Starbucks’ annual fiscal report also reveals the new guidance under the FASB in which leases are required to recognize a lease liability. This policy will begin in 2020 and it is already predicted that under this guidance, Starbucks will experience an increase in the assets and liabilities on the consolidated balance sheets and an impact on the consolidated statements of earnings. Lastly, and despite a few hiccups in the areas of debt, the analysis mostly indicates that Starbucks is on top of their game. Although, there may be some possible trends in areas pertaining to debt, it is currently functional but should be watched closely. The performance of the company is trending positively, sales objectives are being achieved (but could always be higher), and there is a sense of consistency (as there is no sign of unusual activity over a twoyear period). Starbucks Financial Analysis Starbucks Corporation Consolidated Statement of Earnings Fiscal Year End Oct. 2, 2016 Sep. 27, 2015 Sep. 28, 2014 Fiscal Year End Net revenues: Company-operated stores 16,844.10 Licensed stores 2,154.20 CPG, foodservice and other 2,317.60 Total net revenues 21,315.90 Cost of sales including occupancy costs 8,511.10 Store operating expenses 6,064.30 Other operating expenses 545.40 Depreciation and amortization expenses 980.80 General and admistrative expenses 1,360.60 Litigation charge/(credit) Total operating expenses 17,462.20 Income from equity investees 318.20 Operating income/(loss) 4,171.90 Gain resulting from acquistion of joint venture Loss on extinguishment of debt Interest income and other, net 108.00 Interest expense -81.30 Earnings/(loss) before income taxes 4,198.60 Income tax expense (benefit) 1,379.70 Net earnings including noncontrolling interests 2,818.90 Net earnings (loss) attributable to noncontrolli 1.20 Net earnings attributable to Starbucks 2,817.70 Earnings per share -- basic 1.91 Earnings per share -- diluted 1.90 Weight average shares outstanding: Basic 1,471.60 Diluted 1,486.70 15,197.30 1,861.90 2,103.50 19,162.70 7,787.50 5,411.10 522.40 893.90 1,196.70 15,811.60 249.90 3,601.00 390.60 -61.10 43.00 -70.50 3,903.00 1,143.70 2,759.30 1.90 2,757.40 1.84 1.82 1,495.90 1,513.40 12,977.90 1,588.60 1,881.30 16,447.80 6,858.80 4,638.20 457.30 709.60 991.30 -20.20 13,635.00 268.30 3,081.10 142.70 -64.10 3,159.70 1,092.00 2,067.70 -0.40 2,068.10 1.37 1.35 1,506.30 1,526.30 Horizontal Analysis Oct. 2, 2016 Sep. 27, 2015Sep. 28, 2014 Net revenues: Company-operated stores Licensed stores CPG, foodservice and other Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and admistrative expenses Litigation charge/(credit) Total operating expenses Income from equity investees Operating income/(loss) Gain resulting from acquistion of joint ve Loss on extinguishment of debt Interest income and other, net Interest expense Earnings/(loss) before income taxes Income tax expense (benefit) Net earnings including noncontrolling int Net earnings (loss) attributable to noncon Net earnings attributable to Starbucks Earnings per share -- basic Earnings per share -- diluted Weight average shares outstanding: Basic Diluted 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 10.84% 15.70% 10.18% 11.24% 9.29% 12.07% 4.40% 9.72% 13.70% 0.00% 10.44% 27.33% 15.85% 17.10% 17.20% 11.81% 16.51% 13.54% 16.66% 14.24% 25.97% 20.72% -100.00% 