the rules of financial accounting and the governmental and GAAP requirements required for Starbucks

the rules of financial accounting and the governmental and GAAP requirements required for Starbucks

1. Introduction

There is stiff competition in the coffee sector, which has facilitated financial analysis for Starbuck to be conducted to understand its performance. The financial report will aim to know how Starbucks performs differently compared to a coffee shop based in the Midwest. Starbuck was founded in 1971, which has expanded to become “the premier roaster, marketer and retailer of the best coffee in the world.” Starbucks operates in more than 70 countries, such as in the US, Europe, Middle East, Asia, and Africa.

For proper financial analysis, calculations will be prepared, revealing horizontal and vertical analysis for balance sheet and income statements accounts. Besides, ratio analysis such as liquidity, solvency, and profitability will be determined that will allow acquiring a detailed analysis of the financial performance as compared to another coffee shop in the region. The final section will review the rules of financial accounting and the governmental and GAAP requirements required for Starbucks to include in their financial reporting.

2. Horizontal and Vertical Analysis
3. Accounts Receivables

Horizontal Analysis

The horizontal analysis of debtors has been based on the year 2017, which revealed a decrease of $ 177.3, which is represented by 20.37%. Such a reduction will imply that the old accounts receivables have been collected from the customers, increasing the cash inflow in Starbuck Coffee. Therefore, the company has eliminated any possible bad debts, which would create serious financial problems resulting in liquidity issues.

Vertical Analysis

Accounts receivables vertical analysis has been calculated based on total assets. In the year 2017, the entire accounts of accounts receivables that made up total assets were 6.06% while in 2018 was 2.87%. Such financial analysis reveals that the amount of accounts receivables is based on total assets, which has decreased. It, therefore, reveals better debt collection strategies hence an increase in cash inflow in the organization.

Analysis of Starbuck’s Method for Accounting for receivables

Starbucks Company usually considers its debtors’ net of bad debt and allowance for bad debt to understand the company’s financial status. Due to financial challenges, some customers cannot pay their debts, making Starbuck Company have a high number of bad debts. The majority of the bad debts are written off, reducing the cash inflow in the organization. Uncollected receivables are $ 693.1, which will require the management to ensure timely payment of the debt. Accounting for debtors usually affects how vital financial information is communicated since investors may feel that their resources are not properly managed, especially with a high number of bad debts.

1. Asset Acquisition, Depreciation and Amortization

Horizontal changes in Starbuck’s Fixed Asset, intangible assets, depreciation, and amortization.

The company’s fixed tangle asset includes long term investments, equity and cost, investments, property plant, and equity as well as deferred tax. The long-term investment was reduced by 50.64%, which indicated the disposal of a particular investment amount. Starbuck was, therefore, able to receive cash inflow due to the sale of an investment. Besides, equity and investment declined by 30.50%, while property plant and equipment increased by 20.52% due to the acquisition of additional PPEs in the organization. Deferred income tax decreased by 83.06% while long term assets increased by 13.61%, indicating acquisition in the organization. Intangible assets such as depreciation and amortization decreased by 23.34% while goodwill increased by 130%.

Vertical Analysis in Starbucks’ fixed assets, intangible assets, depreciation, and amortization

Long term investment makes up 3.77% of total assets in 2017 and 1.1% in 2018. It, therefore, means there is a decrease in total long term investment in the organization. Equity and cost investments make up 3.35% of total assets in 2017  and 1.39% in 2018. Besides, PPEs make up 34.25% of the total assets in 2017 and 24.54% in 2018, indicating a slight decrease due to sale and disposal. Other, such as deferred income taxes make up 5.53%, other long term assets 2.53%, and intangible assets of 3.07% of the total assets in 2017. The total amount of revenue absorbed by depreciation and amortization expenses in 2017 was 5.42 and 5.9 in 2018. Analysis of Starbucks’ Method for Fixed Asset and Intangible Assets, Depreciation, and Amortization

Starbucks ‘ fixed assets include a capital lease, which is carried at cost less cumulative depreciation. The straight-line method of depreciation has been used to estimate the fixed assets’ useful life over the years. Depreciation related to production and distribution is incorporated in the cost of sales for proper accounting purposes. The company can evaluate its fixed assets if circumstances reveal that there is no carrying amount of the asset. The methods of accounting affect balance sheet, income statement, and cash flow as it helps to provide only the correct and accurate financial information. Therefore, the management team can use the presented financial information to make the best-informed business decision.

1. Debt Financing

Horizontal Changes in Starbucks’ Short and Long Term Debt

Starbucks ‘ accounts payable has increased by 50.71%, indicating an increase in creditors in the organization. In addition, the current portion of long term debt has also increased, meaning the organization has received additional funding in terms of the loan in the organization. The same case applies to long term debt, which means the acquisition of other debt in the organization.

Vertical Changes in Starbucks’ Short and Long Term Debt Over Time

Vertical financial analysis has been conducted based on total assets. The percentage of long-term debt in total liabilities and equity is 27.37% in 2017 and 37.63% in 2018. It, therefore, shows an increase in organization debt financing. In 2017, there was no short term debt in Starbuck. Overall, based on total assets, it means the organization is highly levered, which helps to provide sources of finance as compared to equity financing.

