In its 2009 annual report, Starbucks shows that as of September 27, 2009, it owned $21.5 million in marketable securities designated as available-for-sale. On the same date, Starbucks owned $44.8 million in marketable securities designated as trading securities. Assume that Starbucks sold no marketable securities during the month of October, 2009.
REQUIRED:
a. What would have happened to Starbucks’s net income for the month ended October 31, 2009, if the stock market crashed and share price valuations fell, on average, by 50 percent?
b. Under the same scenario as (a), what could management have done to lessen the impact of the crash on net income? What management decision would have increased the negative impact on net income?
c. Why might management want to classify marketable securities as available-for-sale instead of trading?