15.96% -6.86% 16.87% 151.16% 15.32% 7.57% 20.63% 2.16% -36.84% 2.19% 3.80% 4.40% -69.87% 9.98% 23.52% 4.73% 33.45% -575.00% 33.33% 34.31% 34.81% 100.00% 100.00% -1.62% -1.76% -0.69% -0.85% Vertical Analysis % of net revenue Oct. 2, 2016 Sep. 27, 2015 Sep. 28, 2014 Net revenues: Company-operated stores 79.02% Licensed stores 10.11% CPG, foodservice and other 10.87% Total net revenues 100.00% Cost of sales including occupancy costs 39.93% Store operating expenses 28.45% Other operating expenses 2.56% Depreciation and amortization expenses 4.60% General and admistrative expenses 6.38% Litigation charge/(credit) 0 Total operating expenses 81.92% Income from equity investees 1.49% Operating income/(loss) 19.57% Gain resulting from acquistion of joint ventu 0.00% Loss on extinguishment of debt 0.00% Interest income and other, net 0.51% Interest expense -0.38% Earnings/(loss) before income taxes 19.70% Income tax expense (benefit) 6.47% Net earnings including noncontrolling interes 13.22% Net earnings (loss) attributable to noncontro 0.01% Net earnings attributable to Starbucks 13.22% Earnings per share -- basic 0.01% Earnings per share -- diluted 0.01% Weight average shares outstanding: Basic 6.90% Diluted 6.97% Appendix B. Starbucks Corporation Consolidated Balance Sheets (Horizontal and Vertical Analysis) 79.31% 9.72% 10.98% 100.00% 40.64% 28.24% 2.73% 4.66% 6.24% 0.00% 82.51% 1.30% 18.79% 2.04% -0.32% 0.22% -0.37% 20.37% 5.97% 14.40% 0.01% 14.39% 0.01% 0.01% 7.81% 7.90% 78.90% 9.66% 11.44% 100.00% 41.70% 28.20% 2.78% 4.31% 6.03% -0.12% 82.90% 1.63% 18.73% 0.00% 0.00% 0.87% -0.39% 19.21% 6.64% -12.57% 0.00% 12.57% 0.01% 0.01% 9.16% 9.28% Starbucks Financial Analysis Starbucks Corporation Consolidated Balance Sheets Oct. 2, 2016 Sep. 27, 2015 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Long-term investments Equity and cost investments Property, plant and equipment, etc. Deferred income taxes, net Other long-term assets Other intangible assets Goodwill TOTAL ASSETS LIABILITIES AND EQUITY Current liabilities: Accounts payable Accrued liabilities Insurance reserves Stored value card liability Current portion of long term debt Total current liabilities Long-term debt Other long-term liabilities Total liabilities Shareholders' equity: Common stock ($0.001 par value) -- authorized, 2,400.0 shares; issued and outstanding,1,485.1 and 1,499.1 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity Noncontrolling interest Total equity TOTAL LIABILIITES AND EQUITY 2,128.80 1,530.10 134.4 81.3 768.8 719 1,378.50 1,306.40 350 334.2 4,760.50 3,971.00 1,141.70 312.5 354.5 352 4,533.80 4,088.30 885.4 1,180.80 417.7 415.9 516.3 520.4 1,719.60 1,575.40 14,329.50 12,416.30 730.6 1,991.10 246 1,171.20 400.00 4,546.90 3,202.20 689.7 8,438.80 684.2 1,755.30 224.8 983.3 3,648.10 2,347.50 600.9 6,596.50 1.5 1.5 41.1 41.1 5,949.80 5,974.80 -108.4 -199.4 5,884.00 5,818.00 6.7 1.8 5,890.70 5,819.80 14,329.50 12,416.30 Horizontal Analysis $ Change % Change ASSETS Current assets: Cash and cash equivalents 598.70 39.13% Short-term investments 53.1 65.31% Accounts receivable, net 49.8 6.93% Inventories 72.10 5.52% Prepaid expenses and other curren 15.8 4.73% Total current assets 789.50 19.88% Long-term investments 829.2 265.34% Equity and cost investments 2.5 0.71% Property, plant and equipment, etc 445.50 10.90% Deferred