Question

1. Expanding the number of stores in a foreign market, such as the expansion plan launched by Starbucks in China (announced in 2018), is a major capital budgeting project. A project of this scale requires coordinated planning across all functions of a business that you are studying in your Integrated Core classes. Choose and discuss three items on the income statement and balance sheet (a total of six items) that you think this new undertaking will effect. Explain why you chose those particular items, and how the marketing, management and operations decisions of the company will affect them.

I am confused by finance and do not understand which each item on the IS and BS means.

Answer 1

Three items in the income statement (IS) that this new undertaking will affect are:

· Cost of sales

· Store operating expenses

· Depreciation and amortization expenses

Explanation: As Starbucks expands in China and as it opens more stores its expenses will also increase in a similar fashion. First of all the company’s cost of sales will increase. In finance cost of sales is the accumulated total of all costs used to create a product or service, which has been sold. As new stores are opened the company will also incur additional amounts of direct labor, direct materials as well as overhead for each new store. Similarly store operating expenses will increase and this will include mostly indirect costs like cost of electricity, rent, etc. Lastly as more assets are added then cost of depreciation and amortization will increase as these assets will have to be depreciated going forward.

Three items in the balance sheet (BS) that this new undertaking will affect are:

· Inventories

· Property, plant and equipment (PPE)

· Long term debt

While inventory is a current asset PPE is a fixed asset. Both these assets will increase with expansion of more stores in China. As the number of stores increases so will the Starbucks’ inventory of raw materials that it uses to make its beverages and food items will increase. Starbucks will also have to invest additionally in PPE as each new store will require additional equipment to make the end products. The expansion will be funded most likely by a mix of debt and equity and hence the company’s long term debt will increase as it will avail of bank loans or raise long term debt through other means as well.