Financial reporting assignment 1

FINANCIAL REPORTING: FINANCIAL STATEMENTS REGULATORY
FRAMEWORK & INTERPRETATION

Prepared for:
Lecturer, Mr. Jun Alejo Bathan
Unit 10: Financial Accounting and Reporting
Assignment Title: Financial Statements Regulatory Framework & Interpretation
Banking Academy, Hanoi
BTEC HND in Business (Finance)

Prepared by: Maple Group
Ngô Thị Huyền Trang - Jess
Vương Thị Quỳnh Anh - Lynn
Nguyễn Phương Thảo - Key
Nguyễn Thị Kiều Anh - Snow

Submitted: 4/11/2013
1


Table of Contents

EXECUTIVE SUMMARY
This report provides an analysis and evaluation of the accounting ratios of Starbucks and
brings the varied knowledge about the financial accounting and reporting. The main purpose
of this report is showing the understanding of the regulatory framework for financial
reporting. Besides, the methods were used in this report are trend analysis and industry
analysis as well as ratios such as Current ratio, Quick ratio and profit margin.. This report is
divided into 6 outcomes:
•

Description of the different users (Stakeholders) of financial statements and their
needs

•

Assessing the implications for users of financial statements

•

Explaining the legal and regulatory influences on financial statements

•

Explaining how different laws/regulations are dealt with by accounting and reporting
standards

•

Calculation of accounting ratios to assess the performance and position of Starbucks

•

Preparing a report incorporating and interpreting accounting ratios, including suitable
comparisons

2


The report also have limitation in conducting analysis because there are some information is
not available currently and the using of industry analysis method is limited due to the difficult

in find out information from foreign company.

INTRODUCTION
In this report, our group is working in a financial consultancy firm as a client service manager
providing advice and assistance to clients on financial accounting and general business
issues. You have been asked by Director of Finance in your company to prepare an analytical
review of the financial position and reporting of a well-known company Starbucks.
Starbucks Corporation is an American global coffee company and coffeehouse chain based in
Seattle, Washington. Starbucks is the largest coffeehouse company in the world (was
founding in 1971),Starbucks locations serve hot and cold beverages, whole-bean coffee,
micro ground instant coffee, full-leaf teas, pastries, and snacks with 20,891 stores in 62
countries, including 13,279 in the United States, 1,324 in Canada, 989 in Japan, 851 in the
People's Republic of China, 806 in the United Kingdom, 556 in South Korea, 377 in Mexico,
291 in Taiwan, 206 in the Philippines, 179 in Turkey, 171 in Thailand, and 167 in Germany.
In addition, Starbucks is an active member of the World Cocoa Foundation. Starbucks
expanded its long-term relationship with Maxim's Group to now operate Starbucks stores in
Vietnam, with the first store in Ho Chi Minh City in early February 2013
This report will analyze deeply about the performance and position of Starbucks in the
Vietnam market. Moreover, provides information about legal and regulatory which influences
3


financial statement from which shows the importance of finance statement to each user of
business, company and the ways of using different ratios in assessing Starbucks' performance
by explaining the information from the financial statements.

1.1 Description the different users (stakeholders) of financial statements and their needs
Starbucks is one of the largest coffeehouse company in the world. Therefore, all users of
Starbucks interested so much in financial statements of company because they base on data
and information in these reports to assess development of Starbucks. Each users have

different requirements about data. As a result, Starbucks has to prepare financial statements
which provide sufficient information for stakeholders to satisfy their needs and wants. There
are two types of stakeholders including internal and external users (Catherine, 2008)
1.1.1 Internal stakeholders
Internal stakeholders consist of Managers, Employees, and Shareholders
•

Managers: These are the people appointed by the Starbucks’ owners to supervise the
day-to-day activities of the company; responsible for planning and directing the work
of a group of individuals and monitoring their work (Starbuck, 2012)
The manager of Starbuck is Howard Schultz. He and others managers in
subsidiaries of Starbucks has direct relationship with the operation of organization.
 Manager require financial statements to manage the affairs of the company by
assessing its financial performance and position and taking important business
4


decisions, adjust company’s strategies timely (Catherine, 2008). In financial statement
of Starbucks (2012), total revenue of 2012 is higher than 2011 (increase about $10
billion), meaning that manager of Starbucks implement business strategy well.
•

Employees: are human resources joining directly into the work for Starbuck.
Employees need to know about information related to financial position of company,
because their future careers and the level of their wages depend on it (Catherine,
2008). For Starbucks, employees are people are very important in creating product.
Employees of Starbucks also interested in financial stability and profitability of the
company which also influences to their benefits. If data in financial reporting of
Starbucks is good, it expressed the company operate well. From this information,
employees can assess the ability of Starbuck in providing salaries, welfare policies

(commodities discounts, medical insurance…) retirement benefits and employment
opportunities (training programs, promotion…) for them.

