I need the answers to section IV on Walmart and Target

ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Table of contents Table of contents I. Basics of Financial Accounting .............................................................................. 2 Financial statements ........................................................................................................ 3 Representing and recording transactions ...................................................................... 14 II. Reading and exercises ........................................................................................... 21 Reading assignment and exercises ................................................................................ 21 III. Practice cases ........................................................................................................ 22 Peter's Cycles (Practice 1: 4-6 hours)........................................................................... 22 Starbucks (Practice 2: 2-4 hours) .................................................................................. 33 IV. Wal-Mart (Assigned case: 3-5 hours) ................................................................... 41 V. Further reading and exercises ............................................................................... 49 1 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 I. Basics of Financial Accounting Basics of Financial Accounting In the first section of this tutorial we provide a brief introduction to the principal financial statements of a corporation. We also introduce the process that is used to record the impact of a firm's economic transactions on the numbers that appear in these statements. Section II provides a reading plan from the course textbook that will supplement this tutorial. In Section III are two practice cases. In Section IV is the Wal-Mart case, which must be submitted by the start of second section. Section V provides recommendations for students who feel they need further practice. The pre-skilling materials are often provided with limited availability and extra fees for the students. This pre-skilling material allows us to provide a tutorial free of charge. In addition, the use of the course textbook in the tutorial will familiarize you with the book before we get into advanced topics so that you will be able to better utilize the text during the course. 2 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Financial statements We begin with a review of the three primary financial statements: the balance sheet, income statement, and statement of cash flows. We make use of the financial statements of Starbucks (NASDAQ ticker: SBUX) for our review. Like many large companies, Starbucks' financial statements include many line items that may be unfamiliar to many students. You will also notice that many companies use different words to describe the same thing and two different companies may use the same word to describe two different things. This variation in the use of terms creates a fairly daunting hurdle for newcomers to accounting. It is crucial to view everything on the financial statements within context in order to understand their meaning. At this point, it is important to focus on understanding in broad terms what appears on the various financial statements (e.g., assets and liabilities), rather than every individual line item that might appear. For example, if you understand what an asset is, then when asked where any specific asset, such as inventory on hand, will appear on the financial statements, you will know that it appears in the asset section of the balance sheet. You will almost surely never in your life have to enumerate every possible asset line item that might appear on a balance sheet. 3 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Balance sheet Starbucks' balance sheets as of October 3, 2010 and September 27, 2009: STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except per share data) Oct 3, 2010 Sep 27, 2009 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets $ Total current assets Long-term investments Property, plant and equipment Other assets Goodwill TOTAL ASSETS $ 1,164.0 $ 285.7 302.7 543.3 460.7 599.8 66.3 271.0 664.9 433.8 2,756.4 533.3 2,416.5 2,035.8 423.5 2,536.4 417.3 262.4 322.0 259.1 6,385.9 $ 5,576.8 LIABILITIES AND EQUITY Current liabilities: Accounts payable Accrued liabilities Deferred revenue 282.6 1,082.4 414.1 267.1 925.2 388.7 Total current liabilities Long-term debt Other long-term liabilities 1,779.1 549.4 375.1 1,581.0 549.3 389.6 Total liabilities Shareholders' equity: Common stock Additional paid-in capital Other additional paid-in-capital Retained earnings Accumulated other comprehensive income 2,703.6 2,519.9 0.7 106.2 39.4 3,471.2 57.2 0.7 147.0 39.4 2,793.2 65.4 Total shareholders' equity Noncontrolling interests 3,674.7 7.6 3,045.7 11.2 Total equity 3,682.3 3,056.9 6,385.9 $ 5,576.8 TOTAL LIABILITIES AND EQUITY $ 4 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting The Balance Sheet provides a snapshot of the firm's assets, liabilities, and shareholders' equity at a given point in time (typically, the end of the firm's fiscal quarter or fiscal year). In Starbucks' case, the balance sheet represents the amounts as of the end of the day on 10/3/2010, which is the end of its 2010 fiscal year. In addition, for the purpose of comparison, Starbucks presents last year's balance sheet as of 9/27/2009 in the right column. Some of you may be wondering why Starbucks does not simply end its fiscal years on September 30. Both September 27, 2009 and October 3, 2010 are Sundays and Starbucks ends all of its fiscal periods on Sundays. It is a common practice for companies to use fiscal periods that always end on a Saturday or on a Sunday. We will first review the basic sections of the balance sheet. Then, we will discuss each of the balance sheet's line items. The first section of the balance sheet presents the firm's assets, which are its economic resources. To be considered an asset of the firm, the resource must satisfy the following three criteria: 1) it has a probable future economic benefit; 2) the firm owns and controls it; 3) the firm's ownership and control is based on a past transaction or event. The balance sheet lists assets in order of liquidity (ability to convert them into cash), from the most liquid to the least liquid. The balance sheet splits assets into current assets, which are assets that the firm expects to convert to cash within a year, and non-current assets. The second section of the balance sheet presents the firm's liabilities, which are its economic obligations. To be considered a liability of the firm, the obligation must satisfy the following three criteria: 1) it entails a probable future economic sacrifice; 2) it arises from a present obligation specific to the firm; 3) the firm's obligation is based on a past transaction or event. The balance sheet lists liabilities in order of maturity, from the earliest obligations due to the latest. The balance sheet splits liabilities into current liabilities, which are those that must be paid within a year, and non-current liabilities. Finally, the balance sheet presents the shareholders' equity of the firm. It is equal to assets minus liabilities. The balance sheet splits equity into amounts contributed by the owners (called contributed capital) and amounts earned by the firm (called retained earnings). 