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Integrative Case 8.1: Starbucks

Student Name

Department, Institution

Course Name and Number

Instructor Name

Date of Submission
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Starbucks Integrative Cases

Part (i

Accounting Policy

(i) Operating Lease Present Value

= (640.4÷(1+6.25%)2) + 787.9 + (403.4÷(1+6.25%)3) + (968.5÷(1+6.25%)4) +

(728.5÷(1+6.25%))

=685.65 + 759.95 + 567.81 +787.9 + 336.32

= $3,137.63

(ii)Long-Term Capital Ratio

Existing Capital = 549.6 +5,046.2 = $5,595.8

New Capital = 3,137.63 + 5,595.8 = $8,733.43

% ratio = 549.6/8733.43 = 6.30%

(iii) Debt to Capital ratio

Long-term debt for operating leases, then additional long-term debt for the firm

= 3,137.63 + 549.6 = $3,687.23

Long-term debt in the form of operating leases, followed by new capital for the firm

= 5,046.2 + 3,687.23 = $8,733.43

= 3,687.23 / 8,733.43 = 43.20%

(iv) The long-term capital ratio of Starbucks, if it capitalizes its operating costs, is 6.3 percent

since the debt holders and shareholders share the value of operating lease equally when it is

capitalized. When Starbuck's debt includes the operational lease, the lease value is only

accountable to the loan holder. The capital ratio jumps to 43.2 percent.
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(v) Customers may not only enjoy coffee and fast food at Starbucks, but they can also rest,

work, and spend time as they enjoy their coffee and food. As a result, space is considered an

operational cost that must be factored into the overall cost of sales.

8.1

(a) Because they have distinct major sources of income, Panera's ROA is often lower than

Starbucks'. While Panera sells coffee, food is the company's main source of revenue. While

Starbucks sells food, coffee is the company's main source of revenue. Even though Starbucks

coffee is more costly than coffee from other establishments, consumers are more inclined to

choose an expensive cup of coffee over meals. This explains why Starbucks' coffee's profit

margin and asset turnover are larger than Panera's.

(b) Profit margins, asset turnover, and capital leverage ratios all impact ROCE. These are

greater for Starbucks, which explains why Panera's ROCE is lower than Starbucks'.

(c) The tenant can pay for leasehold improvements out of their finances or through a tenant

allowance furnished by the landlord. This type of allowance is paid back over time by the

tenant by increasing the basic rent payable over the initial term of the lease. All of the

leasehold improvements would then be paid for by the end of the lease.

(d) The expense of asset enhancements or the removal of retiring assets is known as the Asset

Retirement Obligation (ARO). The asset cash is reduced from the balance sheet, and the

liability of the asset retirement obligation is removed. The income statement has been

influenced over time since the interest expenditure for the retirement cost has increased year

after year. Still, it has did not affect the cash distribution. If more money is spent than was

initially specified in the ARO, it is classified as an improvement expenditure. It will be

reduced from income and added to the income statement as an expense.

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(e) If Starbucks followed the IFRS, the discount rate would be evaluated every year, and the

interest expense for ARO would change every year. Because the rate at which the cost is

discounted is the same rate utilized to raise it, USGAAP provides the highest quality

accounting for long-lived asset impairment.

(f) Starbucks should report occupancy costs because it will give them a better idea that this

expense is related to

9.1

a) In the conditions provided in the challenge, Starbucks should recognize revenue and the

working capital accounts that would likely be formed under the revenue recognition

technique in the following manner.

i) When a consumer buys coffee at Starbucks, its inventory is reduced, and its cash is

boosted.

ii) If a consumer tops up her Starbucks card with cash, this raises accrued income under

current obligation while increasing cash under current assets.

iii) If a consumer pays with a Starbucks corporate card, the incurred obligation falls under

current liabilities, while inventory falls under current assets.

iv) If another company buys Starbucks items on credit, the company's inventory will drop,

and its accounts receivable would rise.

v) If a licensed shop transaction occurs, current assets or cash will grow, but retained profits

on the liabilities side would increase.

vi) After a customer pays sales tax to Starbucks when purchasing coffee, cash is added to

current assets, while tax liability is added to liabilities.

b. Starbucks should declare a profit of $14.78 on the sale of the 16th cup of coffee as an
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operating profit. Starbucks plans to boost cash by $18.30, reduce inventories by $3.52, and

reduce retained earnings by $14.78.

(i) Inventory per cup = 16 × 1.50 = $24.00 total inventory for 16 cups

(ii) Total Earning = 15 × 2.20 = $33.00

(iii) Profit realized = 33.00 - 24.00 = $9.00

The operational profit from selling the 16th cup of coffee will be reported as $9.00. On the

liability side, they will raise cash by $33.00, decrease inventory by $24.00, and put the

remaining $9.00 into retained profits.

(a) Starbucks' current ratio demonstrates its capacity to satisfy existing obligations. Over the

last three years, it had steadily risen from 1.65 in 2013 to 1.95 in 2015. The Quick Ratio has

likewise risen over the last three years, from 0.99 in 2013 to 1.35 in 2015. This means that by

keeping inventory low, Starbucks can increase its working capital. Over the last three years,

the Operating Cash Flow to Current Liabilities Ratio has decreased, indicating that Starbucks

provides enough cash to leverage current year liabilities. Over the last three years, the Days

Inventory Held ratio has risen from 50 to 69.32. This is a negative indicator since

merchandise is being retained for extended periods. Starbucks' creditworthiness is measured

by the Interest Coverage Ratio, which is growing, which is a positive indicator.

Conclusion

Through examining Starbucks, we can identify, analyze, and compare Integrative Cases 7.1,

8.1, and 9.1. The case help students apply the knowledge learned in class to real issues.

Dissemination of this knowledge is critical in learners' progress and application of accounting

concepts in generating cash flows and determining the company's profits.

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References

Wahlen, J., Baginski, S., & Bradshaw, M. (2015). Financial Reporting, Financial Statement

Analysis, and Valuation; A Strategic Perspective. Cengage Learning. Boston, MA