•

Shareholders: are owners who hold shares of stock of Starbucks. They interested in
information which help them assess how effectively management is performing its
function, how profitable the company’s operations are and how much profit they can
afford to withdraw from the business for their own use. Based on evaluation through
the figures from financial statements in annual reports, FMR, LLC - one of the main
shareholders of Starbucks can decide whether to continue to hold, sell or buy more
shares (Starbuck, 2012).

1.1.2 External stakeholders
External stakeholder including trade contacts, providers of finance, and government.
•

Trade contacts include two types of stakeholders: suppliers and customers


Suppliers are individuals or organizations who provide goods to the company on
credit (Catherine, 2008).
Yunnan Arabica coffee bean is company which supplies raw material (coffee
bean) for Starbucks will need to consider the financial statements of the
enterprises such as profitability….to ensure about Starbucks’ ability to pay its
debts, and identify how much credit can safely be given for making decisions
whether should make contract with Starbucks or not.



Customers are people who purchases goods and services provided by the
company (Catherine, 2008)
Starbucks’ customers need the guarantee from the company about the quality of
products and services  They are concerned about financial statements which
5


provide useful information about the reliability of the enterprise as confirm the
capacity of the entity in terms of non-current assets or financial position to prove
the strength of enterprise to meet any customers’ requirement to decide whether to
continue buying product of company or not. If Starbucks have high profit and high
positive in competitive market, meaning that Starbucks provide high quality
product, customer will trust in company to choose using their products.
•

Providers of finance include investors and creditors


Investors is people who make investment into the company and expect to gain
financial returns (Catherine, 2008)
Starbucks’

investors

are

Capital

World

Investors,

Northern

Trust

Corporation.... They are concerned about the risk and the return of their
investment. Before making investment decisions, they need find out information
about Starbucks such as assets, liabilities, historical business growth, share prices
and financial strengths. Based on this information in Starbucks’ financial
statement, they can assess the ability of the business to pay dividends for them.


Creditors include present or potential creditors who have lent or may lend money
to a business (Catherine, 2008)
Bank of New York Mellon is one of Starbucks’ creditors...They need information
from financial statements in order to identify whether their money can be used
effectively and ability to perform Starbucks’ commitment such as ensuring that
Starbuck can keep up with interest payments and eventually to repay the money
Starbucks has borrowed.

•

Government: The government makes rules in order to ensure that the company runs
its business legally and interested in the allocation of resources and therefore in the
activities of business entities (Catherine, 2008)
The Government Taxation Agency requires Starbucks to publish annual report, and
ensure that financial statements must be accurate to calculate tax payments of the
enterprise such as business tax, VAT tax…

1.2 Explanation the legal and regulatory influences on financial statements
1.2.1 Company Legislation – Company Act 2006
Company Act is an Act of Parliament which regulates the workings of companies, stating
the legal limits within which companies may do their business (BusinessDictionary, n.d.).
Company Act 2006 was fully completed on October 2009. According Company Act
2006, limited liability companies must prepare the financial statement follow the
6


requirement: prepare accounts annually for distribution for company’s shareholders and
the account should show a “true and fair view” (Frost, 2010). In Company Act 2006, the
director’s responsibilities are: the members have not required the company to obtain an
audit of its accounts for the year in question in accordance with section 476 and the
directors acknowledge their responsibilities for complying with the requirements of the
Act with respect to accounting records and the preparation of accounts. In addition,
company must prepare and published account annually.
→

By using Company Act 2006 financial statement of Starbucks to the Law firms will
become easier. This legal will not affect too much on the reporting Starbucks because
it based on the data after business, not on the segmentation of major customers.

1.2.2 International Financial Reporting Standards (IFRSs)
International Financial Reporting Standards (IFRSs) is a set of international accounting
standards stating how particular types of transactions and other events should be reported
in financial statements. IFRS are issued by the International Accounting Standards
Board.
IFRS are sometimes confused with International Accounting Standards (IAS), which are
the older standards that IFRS replaced (IAS was issued from 1973 to 2000) (Investopedia,
n.d.). Financial statements prepared under IFRSs are required to present the financial

position, financial performance and cash flows of the entity.
→

As a result, financial statements of Starbuck prepared under IFRSs are required to
present fairly like the requirement of Company Act. This standard is very useful for
Starbuck, it seem to be a national requirement, international benchmark and
regulatory authorities for domestic and foreign companies.