5 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Main balance sheet line items We now describe the main line items that appear on Starbucks' balance sheets: Assets: Current Assets: Assets that will be converted into cash or consumed within one year. These include: o Cash and cash equivalents: Cash includes amounts in demand deposit accounts, such as checking accounts. Cash equivalents consist of low-risk, short-term (e.g., 7 day maturity) investments, such as money market funds or treasury notes. o Short-term investments: These represent investments in securities, such as stocks or bonds. They are current assets because they either mature within a year (this applies to debt) or the firm expects to sell them within a year. They earn a higher rate of return than do cash equivalents, but involve more risk and may not be as easy to sell. o Accounts receivable: Amounts of cash expected to be received from customers for services and/or products sold on credit. It is important to note that this is what the firm expects to collect, not what the firm is owed. Typically, the reported accounts receivable amount is less than what the customers owe because the firm expects that some customers will not pay. o Inventories: This is the cost that Starbucks has paid for product that it plans to sell to its customers. This includes coffee and other merchandise. o Other current assets: This includes items such as cash paid in advance for future services that the firm expects to use within the next year, (e.g. rent paid at the beginning of the month that covers the whole month). Non-current Assets: Assets that the firm expects to hold for more than one year. These include: o Long-term investments: Like short-term investments, this line represents investments in securities. However, long-term investments are expected to be held by the firm for more than one year. o Property, plant and equipment (PP&E): This includes items such as the firm's land, buildings, factories, furniture, and equipment. The value at which they are reported on the balance sheet is the original purchase cost less a deduction to reflect usage of the assets to-date. o Other assets: This line includes items such as patents and trademarks and fees paid to investment banks for their help in issuing firm shares or debt into the market. o Goodwill: Goodwill is an asset that can only arise when one company buys another. 6 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Liabilities: Current Liabilities: Obligations the firm will pay within one year. These include: o Accounts payable: These represent the amounts that the firm owes for goods or services that it purchased on credit. It appears as accounts receivable on the balance sheets of the firm's suppliers. o Accrued liabilities: This line includes several types of liabilities, such as wages that have been earned by employees and utility bills that have not yet been paid. o Deferred revenue: This amount represents prepayments by customers for goods and services that will be provided by the firm in the future. This is an example of a liability that is not paid off in cash. Starbucks' deferred revenue includes the unused value on Starbucks' gift cards, which will be paid not with cash, but with lattes. Non-current Liabilities: Obligations the firm will pay later than one year. These include: o Long-term debt. This represents money that the firm has borrowed, but is not obligated to pay back within the next twelve months. o Other long-term liabilities: These liabilities include various items, such as pension benefits for retired workers. Equity: Shareholders' Equity: It represents the shareholders' ownership interest in the firm and is also referred to as shareholders' equity, net assets, or net worth. Equity arises either when owners invest in the firm or when the firm earns profits for its owners. o Common stock and Additional paid-in capital (APIC): These amounts comprise Starbucks' contributed equity, which is the net amount the owners of the firm invested in the original stock issuance (IPO, initial public offering) and any subsequent stock offerings (SEO, seasoned equity offerings). This amount is net of cumulative share repurchases, which occur when the firm buys shares of stock back from its owners. Some companies report repurchases in a separate line called Treasury Stock while others, such as Starbucks, do not. o Retained earnings and Accumulated other comprehensive income: These amounts comprise earned equity, which represents the firm's cumulative total profits minus whatever has been paid to shareholders as dividends. Because this is a cumulative number, if a firm has lost money over time, retained earnings can be negative and would be renamed \"accumulated deficit\" or something similar. Noncontrolling interests: This line item arises when a company does not have 100% control of one or more of its subsidiaries. 7 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Income statement Starbucks' income statements for the years ended October 3, 2010, September 27, 2009 and September 28, 2008 are as follows: STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In millions, except per share data) Oct 3, 2010 Sep 27, 2009 Sep 28, 2008 $ 10,707.4 4,458.6 3,551.4 293.2 510.4 569.5 53.0 9,436.1 148.1 1,419.4 50.3 (32.7) 1,437.0 488.7 948.3 2.7 $ 945.6 $ 1.27 $ 1.24 $ 9,774.6 4,324.9 3,425.1 264.4 534.7 453.0 332.4 9,334.5 121.9 562.0 37.0 (39.1) 559.9 168.4 391.5 0.7 $ 390.8 $ 0.53 $ 0.52 $ 10,383.0 4,645.3 3,745.1 330.1 549.3 456.0 266.9 9,992.7 113.6 503.9 5.2 (53.4) 455.7 144.0 311.7 (3.8) $ 315.5 $ 0.43 $ 0.43 Fiscal Year Ended Net revenues Cost of sales Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Restructuring charges Total operating expenses Income from equity investees Operating income Interest income and other, net Interest expense Earnings before income taxes Income taxes Net earnings including noncontrolling interests Net earnings (loss) attributable to noncontrolling interests Net earnings attributable to Starbucks Earnings per share basic Earnings per share diluted Weighted average shares outstanding: Basic Diluted Cash dividends declared per share $ 744.4 764.2 0.36 $ 738.7 745.9 0.00 $ 731.5 741.7 0.00 In contrast to the balance sheet, which reports assets and liabilities at a point in time, the income statement reports income and its components for a period of time. The income statement is also referred to by other names, such as a 'Statement of earnings', 'Statement of profit and losses, and 'P&L'. The statement describes the current-year change in stockholders' equity due to the profits generated by the firm. Specifically, net income increases the Retained earnings line item on the balance sheet. For example, Starbucks' Statement of stockholders' equity (not included in this tutorial) described the change in retained earnings from September 27, 2009 to October 3, 2010, as follows: Retained earnings on September 27, 2009 (from balance sheet) Net earnings (from income statement) Dividends Retained earnings on October 3, 2010 (from balance sheet) 8 $ 2,793.2 945.6 -267.6 $ 3,471.2 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting The basic components of net income are revenues (increases to income and equity) and expenses (decreases to income and equity). Because revenues increase equity, and equity equals assets minus liabilities, we associate revenues with increases in assets or decreases in liabilities. Similarly, because expenses decrease equity, we associate expenses with decreases in assets or increases in liabilities. Main income statement lines Components of operating profit: Net revenues: This amount represents Starbucks' total sales during the year. It is the amount that Starbucks' customers bought of the firm's products during the year. The word 'net' means that the revenues are net of discounts and allowances for returns. For example, Starbucks