Lesson-1

Chapter 1: An Overview of Financial Management and the Financial Environment

Chapter 2: Financial Statements, Cash Flow, and Taxes

Discussion Questions (DQs)
1. Define working capital and state why it is important. Explain the difference between NOPAT and net income. Which is a better measure of the performance of a firm’s operations and why?

2. Do Thomson ONE Problem on pp. 83-84.

DQ1.1. Define working capital and state why it is important. Explain the difference between NOPAT and net income. Which is a better measure of the performance of a firm's operations and why?

Working Capital (CP) is one of the major tools for operating day to day business activities. It refers to a firm’s investments in short term assets such as cash, account receivables and inventories. According to the definition of Shubin,-“Working Capital is the amount of funds necessary to cover the cost of operating the enterprises.”

Working Capital helps to operate daily business activities so that it must be maintained to some extent for meeting short term obligations.  There are many reasons for its importance. First, it is important for buying the raw materials and spares in the business. Second, it is very useful for making the payment of wages and salaries to labor and employees. Third, without working capital, it is not possible to operate day to day activities such as fuel, officer expenses, power etc.  Last but not the least, it provides credit obligations to the customers and meets the short-term obligations.

NOPAT is widely used for making a comparison between various firms whereas Net Income can be used to know the performance of the company. In the case of NOPAT, tax shield on the interest is not possible while tax shield on the interest is possible in the case of net income. Likewise, NOPAT can be calculated by deducting tax from operating profit, i.e. NOPAT = Gross Profit - (Operating Expenses + Taxes). On the other hand, net income is calculated after deducting all expenses, profit, tax and dividends, i.e. Net Income = Net Profit - (Interest + Tax + Dividends to Preference Shareholders).

NOPAT can be defined as the profit after tax a company has if there are no debt and no investments in non-operating assets. NOPAT is considered as a better measure of the performance of a firm’s operation than that of net income because it excludes the effect of financial decisions.

References

C. Paramasivan, T. Subramanian. (2015). Financial Management. New Delhi: New Age International Publishers.

Eugene F. Brigham, Michael C. Ehrhardt. (2011). Financial Management: Theory and Practice . Natorp Boulevard Mason, USA: South-Western Cengage Learning.

DQ2.2. Do Thomson ONE Problem on pp. 83-84.

http://financials.morningstar.com/cash-flow/cf.html?t=SBUX&region=usa&culture=en-US

Analysis of Starbucks’s Financial Statements

Starbucks coffee is one of the reputed coffee shops in the whole world, growing very quickly from year to year. In this paper, I would like to analyze the financial statements of this company by taking the available last 5 years data starting from 2010, Sept to 2014, Sept. In order to measure the company’s present status, some calculations and interpretations are done.

The Amount of Total Assets on Starbucks’s Balance Sheet

After observing the balance sheet of Starbucks, it is known that how much money it has now and how much it has been investing for the future. In the assets side of balance sheet, there are current assets that indicate how much liquidity it has, and non-current assets that show how much it has invested for the future. As per the balance sheet up to 2014, September 9, the data and their required calculations are shown as follows:

Total Assets(USD in Millions)	2010-09	2011-09	2012-09	2013-09	2014-09
Total current Assets(A)	2,756	3,795	4,200	5,471	4,169
Net Property, Plant & Equipment	2,417	2,355	2,659	3,201	3,519
total non-current Assets(B)	3,630	3,566	4,020	6,045	6,584
Total Assets(A+B)	6,686	7,360	8,219	11,517	10,753
Percentage of Fixed Assets(P&E)	36.15016	31.99728	32.35187	27.7937	32.72575
Percentage of Current Assets	41.22046	51.5625	51.10111	47.50369	38.77058
Growth of Company's Assets	-	10.08077	11.6712	40.12654	-6.63367

It can be seen that total assets of Starbucks has been increasing since past 5 years but at the fiscal year of 2014, total assets decreased from $ 11,517 in 2013 to  $10,753. At the fiscal year of 2010, it is observed that percentage of fixed assets was 36.15% followed by 31.99%, 32.35%, 27.79 % and 32.72% in the subsequent years respectively. Similarly, percentage of Current assets in 2010, 2011, 2012, 2013, 2014 fiscal years were 41.22%, 51.56%, 51.10%, 47.12%, and 38.77% respectively.  It is also important to note that the growth rate of the company was 10.08% in 2011, followed by 11.67% in 2012, 40.12% in 2013, and -6.63% in 2014.

