Question

PLEASE READ AND ANSWER

ACCOUNTING STARBUCKS 10-K (2016-2018)

Review the 2016-2018 10-Ks, Part 1, Items 1, 1A, 2, 3, and Part II, Items 7 and 8. Part I contains a discussion on the business model, risk factors, properties, and legal issues. Part II contains Management’s Discussion and Analyses, the financial statements and the notes to the financial statements. All these statements are referred to as management assertions. Parts I and II contain discussions on many types of risk that the business may be exposed to. You should read through all these areas. Once your team has read through Parts I and II, you are to answer a set of questions at the end of this section of deliverable two. The following narrative elaborates on each area you are to read.

Part 1, Item 1. Business

In this discussion, Starbucks discusses its business model, how it segments it financial information, and how it categorizes and earns revenue.

Part 1, Item 1A. Risk Factors

In this discussion, Starbucks discusses the risks that it has identified as material and has decided to share with the public. Although a company such as Starbucks has to disclose risks, the SEC madates a separate section to discuss risks. However, risks can be identified by reading other areas of the Annual Report and observations of its store operations.

Starbucks identifies the following 15 material risks:

1. Economic conditions in the U.S. and international markets could adversely affect our business and financial results.

2. Our success depends substantially on the value of our brands and failure to preserve their value, either through our actions or those of our business partners, could have a negative impact on our financial results.

3. Incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling, whether or not accurate, as well as adverse public or medical opinions about the health effects of consuming our products, could harm our business.

4. The unauthorized access, use, theft or destruction of customer or employee personal, financial or other data or of Starbucks proprietary or confidential information that is stored in our information systems or by third parties on our behalf could impact our reputation and brand and expose us to potential liability and loss of revenues.

5. We rely heavily on information technology in our operations and growth initiatives, and any material failure, inadequacy, interruption or security failure of that technology could harm our ability to effectively operate and grow our business and could adversely affect our financial results.

6. We may not be successful in implementing important strategic initiatives or effectively managing growth, which may have an adverse impact on our business and financial results.

7. We face intense competition in each of our channels and markets, which could lead to reduced profitability.

8. We are highly dependent on the financial performance of our Americas operating segment.

9. We are increasingly dependent on the success of certain international markets in order to achieve our growth targets.

10. Increases in the cost of high-quality arabica coffee beans or other commodities or decreases in the availability of high-quality arabica coffee beans or other commodities could have an adverse impact on our business and financial results.

11. Our financial condition and results of operations are sensitive to, and may be adversely affected by, a number of factors, many of which are largely outside our control.

12. Interruption of our supply chain could affect our ability to produce or deliver our products and could negatively impact our business and profitability.

13. Failure to meet market expectations for our financial performance and fluctuations in the stock market as a whole will likely adversely affect the market price and volatility of our stock.

14. The loss of key personnel or difficulties recruiting and retaining qualified personnel could adversely impact our business and financial results.

15. Failure to comply with applicable laws and changing legal and regulatory requirements could harm our business and financial results.

Part 1, Item 2. Properties

In this discussion, Starbucks discloses select properties that it owns, providing locations, sizes and purposes. This information can help a reader understand what properties may be at risk and how Starbuck’s operations could be affected if something were to happen to one or more properties.

Part 1, Item 2. Legal Proceedings

Starbucks elaborates on their legal proceedings in Item 15, Commitments and Contingencies. Many companies do the same.

Part II, Item 7. Management’s Discussion and Analyses

This discussion is management’s interpretation of the results of its operations. An important point to be made is that this is management’s interpretations, not anyone elses. Management of companies tend to highlight the positive and suppress the negative. They tend to guide the discussion they way they want. In this section, you may get a better idea what risks management may find important and those they may try to minimize. For your purposes, it is filled with good information that may help you further understand the trends in the horizontal, vertical, and ratio analysis that you performed.