1.2.3 UK Accounting Standards
In current, UK Accounting Standards have four parts: The Financial Reporting Council
(FRC), The Accounting Standard Board (ASB), The Financial Reporting Review Panel
(FRRP) and The Urgent Issues Task Force (UITF):
•

The Financial Reporting Council (FRC) is the UK's independent regulator for
corporate reporting and governance. Its five key objectives are to promote: high
quality corporate reporting; high quality auditing; high standards of corporate
governance; the integrity, competence and transparency of the accountancy
profession; and its own effectiveness as a unified independent regulator. In April 2006
it added the Board for Actuarial Standards to its stable (Glossary, n.d.). As a result,
7


FRC is responsible for funding and ensures the smooth running of the standard setting
process and has an important role in indicating accounts that do not meet the
•

requirements of accounting standard and the company act.
The Accounting Standard Board (ASB): UK organization (similar to the US
Financial Accounting Standards Board) responsible for drafting and establishing

accounting standards. ASB is a subsidiary of Financial Reporting Council; one of its
committees publishes the International Accounting Standards (Andrea, 2007). ASB

•

has responsible in helping FRC in setting accounting standard for companies in UK.
The Financial Reporting Review Panel (FRRP): The Panel sought to ensure that
the annual accounts of public companies and large private companies comply with the
requirements of the Companies Act 2006 and applicable accounting standards (FRC,
n.d.). This panel has legal backing. It means that if company is not follow the
accounting standard, the panel may go to the courts.

•

The Urgent Issues Task Force (UITF): The UITF was disbanded on 2 July 2012 as
a result of the FRC Reform (FRC, n.d.). Its role is to assist the ASB in areas where an
accounting standard or company Act provision already exists, but where
unsatisfactory or conflicting interpretations have developed. This system is able to act
quickly when an authoritative ruling is urgently needed (Phillip, 2007).

→

Starbuck will choose using UK accounting standard system, IFRSs or Company Act
to prepare their accountant. Normally, Starbuck choose UK accounting standard and
Company Act instead of IFRSs because those regulations are more simply and easier
to understand than IFRSs. It helps accountant of Starbuck working easily in preparing
financial statement for their company.

1.3 Assessing the implication for user
Financial ratios are useful indicators of a firm's performance and financial situation.

Financial ratios can be used to analyze trends and to compare the firm's financials to those
of other firms. In some cases, ratio analysis can predict future bankruptcy. Financial ratios
can be classified according to the information they provide. (NetMBA, n.d.)
1.3.1 Liquidity ratios
Liquidity ratio is a class of financial metrics that is used to determine a company's
ability to pay off its short-terms debts obligations. Generally, the higher the value of the
ratio, the larger the margin of safety that the company possesses to cover short-term debts
(Anon, 2012)

8


•

Current ratio is “a measure of the solvency or liquidity of your business”. The
higher the current ratio, the better the capacity to meet short term financial
commitments.

•

Quick ratio “measures the level of all assets that can be quickly convertible into
cash and used to meet short term liabilities”. The higher the ratio, the higher the
level of liquidity for business (Anon, 2006).

Users: Investors, suppliers, creditors, shareholders
Using to measure the capacity of Starbucks to meet the short term financial

-

commitments. Based on this data, investors and suppliers can consider whether

continue invest in Starbucks or not.
Show how liquid is the current assets of Starbucks converted to cash comparing

-

with the present current liability.
1.3.2 Efficiency ratios
Efficiency ratios are ratios that are typically used to analyze how well a company uses its
assets and liabilities internally (Anon, 2007).
•

Receivables payment period measures the average number of days customers
take to pay their bills, indicating the effectiveness of credit and collection
policies of the business.

