business. Use your imagination and common sense what those events could be. Once the boy can assess these risks, he will have to ask himself, if one or more of these events happen, how will affect the financial operations of the business? Can the boy use any financial tools to figure it out? Yes, he can use horizontal, vertical and ratio analysis to get a clearer picture how these events could affect the business. He can further visualize the data with charts. Let’s say he is most concerned about another kid in the next neighborhood opening up a lemonade stand as a competitor. What does competition mean? If you were selling something and a competitor started selling a similar product to yours, what areas of the financial statements would it most likely impact? Probably revenue. A competitor could take away sales. If enough sales are diverted from the business to a competitor, another problem to deal with is to try to control expenses. In the lemonade stand example, if a kid opens up a competing stand nearby and sales are drawn away, the boy will have inventory that may become stale and obsolete. Lemons and ice are perishable, and they have a cost. The boy will have to control costs by reducing the inventory and supply levels. The steps to understanding how risks could affect the financial statements of the lemonade example can be extrapolated to a public company like Starbucks. Of course, the issues with a public company are much more complex, but the principles of analyzing
42 are similar. You have to start with fundamental questions and use common sense to understand what management is saying to the public and how it conforms to the actual published figures in the financial statements in order to make good business decisions. Among the many benefits of the term project, this approach helps to understand this process. When you conduct your store level visitations, let your mind wonder what could happen in that store that could also happen to several hundred or thousands of stores in the same time frame. It could be a strike upsetting the supply chain, the way they conduct their policies, the type of coffee bean used, an inefficient machine used in all stores, an ingredient in their consumable products suddenly known to cause harm, the need to refurbish furniture, etc. Those are just some of the many, many visual things I could sit in a Starbucks and think of. A strike affects inventory (revenue, assets, expenses), policies affect Human Resource and salary issues (liabilities and expenses), coffee and cocoa beans affect inventory (revenue, assets, expenses), harmful consumable products affect possible lawsuits (liabilities and expenses), refurbishing furniture (assets – particularly cash). Other issues that are not so apparent could be the mix of inventory or whether they use LIFO or FIFO. What depreciation methods and assumptions are they using? Is a chair supposed to be depreciated over 2 years, 3 years, 5 years? Does it have any salvage value? How does the choice of a depreciation method affect the financial statements? How do they accept payment? Cash, credit, prepaid store value cards, their
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- Balance Sheet, Starbucks Corporation