reviewing the case study of Starbucks Corporation and completing questions and exercises relating to financial reports, financial statement analysis, and financial valuation.

Starbucks’ Cash Flow and Taxes

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Introduction

Starbucks began as a small store in Seattle and with the strategy by CEO Harold Schultz, became, per Interbrand, one of the world’s top 100 significant brand names. As a possible investor, it is necessary to look at several financial statements. which enable the determining of profitability, risks, and future outlook. They are the balance sheet, income statement, and state of cash flows (Wahlen, Baginski, & Bradshaw, 2015).

Balance Sheet

A balance sheet is a statement of the assets, liabilities, and capital of a business at a particular point in time showing the balances of income and expenditures in the preceding time period. The terms cash and cash equivalent are presented here, and the difference between them is that cash is the form of currency that is bills, coins, and currency notes. (Wahlen, Baginski, & Bradshaw, 2015). Cash equivalent is an investment that can be converted into cash. It has to be a short term investment, typically three (3) months or less.

Income Statement

Starbucks’ income statement discloses their cost of sales as occupancy costs, store, other operating, depreciation , amortization, general and administrative expenses, along with restructuring charges. These costs had increased from over $9 million in 2009 to over $11 million in 2012. The cost of sales initially is the beans. There is a continual fluctuation of prices depending on where the beans are purchased. Occupancy costs are rent/lease of the building, real estate taxes, property taxes, insurance of the building and its contents, depreciation, and amortization expenses. Operating expenses are equipment, water, electricity, phone, products used to make coffee drinks along with the accompanying food (i.e. sandwiches, desserts, etc.).

Statement of Cash Flows

The statement of cash flows represents the cumulative data of the inflow of cash from operations and investments and the outflow from business interests via operations, investments, and financing. The difference between net income and cash flow is the net income is calculated by taking the cost of sales as listed above and subtracting them from total revenue. Cash flow is calculated by combining net income, non-cash expense adjustments, and working capital modifications.

Computation of IncomeTax Expense

The formula to compute this tax is: Income Tax Expense = Taxes Payable − Deferred Tax Asset + Deferred Tax Liability. In the case of the information of the chosen firm, it would be 40,200 in income tax expense: 50,000 – (4,200) (42,900-38,700) + (5,600) (28,600-34,200) = 40,200.

Taxable Income

If we are looking at Starbucks income statement, we see that income before taxes for financial reports exceeded for 2012. The line earnings before income taxes are 2,059 and the line net earnings attributable to Starbucks is 1,384. Therefore they have exceeded the amount of taxable income.

Conclusion

Taking into account the financial statements of Starbucks we see that their costs have increased over 2 million from 2009 to 2012. The costs involved in running this business are constantly changing pending upon the price of beans. They have continued to increase their income and as of 2012 have incomes that exceed taxable income. For shareholders this represents earnings per share (Basic) rising from 0.43 in 2009 to 1.83 in 2012.

References

Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2015). Financial Reporting: Financial statement analysis, and valuation. Boston: Cengage Learning.