Part I – Prior to reading Starbuck’s Form 10-K, please answer the following questions. Your answers should be based upon your general knowledge of Starbucks, gained from visiting their stores, purchasing their products and/or observing them in the marketplace.
a. Up until the economic downturn (Fall of 2008) what do you believe was Starbucks’ growth strategy? Give three examples of specific actions (growth initiatives) you observed Starbucks execute upon as part of their growth strategy?
1. Saturate the U.S. market: Based on our observations, it seemed that Starbuck’s primary strategy for growth was to saturate the U.S. market. At one point there seemed to be a Starbucks at every corner, sometimes so close that one had to wonder why in the heck they were opening stores within a couple dozen feet from each other.
2. Expand internationally: We presume that one of their growth goals was to expand abroad, specially if they began to realize they were cannibalizing their own established stores, so they likely had to go outside of the U.S. to keep up their growth targets.
3. Develop complementary products/alternative revenue sources: We also think that around 2006-2007 was when they started to promote downloadable music and also began to sell CDs & books in stores; which means they began to more aggressively add alternative revenue channels, beyond that of coffee/drinks, to their many locations. (Personally, I purchased a bottle of Starbucks coffee liqueur around that time, which I still have because it’s not as good as other coffee liqueurs such as Kahlua.
b. How do you believe Starbucks measured their success in executing their growth strategy? Give four specific measures you might use to evaluate the success of Starbucks’ growth strategy.
Very likely that they were measuring it against number of new stores opened, and sales growth.
We would probably use the following to evaluate the success of Starbuck’s growth strategy: 1. Sales growth.
2. Operating Revenues.
3. Net income.
4. Return on assets.
The remaining sections of the case should be completed after you have read Starbucks Form 10-K and any other information deemed pertinent.
Part II – Results of the audit by Starbucks’ outside independent accountant, status of Starbucks’ financial reporting controls and industry specific accounting.
a. Who is Starbucks’ outside independent auditor? Did Starbucks receive a qualified or unqualified (clean) audit report from their outside independent auditor for the 2010 fiscal year end? a. Deloitte & Touche, LLP.
b. What was Starbucks management’s conclusion in their report on internal control for financial reporting? What was the outside independent auditor’s conclusion regarding management’s review and assessment of financial reporting controls? c. That their internal control over financial reporting was effective as of October 3, 2010. d. That Starbucks maintained effective internal control over financial reporting as of October 3, 2010.
c. How does Starbucks account for gift cards? What impact do unredeemed gift cards have on the reported operating income in each year? How does Starbucks’ accounting for unredeemed gift cards compare to other retailers? e. Revenues for cards are recognized when tendered for payment, or upon redemption. Outstanding balances are included in deferred revenue on the balance sheet. Balances on cards that are deemed unlikely to be redeemed, get recognized as net interest income. f. Operating income is increased by balances on cards thought unlikely to be redeemed; therefore, it can be argued that operating income is being overstated by the addition of “unlikely-to-be-redeemed” card balances to net interest income. g. Gift card balances by other retailers are probably carried as a liability (unearned revenue). When gift cards are not...
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