Analysis of Starbuck’s Method of Debt Financing

The valuation of debt is adequately explained in note 9 of debt finance, which includes long term dent that has a balance of 3932.6 in 2017 and 9090.2 in 2018. Besides, other non-current liabilities include a balance of $ 750.9 in 2017 and $1430.5 in 2018. From the current liabilities, the total debt finance that Starbucks Company owes is $ 4220.7 in 2017 and $ 5684.2 in 2018. In August 2018, the company issued a long term debt in the form of underwritten registered public offerings, which consisted of $ 1.25 billion of 7 years, 3.8% senior noted that were due on August 2025. The interest is payable semi-annually. The company also issued a long term debt in an underwritten registered public offerings comprised of $ 1 billion 5 years 100% senior notes that were due on March 2023. Additionally, $ 600 million of 10 years 3.5% senior notes due in March 2018 was issued where the interest was paid semi-annually.

Starbucks also issued long term debt in the form of a public offer, which consisted of $ 500 million of 3 years, 2,2% senior notes that were due in November 2020, and $ 500 million of 30 years 3.750% 3.75% due on December 2047. The debts and the bonds issued in the organization helped to support short term and long term financial obligations.

3. Ratio Analysis
4. Liquidity Ratios

Current ratio= current asset/current liabilities

2017=5283.4/4220.7= 1.25

2018= 12494.2/5684.2=2.20

Cash ratio=Cash+ Marketable securities/current liabilities

2017= (2462,3+228.6)/4220.7= 0.64

2018=(8756.3+181.5)/5684.2= 1.57

Analysis

The current ratio helps to analyze the organization’s financial capacity to clear and cater to the current financial obligation. In 2017, the current ratio was 1.25, while in 2018, it was 2.20 in the market. From the ratio, it means the organization has been able to have a stable financial ability, which helps to cater to short term liabilities. It, therefore, means the company cannot face any liquidity challenges in its operations.

Cash ratio means the ability of Starbuck Company to repay short term debts with the available cash. The company’s cash ratio in 2018 was 1.57, which means the organization’s inability to utilize the available cash to earn more profits in the market.

1. Solvency Ratios

Total debt to equity ratio

=total debt/total equity

2017=3932.6/5457=0.72

2018=9090.2/1175.8=7.73

Equity ratio

=shareholders fund/net assets

2017= 5450.1/14365.6=0.38

2018= 1169/24156.4= 0.048

Discussion

Debt to equity ratio measures typically the relationship between long term dent of an organization and its equity fund. There was an increase in debt to equity ratio from 0.72 to 7.73 in the region. In 2018, there was a high ratio, which means indicate a risky business as there are more creditors in the organization. Such a high ratio means the equity was diluted in the market.

Equity ratio indicated a lower ratio in 2018, which was 0.048, which means the company’s poor financial health. It means most of the funds come from debt financing in the organization.

1. Profitability Ratios

Gross profit margin

=gross profit/sales*100%

2017= 4134.7/22386.8*100%=18.47%

2018= 3883.3/24719.5*100=15.70%

Return on Assets

=net income/assets

2017= 2884.7/14365.6= 0.20

2018=4518.3/24156.4= 0.19

Discussion

There was a decline in gross profit margin from 18.47% to 15.70%, which means that the profit levels have reduced. Therefore, there is a higher cost associated with sales, which can be attributed to increased expenses, low selling price, and wrong sales promotion policies in the market. There is a need for the management in Starbuck to manage the expenses and increase sales level to increase profitability levels.

There was a slight decline in return on assets, which helps to reveal the percentage of net earnings that are relative to Starbuck’s total assets. Therefore, it means the company will require higher investment to increase total assets that can be used to generate income.

4. Rules of Financial Reporting

Starbuck, as a publicly-traded company, is supposed to follow all the rules and regulations terms Generally Accepted Accounting Principles (GAAP). Such rules are used to protect potential investors by ensuring that all information presented is accurate, which will allow better comparison with other firms in the same industry.

This section will aim to review different rules concerning financial reporting and the reason why such information is required under any public company.

Why is the Reporting of Control Procedures Required?

Internal controls are considered the systems that an organization maintains to avoid fraud or error. Based on internal controls, it will involve assessing risk, providing oversight, and taking necessary control measures. The main goal of control procedures is to safeguard the organization’s assets against misuse or waste to avoid any inefficiency and fraud among all the employees. Besides, control procedures are aimed to promote operational efficiencies that help to reduce waste, operating cost, and maximize organization profits. Through the use of control procedures, accurate financial is maintained, which helps to safeguard the shareholders’ wealth in an organization like Starbucks.

For publicly traded companies such as Starbucks, it is required to maintain secure and reliable internal control procedures in reporting their annual financial statements. Such measures were introduced in 2002 with the creation of the Sarbanes-Oxley Act (SOX Act) in urgent to the financial scandal that was involving Enron Company among other significant organizations. The SOX Act was formed to protect different investors from any fraud that may emerge within the employees. Section 404 of the SOX Act indicates that financial reporting must outline and establish the necessary healthy internal controls suitable for financial reporting.