•

Inventory turnover illustrates “how well a company manages its inventory
levels”. If inventory turnover is too high, it suggests that a company may be
overbuilding its inventory or that it may be having issues selling products to
customers (Anon, 2007)

Users: Stakeholders, investors
Stakeholders, investors’ concern about the effectiveness of credit and collection policies
of the business and how well business manages inventory levels. For example, based on
this data from inventory turnover, stakeholders, investors can give suggestions for
company that company such as if it too low, business can overbuilding its inventory,
expand market to sell products to new customers.
1.3.3 Profitability ratio
Profitability ratio is a class of financial metrics that are used to assess a business's ability

to generate earnings as compared to its expenses and other relevant costs incurred during
a specific period of time (Anon, 2012).
•

ROE (Return on equity) “measures the rate of return on the money invested by
common stock owners and retained by the company thanks to previous profitable
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years. It demonstrates a company’s ability to generate profits from stakeholders’
equity. ROE show how well a company uses investment funds to generate
growth” (Kennon, n.d.)
•

ROCE (Return on capital employed) “measures the profitability of a company
by expressing its operating profit as a percentage of its capital employed”. A
higher value of return on capital employed is favorable indicating that the
company generates more earnings per dollar of capital employed. A lower value
of ROCE indicates lower profitability (Anon, 2012)

•

Net profit is a measure of the profitability of a venture after accounting for all
costs (Anon, 2002)

•

Asset turnover: Asset turnover “measures a firm's efficiency at using its assets
in generating sales or revenue”. The higher number the better (Anon, 2002)

•

Gross profit indicates how efficiently management uses labor and supplies in the
production process (Anon, 2007)

Users: Employees, managers, government
-

Indicating the efficiency and profitability of Starbucks’ capital investments

-

Show for manager to know ability to generate profit from capital.

-

Based on profitability ratios, government can know control tax payable of
company.

1.3.4 Debt and gearing ratio
Gearing ratio is a group of ratio which demonstrating the degree to which a firm's
activities are funded by owner's funds versus creditor's funds. This ratio compares some
form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial
leverage, demonstrating the degree to which a firm's activities are funded by owner's
funds versus creditor's funds (Anon, 2013).
•

Debt ratio: is “a measure of a company’s financial leverage”. If the ratio is
greater than 1, the majority of assets are financed through debt. If it is smaller
than 1, assets are primarily financed through equity. (Anon, 2003)

•

Gearing ratio (Capital gearing ratio): “measures the percentage of capital
employed that is financed by debt and long term financing”. The higher the level
of gearing, the higher the level of financial risk due to the increased volatility of
profits (Anon, 2003)

•

Cash flow ratio is a measure of how well current liabilities are covered by the
cash flow generated from a company's operations (Anon, 2007)
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Users: Suppliers
-

Suppliers can identify the long-term financing of the business

-

Suppliers can measure of Starbucks’ financial leverage or risk

 In order to easy give decision whether should continue supplies materials for
Starbucks in the future or not.
1.3.5 Investment ratios
Investment ratios are ratios that can be used by investors to estimate the attractiveness of
a potential or existing investment and get an idea of its valuation (Richard, 2012)
•

P/E ratio: Price earnings ratio “is the measure of the share price relative to the
annual net income earned by the firm per share. PE ratio shows current investors
demand for the company share. A high PE ratio generally indicates increases
demand because investors anticipate earnings growth in the future” (Anon, 2011)

•

Dividend yield: “It is a measure of the ability of a company to maintain the level
of dividend paid out”. The higher the cover, the safer of dividend is. The higher
P/E ratio is, the more willing market pay for company’s earning is, and vice versa
(Anon, 2008)

Users: Investors, Shareholders
-

Know how many profit for investors/ shareholder can earn per share of Starbucks.

-

Know how much earning for each dollar invested in Starbucks.

-

Know how many times over the profits could be paid the dividend.

 Identify risk and profits from your investment in Starbucks.
1.4 Explanation how different laws/regulations are dealt with by accounting and
reporting standards
1.4.1 The influences of law to accounting and reporting standards

•

Company Act 2006:
The Companies Act 2006 is a piece of primary legislation that largely applies to
companies directly. A number of provisions are currently being set out in secondary
legislation, mainly through regulations or orders made by statutory instrument was
developed from the Companies Act 1985 in order to meet four key objectives:
-

To enhance shareholder engagement and a long term investment culture;

-

To ensure better regulation and a 'Think Small First' approach;

-

There are some of the key effects resulting from the Act include:

For all companies:
-

A clear statement of directors' general duties clarifies the existing case law based rules
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-

Companies will be able to make greater use of electronic communications for
communications with shareholders.

-

Directors will automatically have the option of filing a service address on the public
record (rather than their private home address).

-

Directors must be at least 16 years old, and all companies must have one natural
person as a director – i.e. they cannot have all corporate directors.

-

There will be improved rules for company names.

-

Companies will no longer be required to specify their objects on incorporation.

-

The articles will form the basis of the company's constitution.

For private companies:
-

There will be separate and simpler model Articles of Association for private
companies.

