Starbucks Financial Analysis - Buckley.docx - Starbucks Financial Analysis Paul Buckley MBA503 \u2013 Financial Reporting and Analysis Southern New

Starbucks Financial Analysis - Buckley.docx - Starbucks...

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Unformatted text preview: Starbucks Financial Analysis Paul Buckley 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 in 2018. 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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