The Long term Debt and the Primary source of Financing on Starbucks’s Balance Sheet      

As per the balance sheet up to 2014, September 9, the data and their required calculations are shown as follows:

Total  liabilities(USD in Millions)	2010-09	2011-09	2012-09	2013-09	2014-09
Total current liabilities	1,779	2,076	2,210	5,377	3,039
Total non-current liabilities	932	900	900	1,659	24,481
total liabilities(A)	2,711	2,976	3,110	7,037	5,481
Long-term debt	549	550	550	1,299	2,048
Total shareholders' Equity(B)	3,675	4,385	5,109	4,480	5,272
Total Liabilities and Shareholders’(A+B)	6,386	7,360	8,219	11,517	10,753

Looking at the liabilities side of Starbucks’s balance sheet, the long term debt has been chosen as a primary source of financing while the company had both options to choose from sources such as long term debt or shareholders’ equity. It is also advisable for the company that they need to be made in a balanced way. The company is going to use more debts because it can provide the benefit of tax shield for the company while interest rates have to be paid timely.

Observing the trend of Starbucks, It has been increasing the debt in a large amount since 2010 for expanding its investments. This is generally seen in companies that the rate of debt increases when a company goes to expansion and more funds are needed. The long-term debt of Starbucks reached $2048 million at the end of fiscal year 2014 from $1299 million in 2013 fiscal year. Starbucks has been expanding, with minimum stock option issued (Starbucks Corporation, 2014).

The Statement of Starbucks’s Cash Flow

Cash Flow statement is one of the financial tools to measure the liquidity in the company. It endeavors to measure the total cash inflows or total cash outflows in terms of the operations, the investments and the financing. It is basically used to depict the overall status of a company. Thus by analyzing the cash flow of Starbucks, it is noticeable that it has declined in 2014; from where it was $2576 (million) in 2013 it has fallen to $1708 (million). As a company which has been focusing on expansion, it is natural tendency for more cash outflow for given time period. The point where star bucks looks questionable is the drastic changes in operating activities. As we have understood earlier also, that Starbucks is managed more by debt, which should have added to increased liquidity.

Income Statement of Starbucks

Income statement can be used to determine the profit or loss of the company for the given time period. Starbucks’s income statement is quite complicated due to world-wide operations. The summary of percentage increase in net incomes and sales calculated by using following formula:

Increase in Net Income=1-(current year income/Previous year Income)*100

Increase in Sales=1-(current year Sales/Previous Year Sales)*100

Particulars/Years	2010-09	2011-09	2012-09	2013-09	2014-09
Net Income($ In millions )	946	1246	1384	8	2068
Sales ($ In Millions )	10,707	11,700	13,300	14,892	16,448
Increase in Net Income (%)	-	31.7124736	11.07544	-99.422	25750
Increase in Sales (%)	-	9.27430653	13.67521	11.96992	10.44856

It is observable that the sales of Starbucks have been increasing from $ 10707 million in 2010 the fiscal year to $ 16,448 million in 2014 fiscal year. On the other hand, net incomes of Starbucks have been increasing from $ 946 in 2010 to $ 2068 in 2014, while in the fiscal year 2013, the revenue has drastically reduced to just $ 8 million.

References

C. Paramasivan, T. Subramanian. (2015). Financial Management. New Delhi: New Age International Publishers.

Eugene F. Brigham, Michael C. Ehrhardt. (2011). Financial Management: Theory and Practice . Natorp Boulevard Mason, USA: South-Western Cengage Learning.

(n.d.) Retrieved September 4, 2015 from http://financials.morningstar.com/income-statement/is.html?t=SBUX&region=usa&culture=en-US