If we were investors in this company, we would consider 5% to be material. The company does not seem to have any high risk of fraud or material misstatement, so we are very comfortable with the quality of its financial reporting. A misstatement of 5% or above in any of the significant company accounts, or a combined misstatement of 5% or above for the company accounts as a whole, would require increased investigation and would reduce our confidence in the records. Any misstatement under 5% would be permissible.
The journal entry for the August 2007 issue of debt at 6.25% interest rate and the interest expense journal entry for 2007 and 2008 related to this debt are as follows:
August 1, 2007 Issue of Debt:
Senior N/P Discount
Senior Notes Payable
December 31, 2007:
14,315,417 (550,000,000 x .0313 x 5/6)
41,667 (50,000 x 5/6)
February 1, 2008:
8,333 (50,000 x 1/6)
August 1, 2008:
December 31, 2008:
3.13% of the Note is Payable in February and August and 5/6th of this expense is accrued at each year-end. It is to be paid at the start of the next February. With no knowledge of the market rate, we amortized the discount evenly over the 20 periods and added the $50,000 to total interest expense for each semi-annual period. Interest payable for each 6-month period (August through January, February through July) is 0.313x550,000 and total interest expense is the payable plus the 50,000 discount amortization. Totals for year-end are the accrued interest expense and discount amortization for 5 months of the 6 month period.
Each ratio we computed for Starbucks, we also computed the same ratio for Caribou Coffee, a competitor of Starbucks. We did this so that we would be able to interpret Starbucks’ ratios by comparing them to another company in the same industry.
Starbucks has a current ratio of 0.787 while its competitor, Caribou Coffee has a current ratio of 0.723. A higher current ratio is considered to be better as it indicates a more liquid company. So Starbucks is more liquid than Caribou Coffee. Current Ratio = Current Assets
Starbucks = 1,696,487/2,155,566 = 0.787
Caribou Coffee= 26,620,000/36,820,000 = 0.723
Cash Debt Coverage Ratio
Cash Debt Coverage Ratio provides information on financial flexibility. This ratio allows for an investor to assess a company’s ability to repay its liabilities from net cash provided by operating activities without having to liquidate the assets employed in its operations. Starbucks cash debt coverage ratio is 67.94% and Caribou Coffee has 41.85%. This means that Starbucks is less likely to experience difficulty in meeting its obligations as they come due than Caribou Coffee.
Inventory Turnover Ratio
As with the current ratio, the higher the inventory turnover ratio is for a company, the better. This ratio measures the liquidity of the inventory. Caribou Coffee has a greater inventory turnover ratio of 20.9961 and Starbucks is only at 6.0233. This shows that Starbucks is not moving its inventory as quickly as Caribou Coffee is. In the income statement, Starbucks states inventory at Lower of Cost or Market. Primary average moving cost is used to allocate costs. Some items that may impact the...
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