sells merchandise such as tumblers and coffee makers and deducts expected product returns when reporting net revenues on the income statement. Net revenues is sometimes called other names, such as 'Sales', 'Net sales', and 'Turnover' (especially in continental Europe). Cost of sales: The amount that it cost Starbucks to purchase the goods that it sold during the year (such as coffee beans) as well as every direct expenditure that was required to sell them (such as the cost of the coffee machines and the wages of the for baristas). This line is sometimes called by other names, such as 'Cost of goods sold' or 'COGS'. Store operating expenses: This line includes store costs such as rent, utilities, and managers' salaries that are not directly linked the coffee and other products sold. Other operating expenses: All other operating expenses. Depreciation and amortization expenses: Depreciation denotes the allocation of the net cost of PP&E to those periods that are expected to benefit from their use. These assets are sometimes referred to as depreciable assets. Note that depreciation is a method of cost allocation, not asset valuation. General and administrative expenses: These expenses include headquarters-type expenses and some marketing expenses. Restructuring charges: Expenses related to the restructuring of the business, such as the cost of furloughing or laying off employees, the cost of closing manufacturing plants, and the cost of shifting production to a new location. Income from equity investees: This represents profits from firms in which Starbucks has a significant investment, but not full control. Operating profit: This line represents the pre-tax profit Starbucks earned from its primary business activities. The remaining income and expense line items are from ancillary activities that are not directly related to Starbucks' operations. 9 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Non-operating line items: Interest income and other: Reflects the amount Starbucks earned on their cash and investment accounts. This line would be an operating line item for a financial institution, but since earning interest is not an inherent part of operating a coffee retailer, Starbucks shows this as a non-operating item. Interest expense: Reflects the amount of interest that Starbucks paid on its debt. Note that this amount reduces income and appears as a negative number, in contrast to other items that reduce income, such as Cost of sales, do not appear as negative numbers. While this inconsistent presentation of expenses frustrates students who are new to accounting, it is not at all uncommon. This is an excellent example of how one must 'get used to' how companies present financial statements and learn to view lines within context. For example, one can infer from the Total operating expenses and Operating profit subtotals that Cost of sales reduces income. Earnings before income taxes: This line represents Starbucks' pre-tax profit. This number is based on financial reporting rules and does not equal the taxable income on Starbucks' tax return. Income taxes: This item represents the tax associated with Starbucks' earnings before income taxes. This item does not equal the taxes owed from Starbucks' tax return. Net earnings including non-controlling interests: This line equals Starbucks' after-tax profit, computed using rules for financial reporting purposes. Net earnings (loss) attributable to non-controlling interests: Not all of the profits from Starbucks' operations and those of its subsidiaries belong to Starbucks' shareholders. Some of Starbucks' subsidiaries are partially owned by parties other than Starbucks. This line represents their share of those subsidiaries' profits. Net earnings attributable to Starbucks: This line represents the 'bottom line' profit earned by Starbucks that belongs to Starbucks' shareholders. This line is sometimes called by other names, such as 'Net income', 'Net profit', and 'Profit'. 10 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Statement of cash flows Starbucks' cash flow statements for the years ended October 3, 2010, September 27, 2009 and September 28, 2008 are as follows: STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Oct 3, 2010 Fiscal Year Ended OPERATING ACTIVITIES: Net earnings including noncontrolling interests Adjustments to reconcile net earnings to net cash provided by operating activities: $ Depreciation and amortization Provision for impairments and asset disposals Deferred income taxes, net Equity in income of investees Distributions of income from equity investees Stock-based compensation Tax benefit from exercise of stock options Excess tax benefit from exercise of stock options Other Cash provided/(used) by changes in operating assets and liabilities: 948.3 Sep 27, 2009 $ 391.5 Sep 28, 2008 $ 311.7 540.8 67.7 (42.0) (108.6) 91.4 113.6 13.5 (36.9) (15.3) 563.3 224.4 (69.6) (78.4) 53.0 83.2 2.0 (15.9) 5.4 604.5 325.0 (117.1) (61.3) 52.6 75.0 3.8 (14.7) (0.1) 123.2 (3.6) (12.9) 24.2 (16.1) 17.6 1,704.9 28.5 (53.0) 57.2 16.3 120.5 60.6 1,389.0 (0.6) (63.9) 7.3 72.4 (11.2) 75.3 1,258.7 Purchase of securities Sales of securities Acquisitions, net of cash acquired Additions to property, plant and equipment Proceeds from sale of property, plant and equipment Net cash used by investing activities FINANCING ACTIVITIES: (547.8) 211.1 (12.0) (440.7) 0.0 (789.5) (134.0) 116.0 0.0 (445.6) 42.5 (421.1) (123.8) 95.9 (74.2) (984.5) 0.0 (1,086.6) Proceeds from borrowings Repayments of borrowings Proceeds from issuance of common stock Cash dividends paid Repurchase of common stock Other Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS: 0.0 (6.6) 127.9 (171.0) (285.6) (10.7) (346.0) (5.2) 564.2 22,303.4 (23,017.2) 57.3 0.0 0.0 14.3 (642.2) 4.3 330.0 66,299.0 (66,297.4) 112.3 0.0 (311.4) 13.0 (184.5) 0.9 (11.5) Inventories Accounts payable Accrued taxes Deferred revenue Other operating assets Other operating liabilities Net cash provided by operating activities INVESTING ACTIVITIES: Beginning of period End of period 599.8 $ 1,164.0 $ 269.8 599.8 $ 281.3 269.8 $ $ $ $ 39.8 162.0 $ $ 52.7 259.5 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of capitalized interest Income taxes 32.0 527.0 Like the income statement, the cash flow statement reports activity during a period. It explains the year-to-year changes in cash. For example, at the bottom of the left-most column of numbers, the Beginning of period cash of $599.8 corresponds to the cash amount on the September 27, 2009 balance sheet while the End of period cash of $1,164.0 corresponds to the cash on the October 3, 2010 balance sheet. 