-

As part of the "think small first" agenda, there will be a separate, comprehensive
"code" of accounting and reporting requirements for small companies.

-

Private companies will not be required to have a company secretary.

-

Private companies will not need to hold an annual general meeting unless they
positively opt to do so.

-

It will be easier for companies to take decisions by written resolutions.

-

There will be simpler rules on share capital, removing provisions that are largely
irrelevant to the vast majority of private companies and their creditors.

For key benefits: Shareholders
-

There will be greater rights for nominee shareholders. These will include the right to
receive information electronically or in hard copy if they so wish.

-

There will be more timely accountability to shareholders by requiring public
companies to hold their AGM within 6 months of the financial year-end (Anon,
2012)

→

The Companies Act 2006 is a piece of primary legislation that Starbuck largely
applies to their companies directly. Using it help Starbuck make it easier to set up and
run a company; and provide flexibility for the future.

•

Partnership Act 1890
A partnership is established whenever two or more people set up in business together
with the intention of sharing profits and losses and do not form either a limited
company or a Limited Liability Partnership (LLP). Even if they do not intend to form a
partnership, if they enter into this type of relationship a partnership is formed.

12


Partnerships formed under the Act are often unwieldy and can lead to disputes between
partners. For instance, under the default provisions of the Act:
-

A partner is not obligated to participate in the running of the business in any way,
which means that they do not have to turn up to work.

-

Partners cannot retire. If a partner dies or decides to leave the partnership, the
partnership must be dissolved, assets distributed equally, and then a new partnership
(or other business) created. The process is by no means simple, and can be
extremely costly.

-

Partners cannot be expelled from a partnership.
The Partnership Act 1890 (c.39) is an act of the UK Parliament, which governs the
rights and duties of business people who do business with a common view of profit.
It has a least membership of two and a maximum of unlimited since the year 2002.
The most important influence of Partnership Act 1890 to accounting standard is the
income allocation. It requires loss or profit of partnership has to distribute to each
partner, based on their proportion of capital contribution (Anon, 2009)

→

By using Partnership Act 1890 Starbucks have the lack of formality that surrounds it.
An agreement of Starbucks is drawn up to counteract the restrictions of the
Partnership Act1890.

•

European Directive:
The European Commission has released its proposals for a fourth money laundering
directive (4th Directive). All countries in the European Union area must comply with
the regulations, the rules of the alliance including UK. The scope of activities
undertaken by legal professionals that are within the 4th Directive and the protection of
legal professional privilege has not changed. The key components of client due
diligence and the money laundering offences also stay the same such as:

The annual accounts are to comprise a balance sheet, a profit and loss account and the
notes to the accounts, these documents constitute a composite whole. The Directives
lay down the principles which govern the drawing up of these documents.
The Directives list the information which must be provided in the notes to the accounts
The annual report must include a fair review of the development of the company's
business and of its position

 The Directives provide for a system of auditing under which Starbuck must have their
annual accounts audited by one or more persons authorized by national law to audit
accounts. Besides that, it’s still have some key changes about: Risk assessments,

13


enhanced due diligence, simplified due diligence, record keeping requirements,
minimum sanctions, the vexing issue of beneficial ownership.
1.4.2 The influences of regulation to accounting and reporting standards
•

International Accounting Standard (IAS) and International Financial Reporting
Standards (IFRS)
International Accounting Standard (IAS)
An older set of standards stating how particular types of transactions and other events
should be reflected in financial statements. In the past, international accounting
standards (IAS) were issued by the Board of the International Accounting Standards
Committee (IASC). Since 2001, the new set of standards has been known as the
international financial reporting standards (IFRS) and has been issued by the
International Accounting Standards Board (IASB). IASC has no authority to require
compliance with its accounting standards. However, many countries require the
financial statements of publicly-traded companies to be prepared in accordance with

IAS (Anon, 2009)
International Financial Reporting Standards (IFRS)
A set of international accounting standards stating how particular types of transactions
and other events should be reported in financial statements. IFRS are issued by the
International Accounting Standards Board.
Generally Accepted Accounting Principles (GAAP)
The common set of accounting principles, standards and procedures that companies
use to compile their financial statements. GAAP are a combination of authoritative
standards (set by policy boards) and simply the commonly accepted ways of recording
and reporting accounting information.