Part II, Item 8. Index to the Notes to the Consolidated Financial Statements

In this discussion, management further clarifies information contained in the income statement, balance sheet and statement of cash flows. Starbucks discloses eighteen notes. However, for purposes of this project we are only going to focus on notes 1, 5, 7, 8, 9, and 15. In Note 1, Summary of Significant Accounting Policies, only focus on the discussion about the business, estimates, cash and cash equivalents, Receivables, net of Allowance for Doubtful Accounts, Property, Plant and Equipment, and Revenue Recognition. Note 5 discusses inventories in detail and will give you insight on where Starbucks get inventory and how it categorizes it. Note 7 contains Supplemental Balance Sheet Information, which discusses Property, Plant and Equipment, and Accrued Liabilities. Note 9 discusses Debt (Liabilities). In this section, Starbucks discusses in a lot of detail how it funds its operations. This discussion is involved. You may want to read it just to see how complex accounting for debt can be and the risks that Starbucks takes to pay back financing agreements. Item 15 discusses Commitments and Contingencies. What is important in this section is the legal proceedings, which is a gold mine for identifying potential risks.

Then, after you read those sections you have to answer the following 5 questions, as a Q&A, not an essay, about a paragraph for each question:

1) Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the balance sheet and why?

2. Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the income statement and why?

3. Of the 15 risks that Starbuck’s management discloses, which one do you think could most adversely affect the Cash Flow Statement and why?

4. Risk number 10 above states “Increases in the cost of high-quality arabica coffee beans or other commodities or decreases in the availability of high-quality arabica coffee beans or other commodities could have an adverse impact on our business and financial results.” Which ratios would be adversely affected if increases in cost or supply chain disruptions occurred for arabica beans? Explain why.

5. Compare your readings of management’s assertions and your findings of your vertical, horizontal, ratio and chart analysis. Discrepancies may exist between what the ratios are indicating and what management is telling you. Is management telling the public one thing, but the financial information indicates another? Explain to the best of your ability.

THANK YOU SO MUCH!

Answer 1

1. Balance sheet risks are uncertainty risks not directly related to the business or financial activities of a venture which affects the future value of the balance sheet. Starbuck risk factor no. 2 which states that; “Our success depends substantially on the value of our brands and failure to preserve their value, either through our actions or those of our business partners, could have a negative impact on our financial results,” will most adversely affect the balance sheet at store level. This is because the failure of Starbucks to preserve the positive value of its brand will lead to a decline in sales volume which will directly affect the store’s balance sheet. This would impact the goodwill (intangible assets) of the business.

2. Along with other risks, The loss of key personnel or difficulties recruiting and retaining qualified personnel could adversely impact our business and financial results as the company is dedicated to serving worldwide with better service in their coffee and other cafe products and this can be possible due to proper management and the key personnel. If the company loses its key person or hires new personnel could directly harm its production and revenue. On this note, if Company has the ability to attract and retain both corporate and retail personnel is also acutely impacted in certain international and domestic markets where the competition for a relatively small number of qualified employees is intense or in markets where large high-tech companies are able to offer more competitive salaries and benefits. If we are unable to recruit, retain and motivate employees sufficiently to maintain our current business and support our projected growth, our business and financial performance may be adversely affected.

3. Starbuck risk factor no. 12, "Interruption of our supply chain could affect our ability to produce or deliver our products and could negatively impact our business and profitability", would affect the Cash Flow statement as when the supply chain is not working properly, the revenue would be low on one side and the purchase on the other side.

Any disruption in the supply chain can lead to starvation of retail outlets of products to serve customers, while the inventory may get stuck in the pipeline somewhere resulting in cash getting blocked in the system. Unavailability of key input materials (like beans) at processing centers will render the production stalled. The cash conversion cycle can get severely stretched. In the end, it may require additional investment in the Working Capital.

4. a) HIGHER COGS - If the increased costs are not passed on to customers, Profitability ratios (GPM, OPM, NPM) will be negatively affected.

b) Accounts Payables would increase in value. This will lower the Accounts payables turnover ratio.

c) Product mix ratios would be effected as if high-quality arabica coffee beans are not available. They would be substituted by another input.