Starbucks usually reports its internal controls and procedures, as stipulated in section 9A of its annual report. The section highlights that Starbucks must acknowledge that they are required to have necessary and robust internal controls and describe the changes that are made. From the latest annual report, Starbucks made no changes in its internal controls. As described in Section 9A of the Form 10-K from Starbucks, “There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that materially affected or are reasonably likely to materially affect internal control over financial reporting.” Starbuck has managed to receive the required benefits from the use of healthy internal controls.

Segment Information

Segment information is prepared for any public company which aims to provide information to investors and other users of financial statements concerning how their financial results of the company. Most organizations usually operate different segments in their business, which helps to evaluate income, expenses, assets, and other necessary financial information. Therefore, they will help identify profitability and riskiness, which will help the management identify the weak areas and reliable that will require a business recommendation.

Starbucks has been able to identify four main operating segments based on Note 16, which include:

• Americas- US, Canada, and Latin America
• China/Asia Pacific
• Europe, Middle East, and Africa
• Channel Development.

Starbucks has been able to consider all company-operated and licensed stores that are within its operating segments. The company has also disclosed different non-reportable segments, which comprise developing business sections and other smaller divisions approximate 3% of total segments. The reporting segments identified by Starbucks have become more critical, which helps to analyze different data that originates from various territories that Starbucks has operations.  Therefore, it becomes possible for the management team to predict and analyze different regions’ financial performance.

Reporting of Estimates

When preparing financial statements, public companies such as Starbucks are supposed to make estimates and necessary assumptions on different items that cannot be fully recorded using traditional means. Some of the notable things included: revenues, assets, and liabilities in the financial statements. To estimate these values, companies are supposed to use accrual accounting methods, which helps to record transactions only when they occur instead of cash-based accounting. Any time a business makes sales or incur expenses, such financial information needs to be recorded for better financial accountability.

Starbuck Company has been able to provide estimates and assumptions based on different items in its financial reporting, such as inventory reserves, assets, income, retirement obligations, and goodwill impairments. Therefore, Starbucks Company has been able to estimate the majority of its assumptions using estimates from cash flows and operating expenses based on internal projections in the organization. The majority of Starbucks’s estimates and assumptions are found in Section 8 of their Form 10-k. Starbuck Company is also supposed to provide necessary financial reporting, which helps disclose any changes used in the calculations to make the estimates and assumptions. In Starbuck’s financial statements, it has been reported that there were no changes in how the company calculates these figures.

Investment and Fair Value

All publicly-traded companies, such as Starbucks, are required to report investments based on the current market value. Such a method is called fair value, which is considered the price at which assets or liability can move from one person to another.

Fair value is a reliable method in GAAP for the US and other international countries as they are stable in the financial market. Starbucks has been able to disclose fair value in Note 1 of section 8 in their Form 10-k, which mainly states that the organization’s investment is valued using internally developed models, which can take into account interest rates, credit, and liquidity spreads. Such calculations are then reported in Note 4, where Starbuck’s reported a total of $ 134.4 million as total short-term investments, while long term investments were $ 1141.7 million.

Leases Reporting

A lease is considered as an agreement between two parties, which will allow a lessee to gain access to an asset without having to finance an immediate purchase at a higher cost. There are two types of lease, namely operating and capital leases. Leases are required to be reported according to GAAP following the introduction of the Sarbanes-Oxley Act of 2002.

As indicated in their Form 10-K, Starbucks owns the majority of its coffee roasting facilities and can utilize lease agreements for warehouse and distributions locations. The company has been able to report all lease agreements under Note 10 of section 8, which declares total rent expenses under operating lease agreement of $ 1223,2 million and provides future minimum estimated payment for the next five years amounting to $ 7285million. Starbucks has also declared additional operating leases in Note 1, including stores, equipment, and warehouse facilities.

Conclusion

Starbucks Company has a sound financial position from the presented financial analysis. Using horizontal and vertical analysis reveals that the organization has managed to improve its efficiencies and made an increased investment in its fixed assets.

For example, a decrease in accounts receivables indicates that cash has been collected from customers, which helps eliminate bad debts. Based on the company’s accounting for fixed tangle assets, long term investment has decreased by 50.64, revealing the disposal of a small investment.

A closer analysis at Starbuck’s debt financing accounts payable has increased by 50.71%, revealing an increase in the organization’s creditors. The organization has also increased long term debt, which helps to provide the necessary financing required. Besides, the 2.2 current ratio means the company can cater to its short term financial needs in the market.

Starbucks’ better performance in reviewing procedures for valuing investments has allowed the company to increase its performance due to the proper valuation of assets. It has been able to free up cash on their balance sheet that has been used in other operations, which helps to improve on profitability. Starbucks ‘ ability to adhere to all accounting rules such as GAAP has helped provide accurate and reliable financial statements.