11 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Main cash flow statement line items Cash Flow from Operating Activities: Cash from operating activities is the net cash from the firm's primary operating activities. In the case of Starbucks, operating activities include running the retail business and the headquarters operations that support it. The operating line items on Starbucks' cash flow statement are: o Net earnings o Plus/minus several adjustments As we will learn during the course, the 'Net earnings +/- adjustments' is a means of computing cash flow from operations. It is not a listing of all of the individual cash inflows and outflows from operations. Cash from operations includes the net effect of: o Cash received from customers. o Cash received for interest and dividends. o Cash paid for wages and purchases of goods and services. o Cash paid for income taxes: Starbucks discloses on the bottom of the cash flow statement that it paid $527.0 in taxes during the year ended October 3, 2010. This is a required supplementary disclosure for the cash flow statement. o Cash paid for interest on loans: Starbucks discloses on the bottom of the cash flow statement that it paid $32.0 in interest during the year ended October 3, 2010. This is a required supplementary disclosure for the cash flow statement. Cash Flow from Investing Activities: Cash from investing activities includes the cash related to the purchase and sale of long-lived assets that support operations and the cash associated with the purchase and sale of investments. Unlike the Cash Flow from Operating Activities section of the cash flow statement, which is a means of computing cash flows, rather than a detailing of the individual cash inflows and outflows, the line items in Cash Flow from Investing Activities are the actual cash inflows and outflows from investing activities. Cash from investing activities includes the net effect of: o Purchase of securities/Sale of securities: These lines reflect the cash flows associated with the short-term and long-term investments that the company makes (and that appear on the balance sheet). Under U.S. accounting standards, the cash interest and dividends received by the firm from these investments are classified as cash flows from operating activities. Under international accounting standards, companies are permitted, but not required, to report the cash interest and dividends received as cash flows from investing activities. o Acquisitions, net of cash acquired: This line represents the cash spent acquiring other companies. 12 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting o Additions to property, plant and equipment/Proceeds from sale of property, plant and equipment: These lines reflect cash flows associated with the Property, plant and equipment line on the balance sheet. These lines on the cash flow statement also include the purchase and sale of patents and other long-lived assets. Cash Flow from Financing Activities: Financing activities include cash transactions with the firm's shareholders and lenders. Like the Cash Flow from Investing Activities section of the cash flow statement, the lines in financing activities represent actual inflows and outflows of cash. Cash from financing activities includes the net effect of: o Proceeds from borrowings: This is the cash inflow from taking new loans. o Repayments of borrowings: This is the cash outflow from repaying loan principal, (that is, the balance due on the loan). Under U.S. accounting standards, the interest portion of loan payments appears as a cash outflow from operating activities. Under international accounting standards, companies are permitted, but not required, to report interest payments as a cash outflow from financing activities. o Proceeds from issuance of common stock: This is the cash received by Starbucks from selling shares of stock to shareholders. o Cash dividends paid: This is the amount of cash dividends Starbucks paid to its shareholders during the year. o Repurchase of common stock: This is the amount that Starbucks spent buying shares of stock from its owners during the year. At first glance, it may seem strange that Starbucks sells and buys back shares in the same period, but this is actually quite common. As is true for many companies, Starbucks sells shares to employees who buy them as part of a compensation program. In order to avoid having the number of shares continually rise due to employee purchases, firms often buy back shares on the open market in an amount that roughly match what they expect to reissue to employees. 13 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Representing and recording transactions Debits and credits When describing transactions and their effect on the various accounts of the firm, we often use debit/credit terminology rather than increase/decrease. The notion of debits and credits follow from the accounting equation: Assets Liabilities Equity We associate debits with the left-hand side of this equation - assets - and we associate credits with the right-hand side of the equation - liabilities and equity -. Debits refer to increases in the left-hand side of the balance sheet or decreases in the right-hand side. Credits refer to increases in the right-hand side of the balance sheet or decreases in the left-hand side. In each transaction, the debits on the transaction equal the credits on the transaction. This is because of the accounting equation: Assets = Liabilities + Equity. Debits Credits Increases in assets Decreases in assets + Decreases in liabilities & equity + Increases in liabilities & equity 'Debits = Credits' for a transaction means that the transaction does not cause the balance sheet to become unbalanced. For example, if debits equal credits and you see an increase in assets (a debit), then it is balanced out by a decrease in assets (credit) or an increase in liabilities or equity on the right-hand side of the balance sheet. Account type Assets (left-hand side of balance sheet) Liabilities (right-hand side of balance sheet) Equity (right-hand side of balance sheet) Increase Debit Credit Credit Decrease Comments Credit Assets are on left (debit) side of balance sheet equation Debit Liabilities are on right (credit) side of balance sheet equation Debit Equity is on right (credit) side of balance sheet equation In Chapter 3 of the textbook is a discussion of how debits and credits relate to income statement line items. Because income is part of the change in equity, the debit/credit rules for income statement line items follow the rules for equity: Account type Revenue - Expenses = Net income Comments Revenues increase equity therefore they are on the credit side of balance sheet equation Expenses decrease equity therefore they are on the debit side of balance sheet equation Net income increases equity Net loss decreases equity 14 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting The income statement reports part of the change in equity. For example, suppose a firm receives cash for a product that it sold. One way to reflect this in the financial statements is to simply enter the amount as an increase (a credit) in retained earnings, with an increase (a debit) to an asset, cash. Why, then, do we need the income statement? We need the income statement because the change to equity during the period is a key element for valuing the firm. We would like to see whether the increase to equity comes from core operations (e.g., from Ford selling cars), from investing in the stock market, or from receiving cash infusions from owners. The income statement reports the firm's activities in terms revenues and expenses so that outsiders to the firm can determine where its equity increases come from. Journal entries and t-accounts Journal entries are discussed in Chapters 2 and 3 of your textbook. Chapter 2 also introduces t-accounts, which is another way of representing how activities affect the financial statements. The format for both journal entries and t-accounts is 'debits on the left/credits on the right,' which corresponds to debits increasing the left-hand side of the balance sheet (assets) and credits increasing the right-hand side of the balance sheet (liabilities and equity). Journal entries have the following format: (Line item being debited) (Line item being credited) $Debit $Credit T-accounts have the following format: (Financial statement line item) Debits Credits Balance sheet lines also have beginning balances (from the end of the prior year balance sheet) and ending balances (from the end of the current year balance sheet). It is common to also show these beginning and ending balances on t-accounts. For example, we showed the