income taxes, net -295.4 -25.02% Other long-term assets 1.8 0.43% Other intangible assets -4.1 -0.79% Goodwill 144.20 9.15% TOTAL ASSETS 1,913.20 15.41% LIABILITIES AND EQUITY Current liabilities: Accounts payable 46.4 6.78% Accrued liabilities 235.80 13.43% Insurance reserves 21.2 9.43% Stored value card liability 187.9 19.11% Current portion of long term debt Total current liabilities 898.80 24.64% Long-term debt 854.70 36.41% Other long-term liabilities 88.8 14.78% Total liabilities 1,842.30 27.93% Shareholders' equity: Common stock ($0.001 par value) - Additional paid-in capital Retained earnings Accumulated other comprehensive Total shareholders' equity Noncontrolling interest Total equity TOTAL LIABILIITES AND EQUITY 0 0 -25.00 91 66.00 4.9 70.90 1,913.20 0.00% 0.00% -0.42% -45.64% 1.13% 272.22% 1.22% 15.41% Vertical Analysis Oct. 2, 2016 Sep. 27, 2015 ASSETS Current assets: Cash and cash equivalents 14.86% 12.32% Short-term investments 0.94% 0.65% Accounts receivable, net 5.37% 5.79% Inventories 9.62% 10.52% Prepaid expenses and other current asset 2.44% 2.69% Total current assets 33.22% 31.98% Long-term investments 7.97% 2.52% Equity and cost investments 2.47% 2.83% Property, plant and equipment, etc. 31.64% 32.93% Deferred income taxes, net 6.18% 9.51% Other long-term assets 2.91% 3.35% Other intangible assets 3.60% 4.19% Goodwill 12.00% 12.69% TOTAL ASSETS 100.00% 100.00% LIABILITIES AND EQUITY Current liabilities: Accounts payable 5.10% 5.51% Accrued liabilities 13.90% 14.14% Insurance reserves 1.72% 1.81% Stored value card liability 8.17% 7.92% Current portion of long term debt Total current liabilities 31.73% 29.38% Long-term debt 22.35% 18.91% Other long-term liabilities 4.81% 4.84% Total liabilities 58.89% 53.13% Shareholders' equity: Common stock ($0.001 par value) -- authorized, 2,400.0 shares; issued and outstanding,1,485.1 0.01% 0.01% and 1,499.1 shares, respectively Additional paid-in capital 0.29% 0.33% Retained earnings 41.52% 48.12% Accumulated other comprehensive incom -0.76% -1.61% Total shareholders' equity 41.06% 46.86% Noncontrolling interest -0.05% 0.01% Total equity 41.11% 46.87% TOTAL LIABILIITES AND EQUITY 100.00% 100.00% Appendix C. Starbucks Corporation Depreciation and Amortization (Horizontal and Vertical Analysis) Starbucks Financial Analysis Horizontal Analysis Depreciation and amortization Oct. 2, 2016 Sept. 27, 2015 Sep. 28, 2014 1,030.10 933.8 748.8 10.31% Vertical analysis Depreciation and amortization Oct. 2, 2016 Sep. 27, 2015 7.19% 6.52% Appendix D. Starbucks Corp., Allowance for Doubtful Accounts Receivable 24.71% Starbucks Financial Analysis Starbucks Corp., Allowance for Doubtful Accounts Receivable Oct 2, 2016 Selected Financial Data (USD $ in thousands) Allowance for doubtful accounts Accounts receivable, gross Ratio Allowance as a percentage of accounts receivable, gross Source: www.stock-analysis-on.net Copyright © 2017 Stock Analysis on Net 2016 Calculations 1 Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross = 100 × 9,400 ÷ 778,200 = 1.21% Sep 27, 2015 Sep 28, 2014 Sep 29, 2013 Sep 30, 2012 Oct 2, 2011 9,400 778,200 10,800 729,800 6,700 637,700 5,700 567,100 5,600 491,500 3,300 389,800 1.21% 1.48% 1.05% 1.01% 1.14% 0.85% Starbucks Financial Analysis KEY FINANCIAL STATEMENT RATIOS 2016 Amounts Answer 2015 Amounts Industry Average Answer