Constructing the Statement of Cash Flow: an Expanded Discussion

Topics: Balance sheet, Generally Accepted Accounting Principles, Asset Pages: 39 (11631 words) Published: February 9, 2013

Constructing the Statement of Cash Flow: An Expanded Discussion


Starbucks Corporation is the leading retailer, roaster, and brander of specialty coffee in the world. It has more than 7,500 retail locations in North America, Latin America, Europe, the Middle East, and the Pacific Rim. Starbucks sells high quality coffee and the “Starbucks Experience.” It also produces and sells bottled Frappuccino® coffee drinks, Starbucks DoubleShot™ coffee drink, and a line of superpremium ice creams through its joint venture partnerships. Its Tazo Tea’s line of premium teas and Hear Music’s compact discs further add to its product offerings. Seattle’s Best Coffee® and Torrefazione Italia® Coffee brands also help Starbucks appeal to a broader consumer base. (Starbucks Website, 2005) Starbucks’ fiscal year 2003 resulted in $4.1 billion in total net revenues, a 24% year-over-year growth, and $267 million in net income, a 26% year-over-year growth. It also reported an 8% comparable store sales growth, which represents the 12th consecutive year of 5% or greater growth. This past year, Starbucks was recognized by Fortune magazine as number 8 on its list of America’s Most Admired Companies and number 34 in its ranking of 100 Best Companies to Work For. Starbucks was also listed among Business Ethics magazine’s 100 Best Corporate Citizens. Product lines of the major U.S. brewed coffee sellers are well defined. On the high end there is Starbucks, with 5,439 U.S. locations. It has made its expensive cappuccinos, frappuccinos, espressos, and lattes part of the common lexicon. On the other end, there is Dunkin’ Donuts, which has 4,100 stores. Dunkin’ Donuts is the largest seller of regular, nonflavored brewed coffee in the U.S. fast-food outlets. It has a 17% market share, compared with 15% for McDonald’s Corporation and 6% for Starbucks. The Wall Street Journal recently reported that “there’s a new brew-haha in Latte-land . . . Starbucks increasingly is looking for growth by opening stores in blue-collar communities where Dunkin’ Donuts would typically dominate . . . At the same time, Dunkin’ Donuts, a unit of United Kingdom spirits group Allied Domecq PLC, wants to lure Starbucks’s well-heeled customers with a new line of Italian brews that it claims it can deliver faster, cheaper and simpler.” (WSJ, February 2004) Although competition exists, Starbucks recent 2004 performance is difficult to top. In the last 10 years, Starbucks’ sales have increased from $285 million to over $4 billion and its income has increased from $29

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million to nearly $400 million. An investor purchasing its stock 10 years ago at a split-adjusted price of $3.45 would have seen its value grow to $35 today. During this same decade, Starbucks’ net income and operating cash flows have increased by 15 times and 61 times, respectively. This is graphically portrayed as follows:

Starbucks Net Income and Operating Cash Flow
1000 800 Net income Operating cash flow

$ Millions

600 400 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Both net income and operating cash flows are important in assessing the financial health of a company and its value. Starbucks is generating much more cash than it is reporting in income. Why is this? What does it mean? In this module, we describe the process of constructing the statement of cash flows. We also describe how we can use and interpret the statement of cash flows to aid both internal and external decisions makers. Sources: Ball and Leung, “Latte Versus Latte—Starbucks, Dunkin’ Donuts Seek Growth by Capturing Each Other’s Customers,” The Wall Street Journal, 10 February 2004; Starbucks 2004 and 2003 Annual Reports and 10-K Reports.



Appendix B: Constructing the Statement of Cash Flow: An Expanded Discussion



he statement of cash flows is a financial statement that summarizes information about...
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