year-to-year changes in Starbucks' retained earnings on page 8. We can also show the changes in t-account form: Dividends Retained earnings Beg. balance (9/27/2009) 267.6 Net income End. Balance (10/3/2010) 15 2,793.2 945.6 3,471.2 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Note that the beginning and ending balances of retained earnings appear on the right/credit side of the t-account. Net income, which increases equity, also appears as a credit while dividends, which reduce equity, appear as a debit. In some cases, we do not bother showing the beginning and ending balances if they are unnecessary for the purpose at hand. For example, in the following transaction examples, we do not show the beginning and ending balances on the t-accounts of the balance sheet accounts because we do not need to track the cumulative balances in anticipation of, for example, preparing a balance sheet. If we were planning to construct a balance sheet that reflected the impacts of the transactions, then we probably would track the beginning and ending balances. The following figure summarizes the debit/credit rules in terms of t-accounts (it is common to abbreviate 'debit' with 'dr', even though debit has no 'r' in it): Assets = Liabilities Beg. Dr End. Beg. Cr Dr Cr End. + Equity Contributed Beg. Dr Earned Beg. Cr Dr End. Dividends Net income End. Revenues Cr - Expenses Cr = Net income Dr Important note Every transaction will have at least one debit (sometimes more than one) and at least one credit. There are three possibilities for the debit/left-hand side: 1) an asset increases, 2) a liability decreases, or 3) equity decreases. Likewise, there are three possibilities for the credit/right-hand side: 1) an asset decreases, 2) a liability increases, or 3) equity increases. Hence we have 9 possibilities. After posting the transaction we need to verify that assets = liabilities + equity, which must hold if the transaction's debits equal its credits and if we correctly assigned debits and credits to the appropriate accounts. To obtain the ending balance sheet we start with the beginning balances in assets, liabilities, and equity, which are on the prior year's balance sheet. Adding the effect on those balances of the transactions during the year yields the ending balances in the accounts, which is the year-end balance sheet. An asset will have a positive balance on the debit/left-hand side of the balance sheet. If it is not positive, then it is a liability. For example, if your bank account is overdrawn (it has a negative balance), then you owe money to the bank and thus have a liability, not an asset. 16 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Examples of transactions We now illustrate the effect of a number of different transactions on the balance sheet accounts, making use of journal entries and t-accounts. We use the following abbreviations to identify the category of each of the effected accounts. We denote the impact of revenues and expenses by their impact on retained earnings. Assets Current assets Non-current assets Liabilities CA Current liabilities NCA Non-current liabilities Equity Contributed equity Retained earnings CL NCL CE RE Financing transactions: Issue stock for $1,000 cash: Cash (CA) 1,000 Common stock (CE) 1,000 Cash 1,000 Common stock 1,000 o An asset (current asset, cash) increases (debit to left-hand side of balance sheet), and owners' equity increases (credit to right-hand side of balance sheet). The lefthand side of the equation A = L + E increases by the amount of cash received and the right-hand side of the equation increases by the same amount. Borrow $1,000 using a notes payable (a type of borrowing from a bank) that will be repaid in three years: Cash (CA) 1,000 Notes payable (NCL) Cash 1,000 1,000 Notes payable 1,000 o We have a liability, which is the obligation to repay the loan. The loan will be repaid more than one year from now, and so it is classified as non-current. An asset (current asset, cash) increases (debit to left-hand side of balance sheet), and a liability increases (credit to right-hand side of balance sheet). The left-hand side of the equation A = L + E increases by the amount of money borrowed (the cash received) and the right-hand side of the equation increases by the same amount. 17 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Investing transactions: Purchase equipment for $1,000 cash: Equipment (NCA) Cash (CA) 1,000 1,000 Cash Equipment 1,000 1,000 o An asset (non-current asset, equipment) increases (debit to left-hand side of balance sheet), and an asset (current asset, cash) decreases (credit to left-hand side of balance sheet). The left-hand side of the equation A = L + E does not change and the right-hand side does not change. Purchase $1,000 of equipment for $600 cash and $400 to be paid to the equipment dealer in six months: Equipment (NCA) Cash (CA) Accounts payable (CL) Cash 600 Equipment 1,000 1,000 600 400 Accounts payble 400 o An asset (non-current asset, equipment) increases (debit to left-hand side of balance sheet), an asset (current asset, cash) decreases, and a liability increases (credit to left-hand side of balance sheet). The left-hand side of the equation A = L + E increases by $400, which means that the right-hand side must increase by $400, as well, which exactly equals the amount by which we increased accounts payable for the amount we still owe. 18 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting Operating transactions: Purchase $400 of inventory on credit, to be paid by the firm within one year: Inventory (CA) Accounts payable (CL) Inventory 400 400 400 Accounts payable 400 o An asset (current asset, inventory) increases and a liability (current liability, accounts payable) increases. The left-hand side of the equation A = L + E increases by the value of the inventory purchased and the right-hand side of the equation increases by the amount we owe (accounts payable, A/P) which exactly equals the value of the inventory purchased. Pay the $400 account payable from the previous transaction: Accounts payable (CL) Cash (CA) 400 400 Cash Accounts payable 400 400 o An asset (current asset, cash) decreases and a liability (current liability, accounts payable) decreases. The left-hand side of the equation A = L + E decreases by the amount of cash we paid and the right-hand side of the equation decreases by the reduction in our obligation to our supplier (accounts payable, A/P) which exactly equals the amount of cash we paid. Sell inventory (previously purchased for $400) for $700 on credit, to be paid by the customer within one year: Accounts receivable (CA) Sales revenue (RE) 700 700 Accounts receivable 700 Sales revenue 700 19 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Basics of Financial Accounting o An asset (current asset, accounts receivable A/R) increases and revenues increase, which, in turn, leads to an increase in equity (retained earnings). The left-hand side of the equation A = L + E increases by the amount our customers owe us and the right-hand side of the equation increases by the same amount, which exactly equals the sales price we charged to our customers. o We have not completed recording this transaction because our balance sheet still includes $400 of inventory that we no longer have and, therefore, is no longer an asset of the firm. We need to reduce the value of inventory by $400, which is an asset. Because assets decrease by $400, liabilities and equity must decrease by $400, as well, since A = L + E. Since liabilities have not changed, the $400 reduction must come out of equity. It is an expense, which reduces the retained earnings component of equity: Cost of goods sold (RE) Inventory (CA) 400 400 Inventory Cost of goods sold 400 400 o Cost of goods sold is an example of a product expense that we directly link to sales. The income statement reports the cost of purchasing inventory during the period in which the firm sells the inventory. Pay salaries of $200 to store managers: Salary expense (RE) Cash (CA) 200 200 Cash Salary expense 200 200 o An asset (current asset, cash) decreases and expenses increase which, in turn, leads to a decrease in equity (retained earnings). The left-hand side of the equation A = L + E decreases by the amount of cash we paid our employees and the right-hand side of the equation decreases by the same amount. This is an expense that reflects the value that the employees provided to us. Managers' salaries are an example of a period expense. We show it on the income statement when the managers earn their salaries, since it is not possible to link managers' salaries to individual sales. 