STARBUCKS: FROM BEAN TO CUP
Introduction to the Financial Statements
The purpose of this assignment is to increase your understanding of the information contained in a firm’s financial statements and of the relationship between the statements. As you study financial accounting, we will focus on using financial information in a meaningful way, to understand the firm’s past performance and project its future performance.
One of the analytical tools that we will use is financial ratio analysis. While we will discuss ratios in depth in class, I have included a few financial ratios in the questions below. The last chapter of the text, Chapter 14, contains explanations of the most commonly used ratios in financial analysis.
To complete the assignment, you will need to refer to Starbucks’ financial statements for fiscal year 2011, analysts’ forecasts, your textbook and the Internet (for the last few questions). The financial statements ARE PROVIDED AT THE END OF THIS CASE. For ease of computation, the financial statements can easily be put into spreadsheets.
Your assignment can be typed or handwritten. You can work on this assignment by yourself or with your study group (consisting of 2 to 3 students). If you work with a group, please turn in only one solution for the group, listing the names of the group members.
In answering the questions below, provide all dollar amounts in thousands to be consistent with the financial statements. When computing percentages, carry all answers out to two decimal places (i.e., 12.34%).
I. Refer to the Starbucks’ Balance Sheet
1. Fill in the following blanks for fiscal year 2010 ($ in millions). | Total Assets = | Total Liabilities +| Shareholders’ Equity| as of 10/2/2011| 7,360.4| 2,973.1| 4,387.3|
as of 10/3/2010| 6,385.9| 2,703.6| 3,682.3|
as of 09/27/2009| 5,576.8| 2,519.9| 3,056.9|
Why do Total Assets = Total Liabilities + Equity? What is the rationale underlying this relationship?
The underlying rationale is that economic resources which are presented as assets come from two funding sources: debt financing and equity financing, which are presented as liability and equity respectively on the financial statement.
2. a. What percentage of Starbucks’ assets was funded by its stockholdersat the end of fiscal year 2011? (Hint: Consider Total Equity / Total Assets.) as of 10/2/2011| 59.61%|
as of 10/3/2010| 57.66%|
as of 09/27/2009| 54.81%|
b. Why is important to know the extent to which the company used debt in financing its assets?
It is important because:
1) Most debt needs to be paid back by the company in the future. If the company cannot make profits from its business in the long run or doesn’t have enough liquidity to settle the debts, it will face bankruptcy. Borrowing debt increases the company’s financial risk. 2) Using debt leverage will bring the benefit of tax shield to its equity holders. A proper capital structure will contribute to the value of the company.
c. Did Starbucks’ total debt level increase or decrease in the most recent year (1) in absolute terms? (2) relative to stockholders’ equity? (Hint: To address (2), consider the ratio of Total Liabilities / Total Equity)
(1) In absolute terms, Starbucks’ debts increased from $2,703.6 million as of 10/3/2010 to $2,973.1 million as of 10/2/2011. (2) As a percentage of stockholders’ equity, Starbucks’ debt level decreased from 73.42% asof 10/3/2010 to 67.77% as of 10/2/2011.
3. What is Starbucks’ total contributed capital? (in $ millions) (Hint: The amount contributed by the shareholders is discussed at the following website:http://www.investopedia.com/terms/c/contributed-capital.asp)
As of 10/2/2011| 0.7+1.1+39.4=41.2|
as of 10/3/2010| 0.7+106.2+39.4=146.3|...