Deliverable Two

Students will be assigned into groups to complete deliverable two, but the work product will be graded individually. At this point in the project, all students should be familiar with the financial information of the business. With the information individually developed in the excel spreadsheets, working as a team, students will begin the process of risk identification.

Step 5: Risk Identification

By now, you have probably been reading some of the information that Starbucks discloses in its website and annual reports. Your next task is to review Part 1 and Part II, Managements Discussion and Analyses of the 2012-2017 10-Ks. Part I contains a discussion on the business model, risk factors and cautionary statement regarding forward-looking statements, properties, legal issues, etc. All these statements are referred to as management assertions.

You are to compare the narrative of managements assertions to the patterns of the ratios in the charts you and your group mates have developed. An interesting phenomenon happens when you start to analyze financial ratios over a longer period such as six years. Certain trends and patterns will emerge that will make you question what is happening. You will begin to see some discrepancies between what the ratios are indicating and what management is telling you.

Form 10-Ks normally follow specific patterns. Once you become familiar with what is reported in the earlier years, the specific narrative in each section generally does not change too much unless new disclosure requirements or other laws/policies/procedures are enacted. This is often a companys achilles heel. If management is telling the public a similar narrative each year, but the charts do not show a nearly linear equation (a straight line), something is not right. Either management is not accurately reporting what is going on, or they are issuing the wrong figures on their financials. Either way, it is an issue that must be further explored to understand the risks.

To give you an example of potential discrepancy, lets look at a hypothetical scenario involving inventory turnover:

As you may remember, the inventory turnover ratio is a measure of how fast a company is getting rid of its inventory (by selling, obsolescence, theft, etc.). If you measure the inventory turnover ratio and it decreases slightly year over year, it generally indicates that inventories are moving slower. Imagine that you perform a ratio analysis and chart the inventory turnover ratio over six years. You notice that inventory is turning over slower. Then you compare the chart to what management asserts in its discussion and analysis. Management boasts about its improved and efficient inventory management systems. This may indicate an area of increased risk. Why? The inventory turnover data shows that inventory may be moving slower, but management claims it improved ways to control inventory. It now becomes an issue for a proactive financial statement analyst to delve into more deeply. The ratios are indicating one thing (through their reported figures), but management is telling everyone another (through their narrative). In this hypothetical situation, several things could be happening. Perhaps everything is fine with their inventory management system, but management is not doing a fine job of communicating the issue, or something could be drastically wrong such as production line breakdowns and management knows it but is not to adequately disclose it, or it could be that someone is stealing inventory but management does not realize it.

Your task in this deliverable is to work with your group and familiarize yourself with the selected 10-K management assertions and comparing them to the charts. Discuss among your group mates how management discusses and discloses risk. After extensive discussions with your group, your in-depth readings, and connecting that information with the spreadsheets you produced, you are to submit an individual two to three page report via Blackboard. The report should discuss:

1. Identification of at least one risk that you believe Starbucks faces (management may not disclose a risk that you believe is important feel free to discuss it but provide evidence).
2. Connect and critic at least one risk to the financial statements.
3. Your understanding of the trend of at least one risk over the years and how management gives importance to them.
4. Your understanding how management is mitigating your identified risk(s) (they may or may not be acting on these risk are their mitigation practices in alignment with your analysis?).

Grading Rubric:

There are five areas to be assessed in this deliverable, each worth 20%, judged whether your work is very good (100%), Acceptable (70%) or just needs way too much work (0%). Grammar, Formatting and Organization is a skill which should be demonstrated by accountants for all work. Therefore, it is part of the grade. This deliverable requires you to identify at least one risk that the company faces. You should target approximately one to two paragraphs for each risk factor. There are various types of risk, including but not limited to financial, operational, strategic and compliance risks. You could conceivably analyze the same stated risk from different aforementioned perspectives. Demonstrating the ability to connect and critic at least one risk to the financial statements is the core of this deliverable. You should be able to look at your analysis from your spreadsheets and tie the figures to the risk(s) identified (and not identified) by management. For a hypothetical example, management boasts that it is actively staying up to date on the latest technologies, but information in the financial statements show no evidence of supporting such statements. You should also demonstrate an understanding of the trend of at least one risk over the years and how management gives importance to it, again, comparing them to the financial statement analysis. Users of financial statements would like to understand how management may be mitigating risks and you should be able to comment on that important area.