20 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 II. Reading and exercises Reading and exercises Reading assignment and exercises The following reading assignments and exercises introduce you to the basic financial statements, which will be the focus of the accounting course. The reading assignments are from Financial Accounting, 8th edition, by Libby, Libby and Short, which is the text we will use during the semester. The chapters include examples. We encourage you to solidify your understanding of these within-chapter exercises before proceeding to the end-of-chapter exercises, which we recommend that you complete on your own. Chapter 2: Investing and financing decisions and the accounting system o Please read Chapter 2, which begins on page 40. Please skip pages 66, beginning with 'Understanding foreign financial statements', through 69, which cover topics that we will address during the semester. Please begin reading again with the 'Demonstration case' that begins on page 69. o Please complete the following exercises from the end of Chapter 2: M2-4, M2-5, E2-4, E2-5, and AP2-3 (skip parts 4 and 6 of AP2-3). Chapter 3: Operating decisions and the accounting system o Please read Chapter 3, which begins on page 98. Please skip `Net profit margin' on starting on page 122, which we will cover during the semester, and begin again with the 'New revenue recognition standard' on page 123. o Please complete the following exercises from the end of Chapter 3: E3-6, E3-7, E3-10, E3-11, E3-12, and P3-2. Solutions to all exercises from the textbook are available on the course website. 21 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 III. Practice cases Practice cases In this section are two practice cases with solutions. Peter's Cycles (Practice 1: 4-6 hours) Case Peter's Cycles is a fictional bicycle retailer founded on 7/1/2013. This assignment requires that you do the following: 1) Prepare journal entries to record all of the transactions listed. 2) Post journal entries to T-accounts. 3) Construct an income statement, a cash flow statement and a statement of stockholders' equity for the six months ended December 31, 2013. 4) Prepare a balance sheet as of December 31, 2013 (use the retained earnings amount from the statement of stockholders' equity). The following transactions describe the activities of the firm during those six months: 1) On July 1 issued 1,000 shares of stock at a price of $40/share, for a total of $40,000. 2) On July 1 borrowed $30,000 from a bank in the form of a note due in one year, with an interest rate of 10%. 3) On July 1 prepaid rent of $2,000 for one year of public storage. 4) On July 15 purchased 20 bicycles on credit from local distributors at a cost of $2,500 per bicycle. Peter's intends to sell these bicycles at a later date. 5) On August 1 accepted orders from customers for 10 bicycles at a sale price of $4,000 per bicycle. 6) On August 15 paid mechanic $200 cash per bicycle to assemble the 10 bicycles ordered in #5. The assembly costs are treated as an increase in the value of the bicycle inventory. 7) On August 17 delivered the 10 bicycles ordered and billed customers for the agreedupon price of $4,000/bicycle. (NOTE: don't forget about the impact on inventory.) 8) On September 1 paid $35,000 of accounts payable to the local distributors. 9) On September 15 collected $25,000 of accounts receivable from customers. 10) On December 31 accrued six months' of interest on the short-term loan from the bank (see #2). (You can use 'straight-line' interest for this question; six months is half of the loan term, so you can record half of the total interest on the loan). 11) On December 31 recognized rent expense for six months of public storage (See #3). 22 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Journal entries: 1) On July 1 issued 1,000 shares of stock at a price of $40/share, for a total of $40,000. 2) On July 1 borrowed $30,000 from a bank in the form of a note due in one year, with an interest rate of 10%. 3) On July 1 prepaid rent of $2,000 for one year of public storage. 4) On July 15 purchased 20 bicycles on credit from local distributors at a cost of $2,500 per bicycle. Peter's intends to sell these bicycles at a later date. 5) On August 1 accepted orders from customers for 10 bicycles at a sale price of $4,000 per bicycle. 6) On August 15 paid mechanic $200 cash per bicycle to assemble the 10 bicycles ordered in #5. The assembly costs are treated as an increase in the value of the bicycle inventory. 7) On August 17 delivered the 10 bicycles ordered and billed customers for the agreedupon price of $4,000/bicycle. (NOTE: don't forget about the impact on inventory.) 23 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases 8) On September 1 paid $35,000 of accounts payable to the local distributors. 9) On September 15 collected $25,000 of accounts receivable from customers. 10) On December 31 accrued six months' of interest on the short-term loan from the bank (see #2). (You can use 'straight-line' interest for this question; six months is half of the loan term, so you can record half of the total interest on the loan.) 11) On December 31 recognized rent expense for six months of public storage (See #3). If you had difficulty with the Peter's Cycles case, we recommend that you complete problem AP3-6 on page 154 of the textbook, at the end of Chapter 3. 24 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases T-accounts: Cash Accounts receivable Beg Beg End End Inventory Prepaid rent Beg Beg End End Accounts payable Beg Short-term loan Beg End End Interest payable Beg Contributed equity Beg End End Sales Expenses 25 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Income statement: Sales Cost of goods sold Gross profit Selling, general and administrative (SG&A) expenses Operating profit Interest expense Income before tax Tax expense Net income Cash flow statement: Cash from operations Collections from customers Payments to employees Payments to suppliers Net cash from operations Cash from investing Cash from financing Issued stock Borrowing Net cash from financing Net cash flow Beginning cash Ending cash 26 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Statement of stockholders' equity: Contributed equity Retained earnings Beginning balance, July 1, 2013 Issued stock Net income Ending balance, Dec. 31, 2013 Balance sheet: Assets Cash Accounts receivable Inventory Prepaid rent Total current assets Total assets Liabilities and equity Accounts payable Short-term loan Interest payable Total current liabilities Contributed equity Retained earnings Total stockholders' equity Total liabilities & stockholders' equity 27 Total equity ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Solutions Journal entries: 1) On July 1 issued 1,000 shares of stock at a price of $40/share, for a total of $40,000. Cash $40,000 Contributed equity $40,000 2) On July 1 borrowed $30,000 from a bank in the form of a note due in one year, with an interest rate of 10%. Cash $30,000 Short-term loan $30,000 3) On July 1 prepaid rent of $2,000 for one year of public storage. Prepaid rent Cash $2,000 $2,000 4) On July 15 purchased 20 bicycles on credit from local distributors at a cost of $2,500 per bicycle. Peter's intends to sell these bicycles at a later date. Inventory $50,000 Accounts payable $50,000 5) On August 1 accepted orders from customers for 10 bicycles at a sale price of $4,000 per bicycle. No entry - Accepting an order is not classified as a transaction in accounting. 