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Unformatted text preview: Starbucks Financial Analysis
MBA503 – Financial Reporting and Analysis
Southern New Hampshire University As Coffee Connection is developing benchmarks for the purpose of improving profits and
scaling operations, its vital to analyze similar industry competitors for insight. Starbucks
Corporation has been identified as the most comparable competitor to Coffee Connection.
Utilizing the 2018 Starbucks Annual Report a financial analysis was conducted. As part of this
overall analysis of Starbucks a horizontal, vertical and ratio analysis were performed to gauge
the financial strength of the company. In addition to the financial data that was analyzed, this
study also addresses the importance of accounting regulations as well as the GAAP reporting
policies that are required of the Starbucks Corporation and Coffee Connection. Vertical and Horizontal Analysis: Starbucks Corporation
Utilizing a horizontal analysis of the Starbucks Corporation it was found that their
accounts receivable hit a four year low in September of 2018. Accounts receivable net was 693.1
in 2018; a 20.4% decrease from 2017 when accounts receivable net was 870.4 million.
Starbucks Corporation's accounts receivables are mainly made up of receivables for product and
equipment sales to and royalties from their licensees, as well as receivables from CPG customers
(Starbucks Fiscal Annual Report, 2018). Starbucks also allocates a certain amount of money
yearly for uncollectable receivables; they calculate the amount based on historical experience,
customer credit risk and application of the specific identification method (Starbucks Coffee
Company, 2018). In 2018 they earmarked 8 million for doubtful accounts; down from 9.8 million
in 2017. The vertical analysis of Starbucks shows that accounts receivable makes up just 2.9%
of the company’s total assets in 2018 compared to 2017 when accounts receivable made up 6.1% of total assets. The decrease in accounts receivable indicates that the company was able to collect
on owed debts and therefore had increased their assets from previous years.
Fixed Assets were increased by 20.5% and intangible assets increased by 131.4% from
2017. Fixed assets consist of property, plant and equipment, which includes assets under capital
leases, are carried at cost less accumulated depreciation (Starbucks Fiscal Annual Report, 2018).
Property, plant and equipment are evaluated when circumstances present that carrying the values
of assets may not be recoverable (Starbucks Fiscal Annual Report, 2018). Depreciation is
computed using the straight-line method over estimated useful lives of the assets, generally
ranging from 2 to 15 years for equipment and 30 to 40 years for building (Starbucks Fiscal
Annual Report, 2018). The horizontal analysis showed depreciation and amortization increased
by 22% in 2018; however, the vertical analysis showed that depreciation and amortization only
made up 5% of total assets in 2018, down from 7% of total assets in 2017.
Intangible assets increased by 131% from 2017 to 2018. Intangible assets mainly consist
of acquired and reacquired rights, trade secrets, licensing agreements, contract-based patents,
copyrights and goodwill. These assets are amortized over their estimated useful lives and are
tested for impairment using a similar methodology to our property, plant and equipment. This
testing for impairment takes place during the third fiscal quarter (Starbucks Fiscal Annual
Report, 2018). The vertical analysis shows that intangible assets account for 19% of total assets
The horizontal analysis of Starbucks short-term debt showed an increase of 35% from
2017 to 2018. Likewise, Starbucks long-term debt increased by 5,157.60 million in 2018, which
is a 131% increase from 2017. A vertical analysis of Starbucks showed that their short-term debt
is 24% of total liabilities in 2018 and their long-term debt is 38% of total liabilities in 2018. Starbucks Ratio Analysis
Liquidity, solvency, and profitability are types of financial ratios that are used to
determine a company’s current financial standing; these ratios can be used by creditors, company
management, and stockholders in assessing a company.
