Reference no: EM132432128

Assignment Instructions

Complete the homework assignment using Excel or Word as appropriate. Ensure your work is organized, properly labeled, any mathematical process shown, and highlight your final answer when appropriate. Written responses must adhere to APA format.

Week 1

Please go to the "Resources" tab and download the Excel template labeled "Starbucks_Student" to complete the case

INTEGRATIVE CASE 1.1 - Starbucks

Respond to the following questions relating to Starbucks.

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?

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 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?

Income Statement

i. Starbucks reports three principal sources of revenues: (1) company-operated stores, (2) licensing, and (3) 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 on its income statement. Using the narrative information provided in this case, describe the nature of this type of income.

Statement of Cash Flows

l. Why does net income differ from the amount of cash flow from operating activities? m. Why does Starbucks add the amount of depreciation and amortization expense to net income when computing cash flow from operating activities?

m. Why does Starbucks show an increase in inventory as a subtraction when computing cash flow from operations?

o. Why does Starbucks show a decrease in accounts payable as a subtraction when computing cash flow from operations?

p. Starbucks includes short-term investments in current assets on the balance sheet, yet it reports purchases and sales of investment securities as investing activities on the statement of cash flows.

Explain why changes in investment securities are investing activities while changes in most other current assets (such as accounts receivable and inventories) are operating activities

q. Starbucks includes changes in short-term borrowings as a financing activity on the statement of cash flows. Explain why changes in short-term borrowings are a financing activity when most other changes in current liabilities (such as accounts payable and other current liabilities) are operating activities.

Relations between Financial Statements

r. Prepare an analysis that explains the change in retained earnings from $4,297 at the end of fiscal 2011 to $5,046 at the end of fiscal 2012.

s. Prepare an analysis that explains the changes in property, plant, and equipment from $6,163 at the end of fiscal 2011 to $6,903 at the end of fiscal 2012 and accumulated depreciation from $3,808 at the end of fiscal 2011 to $4,244 at the end of fiscal 2012. You may need to deduce certain amounts that Starbucks does not disclose. For simplicity, assume that all of the depreciation and amortization expense is depreciation.

Interpreting Financial Statement Relations

Exhibit 1.29 presents common-size and percentage change balance sheets and Exhibit 1.30 (page 81) presents common-size and percentage change income statements for Starbucks for 2009-2012. The percentage change statements report the annual percentage change in each account from 2010 through 2012. Respond to the following questions.

t. The dollar amount shown for cash and cash equivalents (see Exhibit 1.26) increased between the end of fiscal 2011 and the end of fiscal 2012, yet the percentage of total assets comprising these assets declined (see Exhibit 1.29). Explain.

u. From 2009 through 2012, the proportion of total liabilities declined while the proportion of shareholders' equity increased. What are the likely explanations for these changes?

v. How has the revenue mix of Starbucks changed from 2009 to 2012? Relate these changes to Starbucks' business strategy.

w. Net earnings as a percentage of total revenues increased from 3.2% in fiscal 2009 to 10.4% in fiscal 2012. Identify the most important reasons for this change.

Attached the excel file).Please remember to save this template as it will be used for the entirety of the course.

Week 2

INTEGRATIVE CASE 2.1 - Starbucks

REQUIRED

a. Assuming that Starbucks had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2012? Explain.

b. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or subtraction for 2012?

c. Starbucks rents retail space for its coffee shops. It must recognize rent expense as it uses rental facilities but cannot claim an income tax deduction until it pays cash to the land- lord. Suggest the scenario that would give rise to a deferred tax asset instead of a deferred tax liability related to occupancy cost (''Accrued occupancy costs'').

d. Starbucks recognizes an expense related to retirement benefits as employees rendered services but cannot claim an income tax deduction until it pays cash to a retirement fund. Why do the deferred taxes for deferred compensation appear as a deferred tax asset (''Accrued compensation and related costs'')? Suggest possible reasons why the deferred tax asset decreased slightly between the end of 2011 and the end of 2012.

e. Starbucks reports deferred revenue for sales of store value cards, such as the Starbucks Card and gift certificates. These amounts are taxed when collected, but not recognized in financial reporting income until tendered at a store. Why does the tax effect of deferred revenue appear as a deferred tax asset?

f. Starbucks recognizes a valuation allowance on its deferred tax assets to reflect net operating losses of consolidated foreign subsidiaries. Why might the valuation allowance have increased between 2011 and 2012?

g. Starbucks uses the straight-line depreciation method for financial reporting and accelerated depreciation for income tax reporting. Like most firms, the largest deferred tax liability is for property, plant, and equipment (depreciation). Explain how depreciation leads to a deferred tax liability. Suggest possible reasons why the amount of the deferred tax liability related to depreciation increased between 2011 and 2012.