6) On August 15 paid mechanic $200 cash per bicycle to assemble the 10 bicycles ordered in #5. The assembly costs are treated as an increase in the value of the bicycle inventory. Inventory $2,000 Cash $2,000 7) On August 17 delivered the 10 bicycles ordered and billed customers for the agreedupon price of $4,000 per bicycle. Accounts receivable Sales Cost of goods sold Inventory $40,000 $40,000 $27,000 $27,000 NOTE: Each of the 10 bicycles had an inventory cost of $2,500 for the bicycle and $200 for assembly, for a total of $2,700/bicycle. 28 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases 8) On September 1 paid $35,000 of accounts payable to the local distributors. Accounts payable Cash $35,000 $35,000 9) On September 15 collected $25,000 of accounts receivable from customers. Cash $25,000 Accounts receivable $25,000 10) On December 31 accrued six months' of interest on the short-term loan from the bank (see #2). (You can use 'straight-line' interest for this question; six months is half of the loan term, so you can record half of the total interest on the loan.) Interest expense Interest payable $1,500 $1,500 NOTE: Total interest for the year will be $30,000 10% = $3,000, so a half year of interest is $1,500 = $3,000 2. 11) On December 31 recognized rent expense for six months of public storage (see #3). Rent expense Prepaid rent $1,000 $1,000 29 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases T-accounts: Cash Beg 1) 2) 9) 40,000 3) 30,000 6) 25,000 8) End 56,000 Beg 4) 6) Inventory 50,000 7) 2,000 End 25,000 8) Accounts payable Beg 35,000 4) 50,000 Beg 7) 2,000 2,000 35,000 End End Interest payable Beg 10) End Sales 7) 27,000 Accounts receivable 40,000 9) 25,000 15,000 Beg 3) Prepaid rent 2,000 11) End 1,000 1,000 Short-term loan Beg 2) 30,000 15,000 End 30,000 Contributed equity Beg 1) 40,000 1,500 1,500 End 40,000 7) 10) 11) 40,000 Expenses 27,000 1,500 1,000 29,500 30 40,000 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Income statement: Sales Cost of goods sold $ 40,000 27,000 Gross profit Selling, general and administrative (SG&A) expenses $ 13,000 1,000 Operating profit Interest expense $ 12,000 1,500 Income before tax Tax expense $ 10,500 - Net income $ 10,500 Cash flow statement: Cash from operations Collections from customers (#9) Payments to employees (#6) Payments to suppliers (#3, #8) Net cash from operations Cash from investing Cash from financing Issued stock (#1) Borrowing (#2) Net cash from financing $ 25,000 (2,000) (37,000) $ (14,000) $ - $ 40,000 30,000 70,000 $ Net cash flow Beginning cash $ 56,000 - Ending cash $ 56,000 31 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Statement of stockholders' equity: Beginning balance, July 1, 2013 Issued stock Net income Ending balance, December 31, 2013 Balance sheet: Assets Cash Accounts receivable Inventory Prepaid rent Total current assets Total assets $56,000 15,000 25,000 1,000 Contributed Retained Total equity earnings equity $ $ $ 40,000 40,000 10,500 10,500 $ 40,000 $ 10,500 $ 50,500 Liabilities and equity Accounts payable Short-term loan Interest payable $ 15,000 30,000 1,500 Total current liabilities $ 46,500 Contributed equity Retained earnings Total stockholders' equity $ 40,000 10,500 $ 50,500 Total liabilities & stockholders' equity $ 97,000 $97,000 $97,000 32 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Starbucks (Practice 2: 2-4 hours) Questions Answer the following questions using the Starbucks' financial statements that begin on the next page. 1) Use the information from the balance sheet and show that the \"Accounting Equation\" holds on October 3, 2010. Assets = Liabilities + Equity 2) Suggest something that might provide future benefits to the company, but is not recognized as an asset on the balance sheet. 3) A ratio of Current Assets to Current Liabilities is sometimes taken as an indication of a company's ability to repay its liabilities. Determine this ratio as of October 3, 2010. 4) Estimate the average interest rate on the company's debt for fiscal 2010 by dividing interest expense by the average of the beginning and ending balances of long-term debt. 5) Using operating profit divided by total net revenues (called the operating profit margin) as a measure of operating efficiency, indicate whether the company was more or less efficient in fiscal year 2010 as compared to 2009. 33 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases 6) Assume that Interest and Other Income reported on the income statement was earned on the Cash and Cash Equivalents plus Short-Term Investments (i.e., exclude longterm investments in the calculation). Estimate the rate of return on those assets during fiscal 2010 by dividing the Interest and Other Income for the year by the average of the beginning and ending balances of Cash and Cash Equivalents plus Short-Term Investments. 7) What is Starbucks' fiscal 2010 EBITDA (earnings before interest expense/income, taxes and depreciation & amortization)? 8) Please explain the sharp increase in the Net Cash Used in Investing Activities (i.e., the significantly larger cash outflow) from 2009 to 2010. 9) From the Notes to Financial Statements, determine what percentage of Starbucks' October 3, 2010 inventory balance is made up of coffee. 10) Referring to the excerpt from Item 1 of Starbucks' 10-K (annual report), please outline the key element of the company's business model. 34 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Data Balance sheet STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except per share data) Oct 3, 2010 Sep 27, 2009 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets $ Total current assets Long-term investments Property, plant and equipment Other assets Goodwill TOTAL ASSETS $ 1,164.0 $ 285.7 302.7 543.3 460.7 599.8 66.3 271.0 664.9 433.8 2,756.4 533.3 2,416.5 2,035.8 423.5 2,536.4 417.3 262.4 322.0 259.1 6,385.9 $ 5,576.8 LIABILITIES AND EQUITY Current liabilities: Accounts payable Accrued liabilities Deferred revenue 282.6 1,082.4 414.1 267.1 925.2 388.7 Total current liabilities Long-term debt Other long-term liabilities 1,779.1 549.4 375.1 1,581.0 549.3 389.6 Total liabilities Shareholders' equity: Common stock Additional paid-in capital Other additional paid-in-capital Retained earnings Accumulated other comprehensive income 2,703.6 2,519.9 0.7 106.2 39.4 3,471.2 57.2 0.7 147.0 39.4 2,793.2 65.4 Total shareholders' equity Noncontrolling interests 3,674.7 7.6 3,045.7 11.2 Total equity 3,682.3 3,056.9 6,385.9 $ 5,576.8 TOTAL LIABILITIES AND EQUITY $ 35 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Income statement STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In millions, except per share data) Oct 3, 2010 Sep 27, 2009 Sep 28, 2008 $ 10,707.4 4,458.6 3,551.4 293.2 510.4 569.5 53.0 9,436.1 148.1 1,419.4 50.3 (32.7) 1,437.0 488.7 948.3 2.7 $ 945.6 $ 1.27 $ 1.24 $ 9,774.6 