→

By using International Accounting Standard (IAS) and International Financial
Reporting Standards (IFRS), Starbuck have to use to compile their financial
statements and particular types of transactions. helps these statements more clearly
and understandable for the company’s stakeholders

•

UK accounting standard:
In UK, the accounting standard system including:
Financial Reporting Council (FRC)
In the United Kingdom, an independent regulator responsible for setting standards for
corporate reporting and actuarial practice, as well as monitoring and enforcing
accounting and auditing standards. They also oversee the regulatory activities of the

14

professional accounting bodies and operate independent disciplinary arrangements for
public interest cases involving accountants and actuaries (Anon, 2009)
Accounting Standard Broad (ASB)
UK organization responsible for drafting and establishing accounting standards. ASB
is a subsidiary of Financial Reporting Council; one of its committees publishes the
International Accounting Standards. Accounting Standard Broad (ASB) makes,
improves, amends and withdraws accounting standards. Many of ASBs specialize in
the various fields or sectors of accounting (Anon, 2003).
Financial Reporting Review Panel (FRRP)
The task of FRRP group for examining questionable accounting practices in the
United Kingdom, a review panel established to examine contentious departures from
accounting standards by large companies. It is a subsidiary body of the Financial
Reporting Council or we can say that receives and investigates complaints about the
annual accounts of companies in which it is claimed that the accounting requirements
of the Companies Act have not been fulfilled (Anon, 2007)
Urgent Issues Task Force (UITF)
The UITF is a committee of the ASB and is designed to assist the Broad in the
maintenance and development of good accounting standard and best practice in
financial accounting and reporting. The main role of UITF is to deal with urgent
issues not covered satisfactorily by existing standards. Such issues usually arise where
there are new developments in financial reporting or where controversial or
conflicting interpretations of the application of existing regulations are developing
(Anon, 2005).
→

In the UK accounting standard an independent regulator responsible for setting
standards for Starbucks reporting and actuarial practice, as well as monitoring and
enforcing accounting and auditing standards, it also makes, improves, amends and
withdraws accounting standards.

4.1 Calculation accounting ratios to assess the performance and position of a business
Result
Ratios
Formula
Indicators
Comment
(2012)
Liquidity and efficiency

15


1

Current
ratio

= 1.9
times

1.5

2

Quick
ratio

= 1.3
times

0.8

Increase
over years
Receivabl
e days
(Receivab
3
le
payment
periods)

10.3 days
= 13.34
days

(2010)
12.1 days

Good. Above the
acceptance level.
Current ratio is
1.9
times,
meaning
that
current assets of
Starbucks
are
more 1.9 times

than its current
debts, and the
company can easy
to convert current
assets to cash to
pay off debts.
Good. Above the
acceptance level
Quick ratio of
Starbucks
1.3
times, therefore, it
are
sufficiently
able to meet their
short-term
liabilities based
on the common
rule of thumb.
Poorly managed
credit control.
Starbucks will
receive credit
sales after 13.34
days.

(2011)
13.4 days
(2012)
Increase

over years
44.9

Average
inventory
(Inventor
4
y
turnover
period)

days
= 77.95
days

(2010)
71.7
days
(2011)
77.9
days
(2012)

16

Not good. In
2012, inventory
can be storage 78
days before sale.
Starbucks may be

overbuilding its
inventory due to
slowdown
trading.


Profitabilit
y

1 ROE

2 ROCE

3 Net profit

4

Asset
turnover

5

Gross
profit

Debt and
gearing
1 Debt ratio

PBIT = Profit before taxation + Interest of long-term debt = 2,059.1 + 32.7

= 2,091.8
High
profitability.
ROE of Starbucks
is
27.10%,
=
meaning that for
27.10%
$1000 investors
invest
in
Starbucks,
they
can receive $271
of returns.
Good. In 2012,
Starbucks
gain
from its assets
(Capital employed =
approximately
=
Shareholder equity + Non40.90%.
It is
40.90%
current liabilities = Total assets
higher than the
– current liabilities)
average

of
beverage industry
at the same time
Gross profit - expense =
=
Well
managed
7,486.2 - 5,699.5
1,786.7
control
Asset turnover is
2.21 times,
meaning that the
= 2.21
asset generate
times
more than times
their value in
annual turnover.
Revenues - Cost of sales =
13,299.5 - 5,813.3

=
7,486.2

=
10.76%

17

Good

50%

Good.
Starbucks’s equity
ratio is smaller
than
1,
the
majority of assets
are
financed
through
equity.
Starbucks should
maintain
this
result in the future
and
avoid
increasing
because high debt
ratio show that
company may not
have been able to
secure long-term,


2

Gearing
ratio

=
9.71%

3

Cash
flow ratio

=
79.20%

50%

lower
interest
financing, instead
of
having
to
secure short-term,
higher
interest
short-term
financing.
Good. In 2012,
with every $100

of long term
funds, long term
debts
acquired
$9.71 Starbucks
considered
as
low-gearing
company,
low
level
of
borrowings.
It
indicates
that
Starbucks
is
growing through
reinvestment of
profits,
minimizing risk.
Good.
The
higher, the better

higher
company’s
solvency.