Liquidity ratios gauge a company’s ability to pay off its short-term debt obligations and
convert its assets to cash; two common liquidity ratios are current and quick ratio (Harrison,
Horngren, and Thomas p.271) Current ratio is found by dividing current assets by current
liabilities; the calculation produced reflects a company's ability to generate enough cash to pay
off all its debts once they become due (Harrison, Horngren, and Thomas p. 113). Starbucks had a
current ratio of 2.2 in 2018 and 1.25 in 2017. The non-alcoholic beverage industry average for
current ratio is 0.97 indicating that Starbucks well surpasses their competition in being able to
meet short-term financial obligations. In 2018 Starbucks doubled their assets from Q4 of 2017
which substantially impacted the company’s current ratio. A current ratio of 2.2 shows Starbucks
is more than capable of paying off its short-term debt; the company has been able to make a
substantial increase to their cash while not increasing their inventory by all that much.
The quick ratio is calculated by dividing quick assets by current liabilities. A quick ratio
of 1:1 is considered to be ideal. The quick ratio for Starbucks in 2018 was 1.95 and .93 in 2017.
The industry average quick ratio is just .51 which indicates that the non-alcoholic beverage
industry may have excessive inventory or some other liabilities that prevent it from paying.
Starbucks quick ratio increase from 2017 to 2018 shows the company is experiencing revenue
growth, collecting its accounts receivable and turning them into cash quickly. Solvency ratios differ from liquidity ratios since solvency ratios look at a company’s
ability to meet its total financial obligation rather than just its short-term debt. A common
solvency ratio is debt to asset. The debt to asset ratio is calculated by dividing total liabilities by
total assets. Harrison, Horngren, and Thomas state that the norm for debt to asset ratio is between
60 and 70%, however Starbucks debt to asset ratio in 2017 and 2018 were 27% and 39%
respectively (p. 146). Starbucks debt to asset ratio suggests the company has favorable solvency;
meaning it is capable of paying back its debt to lenders and creditors when due.
Times interest earned is another solvency ratio that measures a company’s ability to pay
interest on outstanding debt. The times interest earned ratio is calculated by dividing earnings
before interest and taxes by interest expense. Starbucks times interest earned ratio in 2017 and
2018 was 47.68 and 34.94. By comparison the industry average is just 7.12. The times interest
earned ratio shows that Starbucks is able to cover their current interest payment 34 times over
with their available earnings. Though the ratio did decline over the period of a year, Starbucks
ratio is still high enough that they would be able to withstand even unforeseeable financial
hardships should they arise. If the ratio continues to substantially decrease with time creditors
and lenders may determine the company is not worth anymore capitol; this however is currently
not the case for Starbucks.
Rules of Financial Reporting for Starbucks
The Financial Accounting Standards Board (FASB) establishes financial accounting and
reporting standards for companies in the United States, these standards are also known as
Generally Accepted Accounting Principles or GAAP (Harrison, Horngren, Thomas p.865).
Though the FASB writes the GAAP, the Securities and Exchange Commission (SEC) holds the “ultimate responsibility for establishing accounting rules” for publicly traded companies such as
Starbucks (Harrison, Horngren, Thomas p.865).
Reporting of control procedures is required to “prevent fraud and clerical errors that may
compromise the accuracy of a company's financial statements” (Sullivan, n.d., para. 2). Without
these internal controls company executives may be able to inflate the success of their company to
investors or lenders. There are seven internal control procedures that should be followed to
ensure accurate financial statements; they are separation of duties, access controls, physical
audits, standardized documentation, trial balances, periodic reconciliations, and approval
authority (Ingram, 2019). The Securities and Exchange Commission mandates the reporting of
control procedures in the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act states the
internal control report must include the “a statement of management's responsibility for
establishing and maintaining adequate internal control over financial reporting for the company;
management's assessment of the effectiveness of the company's internal control over financial
reporting as of the end of the company's most recent fiscal year; a statement identifying the
framework used by management to evaluate the effectiveness of the company's internal control
over financial reporting; and a statement that the registered public accounting firm that audited
the company's financial statements included in the annual report has issued an attestation report
on management's assessment of the company's internal control over financial reporting.”