Liquidity ratios Current Ratio Quick Ratio, or "Acid Test" Current Assets = Current Liabilities 4670.5 4546.9 = 1.027 Quick Assets * Current Liabilities 3032 4546.9 0.667 3971 = 1.0885 3648.1 1.14*** 2330.4 3648.1 0.55** 0.6388 * Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory) ** Industry MRQ - Source: http://csimarket.com/stocks/SBUX-Financial-Strength-Comparisons.html ***2015 industry comparison - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Long-Term-Trends/Current-Ratio#Comparison-to-Industry Asset Management Ratios Inventory Turnover Cost of Goods Sold Inventory* Accts Receivable Turnover Sales Accts Receivable* 8511.1 1378.5 6.174 7787.5 1306.4 5.961 21315.9 768.8 27.73 19162.7 719 26.652 * Textbooks generally use "average" for the year ( beginning + ending ) / 2, but it's OK to use 8.20** 22.42*** ending only **2015 Industry comparison - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Ratios/Short-term-Operating-Activity#Inventory-Turnover ***2015 Industry comparsion - Source: https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/Ratios/Short-term-Operating-Activity#Receivables-Turnover Debt (Leverage) (Long-term Solvency) Ratios Debt to Assets Total Liabilities Total Assets 3202.2 14329.5 0.223 2347.5 12416.3 0.1891 .53** Debt to Equity Total Liabilities Total Equity 3602.2 5884 0.612 2347.5 5819.8 0.4034 .17*** Times interest Earned EBIT* Interest expense 4279.9 81.3 52.64 3973.5 70.5 56.362 37.96**** * EBIT means "Earnings before Interest and Taxes" **Industry average debt to assets - Source: http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=sbux ***Industry average debt to equity - Source: http://csimarket.com/stocks/singleFinancialStrength.php?code=SBUX&Lte&hist=1 **** Industry average interest coverage Q4 2016 - Source: http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=914 Profitability Ratios (not applicable if net loss) Net Profit Margin (%) Net Income Sales 2817.7 21315.9 13% 2757.4 19162.7 Gross Profit Gross Profit Sales 12804.8 21315.9 60% 11375.2 19162.7 59% 57.99%** 2817.7 14329.5 20% 2757.4 12416.3 22% 35.03%*** 2817.7 5890.7 48% 2757.4 5819.8 47% 25.23%**** on Sales (%) Return on Assets (%) Net Operating Income Total Operating Assets ##### 9.1%* aka ROI Return on Equity (%) Net Income Total Equity *Industry Average Industry Statistics - Sources: http://csimarket.com/stocks/singleProfitabilityRatios.php?code=SBUX&net **Industry Average Food Services and Drinking Places - Source: http://www.bizstats.com/corporation-industry-financials/accommodation-food-services-72/food-services-and-drinking-place ***Industry Average Food Services and Drinking Places - Source: http://www.bizstats.com/corporation-industry-financials/accommodation-food-services-72/food-services-and-drinking-plac ****Industry Average - Source: http://csimarket.com/stocks/SBUX-Return-on-Equity-ROE.html Market Value Ratios Earnings per Share (EPS) Price/Earnings* Ratio (P/E) Net Income No. shares outstanding Market Price EPS 2817.7 1455.4 $1.94 55.77 1.94 28.75 2757.4 1484.8 $1.86 prior year not required Industry avg. not relevant 26.2** * P/E ratio changes daily with market price. If EPS is negative, ratio is "not applicable". Use "Basic" , not "Diluted". **Current industry average - Source: http://financials.morningstar.com/valuation/price-ratio.html?t=SBUX®ion=usa&culture=en-US