Investment
ratios

1 P/E ratio

= 26.31
times

2 Dividend
yield

= 2.54
times

18

Price earning of
2012 show that
after nearly 28
years,
shareholders can
gains. The more
higher the more
willing market to
pay
for
company’s
earning.
With each $2.54
earnings

per
share,
shareholders
receive $1 in
dividend. EPS is


more 2.54 than
DPS,
meaning
that
Starbucks
have ability to pay
out dividend.
Table 1: Ratios of Starbucks in 2012 (Value: $million)

19


4.2 Preparation a report incorporating and interpreting accounting ratios, including
suitable comparisons
REPORT
To: Director of Finance
From: Financial consultant
Date: 20 October 2013
Performance and position of Starbucks Corporation
As requested, I have analyzed the performance and position of Starbucks Corporation with
special reference to selected accounting ratio. The calculation of the ratio is shown in the
previous part (4.1) in this report. The purpose of the analysis is to determine whether we
should use Starbucks Corporation as a good company to invest.

General comment
Both sales revenue and profit have increased over the two years. Starbucks Corporation
(SBUX) continued with its streak of announcing strong yearly earnings, rounding off what
has been an excellent fiscal year for the company. Outstanding global sales growth combined
with record earnings and operating margin demonstrates the fundamental health of our
business model and our continued ability to successfully execute on new initiatives while
maintaining financial discipline. The performance of Starbucks will be analyzed based on
four types of ratios: Liquidity and efficiency, profitability, debt and gearing ratio, investment
ratios.
Liquidity and efficiency
Current ratio:
The current ratio shows the liquidity of business. The current ratio of Starbucks Corporation
in 2012 is healthy. It is 1.9 times so it means that current assets of Starbucks are more 1.9
times than its current debts, and the company can easy to convert current assets to cash to pay
off debts. This is an encouraging signs.
Quick ratio:
The quick ratio show how many assets, excluding inventory, are available to meet the current
liabilities, inventory is excluded because it is not always readily convertible into cash. Quick
ratio of Starbucks Corporation is accepted (around 1) in 2012. This is good signs and
Starbucks has not fallen into this trap.
Profitability
Return on capital employed (ROCE):

20


ROCE has decreased from 42.03% in 2011 to 40.09% in 2012. Although value of return on
capital employed in 2012 is lower than 2011 (1.94%), this rate is still high level. There are
encouraging signs. As indicated above, Starbucks Corporation has not invested significantly
in non-current assets to finance its expansion – the assets/ capital employed is simply

working harder.
Asset turnover:
Asset turnover of Starbucks Corporation is 2.21 times in 2012, meaning that the asset
generate more than times their value in annual turnover. This is higher than 1 so it is accepted
ratio with a company such as Starbucks Corporation.
Gross profit:
Gross profit of Starbucks Corporation had increased from 6,784.9 (in millions) in 2011 to
7,486.2 (in millions) in 2012. Gross profit increase year to year and it is a good sign with
company.
Debt and gearing
Debt ratio:
The debt ratio of Starbucks Corporation in 2012 is good (10.76% less than 100%). It means
that Starbucks’s equity ratio is smaller than 1, the majority of assets are financed through
equity. This is an encouraging signs of Starbucks Corporation.
Gearing ratio:
The gearing ratio is also favorable. This can be calculated in two ways: debt/capital employed
and debt/equity. Gearing ratio had decreased from 11.14% in 2011 to 9.71% in 2012. Both
gearing ratio in 2011 and 2012 is good. Starbucks considered as low-gearing company, low
level of borrowings. It indicates that Starbucks is growing through reinvestment of profits,
minimizing risk.
Investment ratios
Dividend yield:
The dividend yield of Starbucks Corporation in 2012 is 2.54 higher than 2 so it is accepted.
This a encouraging signs. This dividend yield means that with each $2.54 earnings per share,
shareholders receive $1 in dividend. EPS is more 2.54 than DPS, meaning that Starbucks
have ability to pay out dividend. This is a good dividend yield with a company.
Conclusion
On the basic of the above analysis, I see every reason to decide Starbucks Corporation is a
good company to invest. In 2012, the company’s liquidity ratio are good, the profitability is
improve when compare with 20111. In addition, the gearing and debt ratio is accepted and

21


lower than 2011. In addition, the investment ratio is also good when compare with other
companies.