Please go to the "Resources" tab and download the Excel template labeled "Starbucks_Student" to complete the case. Please remember to save this template as it will be used for the entirety of the course.

Week 3

INTEGRATIVE CASE 3.1 - Starbucks

a. Explain why equity in income of investees appears as a subtraction when net income is converted to cash flow from operations.

b. Compute the amount of cash received from investees as dividends each year. To answer this question, you need to refer to the income statement of Starbucks in Exhibit 1.27 in Chapter 1 (Integrative Case 1.1).

c. Explain why stock-based compensation appears as an addition to net income to compute cash flow from operations.

d. Discuss the relation between net income and cash flow from operations for each of the three years.

e. Discuss the relations among cash flows from operating, investing, and financing activities for each of the three years.

f. Refer to the income statement for Starbucks in Exhibit 1.27). Compute the amount of EBITDA for 2010, 2011, and 2012.

g. Discuss the relations among net income, non-working capital adjustments, working capital adjustments, operating cash flows, and EBITDA for the three years. Are the patterns similar or different? What are the primary determinants of the differences between the summary measures net income, operating cash flows, and EBITDA?

h. The income statement in Exhibit 1.27 shows depreciation and amortization expense as follows:

i. Explain why the amount on the income statement differs from the amount on the statement of cash flows each year.

Week 5

INTEGRATIVE CASE 5.1 - Starbucks

a. Compute the values of each of the ratios in Exhibit 5.27 for Starbucks for 2012. Starbucks had 749.3 million common shares outstanding at the end of fiscal 2012, and the market price per share was $50.71. For days accounts receivable outstanding, use only specialty revenues in your calculations, because accounts receivable are primarily related to licensing and food service operations, not the retail operations.

b. Interpret the changes in Starbucks risk ratios during the three-year period, indicating areas of concern.

Week 6

INTEGRATIVE CASE 6.1 - Starbucks

a. Given your knowledge of Starbucks' key success and risk factors, use the note information presented above to evaluate Starbucks' accounting quality.

b. If you believe that Starbucks' accounting policy does not yield measurements of assets and liabilities that reflect economic reality and a measurement of net income that is predictive of future earnings, suggest any changes that you would make to assets, liabilities, and earnings to improve accounting quality. (At this point in your learning process, if you do not have specific numerical adjustments to propose, at least describe potential journal entries you would make to change the financial statements, if any, and what information you might need to make those entries.)

c. Evaluate whether your proposed adjustments are necessary for (1) credit analysis, (2) equity valuation, and (3) management evaluation

Week 7

INTEGRATIVE CASE 7.1 - Starbucks

a. Compute the present value of operating lease obligations using a 6.25% discount rate. Assume that all cash flows occur at the end of each year. Also assume that the minimum lease payments after 2017 occur evenly over a five-year period.

b. Re compute the long-term debt to long-term capital ratio assuming that Starbucks capitalizes operating leases and reports the long-term portion as part of long-term debt.

c. Re compute the long-term debt to long-term capital ratio assuming that the long-term portion of operating leases are treated as long-term debt and using market values of long-term debt and equity.

d. Comment on the results from Requirements b and c. What additional insights do these alternative calculations provide?

e. Starbucks reports an expense labeled ''Cost of Sales including Occupancy Costs'' on its income statement. Speculate why Starbucks reports cost of sales and occupancy (operating lease payments) costs as a combined amount on the income statement.

Textbook - Financial Reporting, Financial Statement Analysis and Valuation by James Wahlen

Attachment:- Starbucks Assignment.zip