A. Apply Porter's five forces framework to the specialty coffee

a. Apply Porter's five forces framework to the specialty coffee retail industry.

b. How would you characterize the strategy of Starbucks? How does Starbucks create value for its customers? What critical risk and success factors must Starbucks manage?

c. Describe how ''cash'' differs from ''cash equivalents.''

d. Why do investments appear on the balance sheet under both current and noncurrent assets?

e. Accounts receivable are reported net of allowance for uncollectible accounts. Why? Identify the events or transactions that cause accounts receivable to increases and decrease. Also identify the events or transactions that cause the allowance account to increase and decrease.

f. How does accumulated depreciation on the balance sheet differ from depreciation expense on the income statement?

g. Deferred income taxes appear as a current asset on the balance sheet. Under what circumstances will deferred income taxes give rise to an asset?

h. Accumulated other comprehensive income includes unrealized gains and losses from marketable securities and investments in securities as well as unrealized gains and losses from translating the financial statements of foreign subsidiaries into U.S. dollars. Why are these gains and losses not included in net income on the income statement? When, if ever, will these gains and losses appear in net income?

i. Starbucks reports three principal sources of revenues: (1) company-operated stores, (2) licensing, and (3) foodservice and other consumer products. Using the narrative information provided in this case, describe the nature of each of these three sources of revenue.

j. What types of expenses does Starbucks likely include in (1) cost of sales, (2) occupancy costs, and (3) store operating expenses?

k. Starbucks reports income from equity investees on its income statement. Using the narrative information provided in this case, describe the nature of this type of income.

l. Why does net income differ from the amount of cash flow from operating activities?

m. Why does Starbucks add the amount of depreciation and amortization expense to net income when computing cash flow from operating activities?

n. Why does Starbucks show an increase in inventory as a subtraction when computing cash flow from operations?

o. Why does Starbucks show a decrease in accounts payable as a subtraction when computing cash flow from operations?

p. Starbucks includes short-term investments in current assets on the balance sheet, yet it reports purchases and sales of investment securities as investing activities on the statement of cash flows. Explain why changes in investment securities are investing activities while changes in most other current assets (such as accounts receivable and inventories) are operating activities.

q. Starbucks includes changes in short-term borrowings as a financing activity on the statement of cash flows. Explain why changes in short-term borrowings are a financing activity when most other changes in current liabilities (such as accounts payable and other current liabilities) are operating activities.

r. Prepare an analysis that explains the change in retained earnings from $4,297 at the end of fiscal 2011 to $5,046 at the end of fiscal 2012.

s. Prepare an analysis that explains the changes in property, plant, and equipment from $6,163 at the end of fiscal 2011 to $6,903 at the end of fiscal 2012 and accumulated depreciation from $3,808 at the end of fiscal 2011 to $4,244 at the end of fiscal 2012. You may need to deduce certain amounts that Starbucks does not disclose. For simplicity, assume that all of the depreciation and amortization expense is depreciation.

t. The dollar amount shown for cash and cash equivalents increased between the end of fiscal 2011 and the end of fiscal 2012, yet the percentage of total assets comprising these assets declined. Explain.

u. From 2009 through 2012, the proportion of total liabilities declined while the proportion of shareholders' equity increased. What are the likely explanations for these changes?

v. How has the revenue mix of Starbucks changed from 2009 to 2012? Relate these changes to Starbucks' business strategy.

w. Net earnings as a percentage of total revenues increased from 3.2% in fiscal 2009 to

10.4% in fiscal 2012. Identify the most important reasons for this change.

The first case at the end of this chapter and numerous subsequent chapters is a series of integrative cases involving Starbucks. The series of cases applies the concepts and analytical tools discussed in each chapter to Starbucks' financial statements and notes. The preparation of responses to the questions in these cases results in an integrated illustration of the six sequential steps in financial statement analysis discussed in this chapter and throughout the book.

''They don't just sell coffee; they sell the Starbucks Experience,'' remarked Deb Mills while sitting down to enjoy a cup of Starbucks cappuccino with her friend Kim Shannon. Kim, an investment fund manager for a large insurance firm, reflected on that observation and what it might mean for Starbucks as a potential investment opportunity. Glancing around the store, Kim saw a number of people sitting alone or in groups, lingering over their drinks while chatting, reading, or checking e-mail and surfing the Internet through the store's wi-fi network. Kim noted that in addition to the wide selection of hot coffees, French and Italian style espressos, teas, and cold coffee blended drinks, Starbucks also offered food items and baked goods, packages of roasted coffee beans, coffee-related accessories and equipment, and even its own line of CDs. Intrigued, Kim made a mental note to do a full financial statement and valuation analysis of Starbucks to evaluate whether its business model and common equity shares were as good as their coffee?

Kim's research quickly confirmed her friend's observation that Starbucks is about the experience of enjoying a good cup of coffee. The Starbucks 2012 Form 10-K (page 3) asserts the following:

Our retail objective is to be the leading retailer and brand of coffee in each of our target markets by selling the finest quality coffee and related products, and by providing each customer a unique Starbucks Experience. The Starbucks Experience is built upon superior customer service as well as clean and well-maintained company operated stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty.

The Starbucks experience strives to create a ''third place''-somewhere besides home and work where a customer can feel comfortable and welcome-through friendly and skilled customer service in clean and personable retail store environments. This approach enabled Starbucks to grow rapidly from just a single store near Pike's Place Market in Seattle to a global company with 18,066 locations worldwide at the end of fiscal 2012. Of that total, Starbucks owned and operated 9,405 stores (7,857 stores in the Americas; 882 stores in the Europe, Middle East & Africa (EMEA) region; and 666 stores in the China and Asia Pacific (CAP) region). In addition, licensees owned and operated a total of 8,661 stores (5,046 stores in the Americas; 987 stores in the EMEA region; and 2,628 stores in the CAP region).

Most of Starbucks' stores at the end of fiscal 2012 were located in the United States, amounting to one Starbucks retail location for every 28,000 U.S. residents. However, Starbucks was clearly not a company content to focus simply on the U.S. market, as it was extending the reach of its stores globally, with thousands of stores outside the United States. At the end of fiscal 2012, Starbucks owned and operated stores in a number of countries around the world, including 878 stores in Canada, 593 stores in the United Kingdom, and 408 stores in China?


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