22


APPENDIX
1. Balance Sheets
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
Sep 30,
2012

Oct 2,
2011

ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Deferred income taxes, net
Total current assets
Long-term investments — available-for-sale

securities
Equity and cost investments
Property, plant and equipment, net
Other assets
Goodwill
TOTAL ASSETS

$

$

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Insurance reserves
Deferred revenue
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Shareholders’ equity:
Common stock ($0.001 par value) —authorized,
1,200.0 shares; issued and outstanding, 749.3 and
744.8 shares, respectively (includes 3.4 common
stock units in both periods)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity

Non controlling interests
Total equity
TOTAL LIABILITIES AND EQUITY
23

$

$

1,188.6
848.4
485.9
1,241.5
196.5
238.7
4,199.6

$ 1,148.1
902.6
386.5
965.8
161.5
230.4
3,794.9

116.0
459.9
2,658.9
385.7
399.1

8,219.2

107.0
372.3
2,355.0
409.6
321.6
$ 7,360.4

398.1
1,133.8
167.7
510.2
2,209.8
549.6
345.3
3,104.7

$

0.7
39.4
5,046.2
22.7
5,109.0
5.5
5,114.5
8,219.2

0.7

40.5
4,297.4
46.3
4,384.9
2.4
4,387.3
$ 7,360.4

540.0
940.9
145.6
449.3
2,075.8
549.5
347.8
2,973.1


2. Income Statement
STARBUCKS CORPORATION
INCOME STATEMENT
(in millions)
Period Ending
Total Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Research Development
Selling General and Administrative
Non Recurring

Others
Total Operating Expenses

Sep 30,
2012
13,299.5
5,813.3
7,486.2

Oct 2,
2011
11,700.4
4,915.5
6,784.9

5,149.2
550.3
-

4,737
523.3
-

94.
4
2,091.8
32.7
2,059.1
1,384.70
674.4

(9)
1, 594.5

146.1
1,844.4
33.3
1,811.1
1,248.0
563.1
(2.3)
1,419.4

1,383.8
1,383.8

1,245.7
1,245.7

Operating Income and Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest and Taxes
Interest Expense
Income Before Tax
Income After Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
Non-recurring Events
Discontinued Operations

Extraordinary Items
Effect of Accounting Changes
Other Items
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares

24


3. Statement of cash flow
STARBUCKS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(in millions)
Sep 30,
Fiscal Year Ended
2012
OPERATING ACTIVITIES:
Net earnings including noncontrolling interests
$ 1,384.7
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization
580.6
Gain on sale of properties
Deferred income taxes, net
61.1
Income earned from equity method investees, net of
distributions
(49.3)

Gain resulting from acquisition of joint ventures
Stock-based compensation
153.6
Other
23.6
Cash provided/(used) by changes in operating
assets and liabilities:
Accounts receivable
(90.3)
Inventories
(273.3)
Accounts payable
(105.2)
Accrual liabilities and insurance reserves
23.7
Deferred revenue
60.8
Prepaid expenses, other current assets and other
assets
(19.7)
Net cash provided by operating activities
1,750.3
INVESTING ACTIVITIES:
Purchase of investments
(1,748.6)
Maturities and calls of investments
1,796.4
Acquisitions, net of cash acquired
(129.1)
Additions to property, plant and equipment

(856.2)
Cash proceeds from sale of property, plant, and
equipment
5.3
Other
(41.8)
Net cash used by investing activities
FINANCING ACTIVITIES:
(Payments)/proceeds from short-term borrowings
Purchase of noncontrolling interest
Proceeds from insurance of common stock
Excess tax benefits from exercise of stock options
Cash dividends paid
Repurchase of common stock
Minimum tax withholdings on share-based awards
Other
Net cash used by financing activities
25

Oct 3,
2011
$

1,248.0
550.0
(30.2)
106.2
(32.9)
(55.2)
145.2

33.3
(88.7)
(422.3)
227.5
(81.8)
35.8
(22.5)
1,612.4
(966.0)
430.0
(55.8)
(531.9)

(974.0)

117.4
(13.2)
(1,019.5
)

(30.8)
236.6
169.8
(513.0)
(549.1)
(58.5)
(0.5)
(745.5)

30.8

(27.5)
250.4
103.9
(389.5)
(555.9)
(15.0)
(5.2)
(608.0)