ACC FINAL PAPER

Starbucks’ Analysis for the fiscal years 2014 and 2015

Balance sheet of a company is a financial statement that represents the financial position of the company at a given time in its financial period. This statement stipulates the assets of the company as well as its obligations. In this paper, I will perform an analysis of the Starbucks Corporation’s balance sheet and determined the necessary liquidity ratios of the company from its balance sheet of 2014 through 2015. Also, both the vertical and horizontal analysis of the balance sheet items will be dealt with.

A. Accounts Receivables

1. Horizontal Analysis

The gross accounts receivables for Starbucks Corporation increased in the accounting year ending 2015 by 14.44%. Also, in the fiscal year ending 2015, Net accounts receivables increased by $88,000,000. This is a 13.95% increase on net accounts receivables. Between September 27, 2015 and September 28, 2014, the allowance for doubtful accounts were reported as $10.8m and $6.7m, respectively. This represents a 6.12% increase in the Allowance for doubtful debts in 2015. Therefore, it implies that more products were sold on account in the fiscal year ending September 27, 2015 than in the preceding fiscal year 2014. This also implies that the company’s risk increased as the number of accounts receivables increase (Starbuck Corporation, 2016).

2. Vertical Analysis

In order to carry out vertical analysis on accounts receivable for Starbucks, we shall use total assets as the baseline. There was a slight decline in gross accounts receivable from 5.93% in 2014 to 5.86% in 2015. Allowance for doubtful debts increased by 0.03% in 2015. Net accounts receivables somewhat dropped in 2015 relative to that of 2014 by 0.09%. This represents small change in accounts receivable for the company (Previts, G. J., Bricker, R. J., Robinson, T. R., & Young, S. J., 1994).

3. Methods of accounting for accounts receivable

Accounts Receivable are reported when a customer has received a product but so far has not paid for that product. This ensures that the amount of accounts receivable recorded in the balance sheet has taken into consideration any losses that might occur as a result of advancing credit to customers. Bad debts actually incurred during the period are reported in the income statement of the company. Starbucks Corp.’s receivables are primarily consisting of receivables for product as well as equipment sales to and royalties from the company’s licensees, as well as receivables from Price George and foodservice business customers. It calculates allowance for doubtful accounts based on historical understanding, client credit risk and use of the specific identification method (Penman, S. H., & Penman, S. H., 2007).

B. Asset Acquisition, Depreciation, and Amortization:

1. Horizontal Analysis

Starbucks’ Gross fixed assets increased in the fiscal year ending September 2015, by 12.36%. Accumulated depreciation also increased by 9.72%. Net fixed assets reported in 2015 increased by 16.17% as well. It means that the company expanded its investment in the fiscal year ending September 27, 2015 by 12.36%.

2. Vertical Analysis

Using the total assets as a baseline, gross fixed assets are 77.47% of total assets in 2015, which represents a drop relative to that of 2014 (79.80%). Accumulated depreciation of fixed assets dropped from 47.08% in the fiscal year ending 2014 to 44.62 in 2015. Net fixed assets on the other hand increased from 32.73% in 20114 to 32.85% in 2015.

3. Methods for fixed asset and intangible asset acquisitions

Starbucks’ fixed assets together with assets under capital leases are reported at cost less accumulated depreciation. Cost consists of all direct costs required to acquire and prepare assets for use, including overhead and domestic labor in some cases. It computes depreciation using the straight-line method over estimated useful lives of the assets, usually ranging from 2 to 15 years for equipment and 30 to 40 years for buildings. It amortizes leasehold improvements over the shorter of their estimated useful lives or the related lease life, usually 10 years. For leases with renewal periods at option, they usually use the original lease term, excluding renewal option periods, to decide on estimated useful lives. Starbucks’ classify its assets into current assets such as cash, inventory, short-term securities, accounts receivable and long-term such as goodwill, long-term investments fixed assets and deferred assets.

4. Implications on financial statements

i. Straight line method of depreciation

The company depreciates its assets by using straight line method. This method of depreciation accounts for depreciation uniformly over the class life of the asset. Since we have the same amount of expense in depreciated each year, Starbucks will receive a stable cost recovery, with no increase in depreciation expense in any year.

ii. Acquisition of assets