Starbucks management, including their chief executive officer and chief financial officer
evaluated the effectiveness of the design and operation of their disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and found that
their disclosure controls and procedures were effective as of September 30, 2018. Segment reporting is required by the Accounting Standards Codification Topic 280
(ASC280). Segment reporting is vital in assessing the financial performance of different
operating units of a company; investors and creditors are especially interested in this
information. Segments can be broken out by product lines or geographical locations. The
information disclosed in segment reporting are sales revenue from each segment, capital
additions, assets, and liabilities. In a company such as Starbucks, segment reporting allows
management to identify products or geographical areas that are successful as well as those areas
that may be underperforming. This information would be very helpful to investors in order to
determine which sector they would like to invest in. Starbucks annual report includes segment
reports for its four main operating segments which are Americas, China/Asia Pacific (CAP),
EMEA and Channel Development.
Estimates and assumptions are necessary in preparing financial statements when there is
no precise means for measurement. Estimates are continually evaluated, are based on historical
experience and other factors, including expectations of future events that are believed to be
reasonable given the circumstances. Estimates are necessary to make a financial statement more
complete. According to Starbucks Annual Report “preparing financial statements in conformity
with accounting principles generally accepted in the United States of America (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses (p.54). Some examples include estimates for inventory
reserves, asset and goodwill impairments, assumptions underlying self-insurance reserves,
income from unredeemed stored value cards, stock-based compensation forfeiture rates, future
asset retirement obligations and the potential outcome of future tax consequences of events that
have been recognized in the financial statements (p54). The reporting of the investments and fair value is required by Accounting Standards
Codification Topic 820 (ASC820). According to ASC 820-10-20: “fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.” Starbucks assesses fair value is in three different
levels which determine assets and liabilities recorded or disclosed on a recurring basis. The first
level looks at quoted prices in markets for identical assets, the second levels value is based on
inputs other than quoted market prices included in level 1 that are observable for the asset or
liability either directly or indirectly, and in level 3 Starbucks determines the fair value of their
auction rate securities using an internally-developed valuation model, using inputs that include
interest rate curves, credit and liquidity spreads, and effective maturity.
The Financial Accounting Standards Board has issued an Accounting Standards Update
(ASU) NO. 2016-02, regarding Leases (Topic 842). This update will help investors see a
company’s true financial obligations in regard to outstanding leases; excluding leases on a
company’s balance sheet may make the company appear more successful or desirable to
investors. The standards update distinguishes whether the lease is classified as a capital lease or
an operating lease. Capital leases are recognized as assets and liabilities on a lessee’s balance
sheet, but operating leases appear in financial statements only as a rent expense and as a
disclosure item (Santarelli, n.d.) According to the Starbucks Annual Report the company utilizes
operating leases. The lease agreements cover tentative improvement allowances, rent holidays,
lease premiums, rent, escalation clauses and or convincement rent provisions. Lease incentives,
premiums and minimum rent expenses are recognized on a straight- line basis beginning on the
date of initial possession.
Conclusion Coffee Connection could learn a great amount from how Starbucks Corporation performs
financially. Starbucks has been able to scale their company worldwide, currently they report
three segments based of geography. Starbucks has taken on substantial long-term debt over the
last two years but has always been able, and still can meet their financial obligations. The debt
accrued is the cost of doing business, Starbucks assets significantly increased in 2018. Both the
horizontal and vertical analysis showed both Fixed and Intangible assets having a large
percentage jump. Starbucks accounts receivable decreased significantly as did their allotment for
doubtful accounts; which indicates the company is collecting on their debts. Starbucks also
adheres to all the reporting rules set forth by the GAAP and the SEC. Coffee Connections would
do well to set their standards to mirror that of the Starbucks Corporation. References
Ingram, David. (2019, January 25). What Are the Seven Internal Control Procedures in
Accounting? Small Business - Chron.com. Retrieved from
Harrison, W.T., Horngren, C. T . , & Thomas, C. W. (2014). Financial accounting, (10th ed).
Boston, MA: Pearson.
Santarelli, Philip. (2016, April 4). Leases: New financial reporting rules for business leases –
Bakertilly.com Retrieved from
Sullivan, Denise. (n.d.). GAAP Principles for Internal Control Procedures. Small Business Chron.com. Retrieved from
Starbucks Corporation (2018). Starbucks Fiscal 2018 Annual Report. Retrieved from
Appendix A Appendix B ...
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- Spring '13