4,324.9 3,425.1 264.4 534.7 453.0 332.4 9,334.5 121.9 562.0 37.0 (39.1) 559.9 168.4 391.5 0.7 $ 390.8 $ 0.53 $ 0.52 $ 10,383.0 4,645.3 3,745.1 330.1 549.3 456.0 266.9 9,992.7 113.6 503.9 5.2 (53.4) 455.7 144.0 311.7 (3.8) $ 315.5 $ 0.43 $ 0.43 Fiscal Year Ended Net revenues Cost of sales Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Restructuring charges Total operating expenses Income from equity investees Operating income Interest income and other, net Interest expense Earnings before income taxes Income taxes Net earnings including noncontrolling interests Net earnings (loss) attributable to noncontrolling interests Net earnings attributable to Starbucks Earnings per share basic Earnings per share diluted Weighted average shares outstanding: Basic Diluted Cash dividends declared per share 36 $ 744.4 764.2 0.36 $ 738.7 745.9 0.00 $ 731.5 741.7 0.00 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Statement of cash flows STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Oct 3, 2010 Fiscal Year Ended OPERATING ACTIVITIES: Net earnings including noncontrolling interests Adjustments to reconcile net earnings to net cash provided by operating activities: $ Depreciation and amortization Provision for impairments and asset disposals Deferred income taxes, net Equity in income of investees Distributions of income from equity investees Stock-based compensation Tax benefit from exercise of stock options Excess tax benefit from exercise of stock options Other Cash provided/(used) by changes in operating assets and liabilities: 948.3 Sep 27, 2009 $ 391.5 Sep 28, 2008 $ 311.7 540.8 67.7 (42.0) (108.6) 91.4 113.6 13.5 (36.9) (15.3) 563.3 224.4 (69.6) (78.4) 53.0 83.2 2.0 (15.9) 5.4 604.5 325.0 (117.1) (61.3) 52.6 75.0 3.8 (14.7) (0.1) 123.2 (3.6) (12.9) 24.2 (16.1) 17.6 1,704.9 28.5 (53.0) 57.2 16.3 120.5 60.6 1,389.0 (0.6) (63.9) 7.3 72.4 (11.2) 75.3 1,258.7 Purchase of securities Sales of securities Acquisitions, net of cash acquired Additions to property, plant and equipment Proceeds from sale of property, plant and equipment Net cash used by investing activities FINANCING ACTIVITIES: (547.8) 211.1 (12.0) (440.7) 0.0 (789.5) (134.0) 116.0 0.0 (445.6) 42.5 (421.1) (123.8) 95.9 (74.2) (984.5) 0.0 (1,086.6) Proceeds from borrowings Repayments of borrowings Proceeds from issuance of common stock Cash dividends paid Repurchase of common stock Other Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS: 0.0 (6.6) 127.9 (171.0) (285.6) (10.7) (346.0) (5.2) 564.2 22,303.4 (23,017.2) 57.3 0.0 0.0 14.3 (642.2) 4.3 330.0 66,299.0 (66,297.4) 112.3 0.0 (311.4) 13.0 (184.5) 0.9 (11.5) Inventories Accounts payable Accrued taxes Deferred revenue Other operating assets Other operating liabilities Net cash provided by operating activities INVESTING ACTIVITIES: Beginning of period End of period 599.8 $ 1,164.0 $ 269.8 599.8 $ 281.3 269.8 $ $ $ $ 39.8 162.0 $ $ 52.7 259.5 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of capitalized interest Income taxes 37 32.0 527.0 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Inventory note (The notes to the financial statements provide additional detail not reflected in the main statements, which are highly summarized. The following note provides additional details regarding the inventory balances that appear on Starbucks' balance sheets.) Note 6: Inventories (in millions) Oct 3, 2010 Coffee: Unroasted Roasted Other merchandise held for sale Packaging and other supplies Total $ $ 238.3 95.1 115.6 94.3 543.3 Sep 27, 2009 $ $ 381.6 76.7 116.0 90.6 664.9 Excerpt from Item 1: Business in Starbucks' 10-K (The 10-K is a corporation's annual filing with the U.S. Securities and Exchange Commission. The first item in the 10-K describes the company's business. Other sections include financial statements and discussions of financial results, among other things.) General Starbucks is the premier roaster and retailer of specialty coffee in the world, operating in more than 50 countries. Starbucks Corporation was formed in 1985 and its common stock trades on the NASDAQ Global Select Market (\"NASDAQ\") under the symbol \"SBUX.\" Starbucks purchases and roasts high-quality whole bean coffees and sells them, along with handcrafted coffee and tea beverages and a variety of fresh food items, through company-operated retail stores. We also sell coffee and tea products and license our trademarks through other channels such as licensed retail stores and, through certain of our licensees and equity investees, we produce and sell a variety of ready-to-drink beverages. All channels outside the company-operated retail stores are collectively known as specialty operations. In addition to our flagship Starbucks brand, our portfolio includes brands such as Tazo Tea, Seattle's Best Coffee, and Starbucks VIA Ready Brew. Our objective is to maintain Starbucks standing as one of the most recognized and respected brands in the world. To achieve this goal, we plan to continue disciplined expansion of our retail and licensed store base, primarily focused on growth in countries outside of the US. In addition, by leveraging the experience gained through our traditional store model, we are offering consumers new coffee products in multiple forms, across new categories, and through diverse channels. Starbucks Global Responsibility strategy and commitments related to coffee and the communities we do business in, as well as our focus on being an employer of choice, are also key complements to our business strategies. 38 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Solutions 1) Use the information from the balance sheet and show that the \"Accounting Equation\" holds on October 3, 2010. Assets 6,385.9 = Liabilities 2,703.6 + Equity 3,682.3 2) Suggest something that might provide future benefits to the company, but is not recognized as an asset on the balance sheet. name recognition (brand name), pricing ability, customer base 3) A ratio of Current Assets to Current Liabilities is sometimes taken as an indication of a company's ability to repay its liabilities. Determine this ratio as of October 3, 2010. Current assets 2, 756.4 1.6 Current liabilities 1, 779.1 4) Estimate the interest rate on the company's debt from information on the income statement and balance sheets for fiscal 2010 by dividing interest expense by the average of beginning and ending long-term debt. Interest expense 32.7 32.7 6.0% Average debt (549.4 549.3) / 2 549.35 5) Using operating profit divided by total net revenues (called the operating profit margin) as a measure of operating efficiency, indicate whether the company was more or less efficient in fiscal year 2010 as compared to 2009. 2010 : 2009 : Operating profit Net revenue Operating profit margin 1, 419.4 10, 707.4 13.26% 562.0 9, 774.6 5.75% More efficient 6) Assume that Interest and Other Income reported on the income statement was earned on the Cash and Cash Equivalents plus Short-Term Investments (i.e., exclude longterm investments in the calculation). Estimate the rate of return on those assets during fiscal 2010 by dividing the Interest and Other Income for the year by the average of the beginning and ending balances of Cash and Cash Equivalents plus Short-Term Investments. 39 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Practice cases Interest income and other 50.3 Average Cash + Short-term investments [(1,164.0 285.7) (599.8 66.3)] / 2 50.3 50.3 4.8% (1, 449.7 666.1) / 2 1, 057.9 7) What is Starbucks' fiscal 2010 EBITDA (earnings before interest expense/income, taxes and depreciation & amortization)? EBITDA Operating profit Depr & Amrt EBITDA 1, 419.4 510.4 1,929.8 You could have also computed this by adding interest, taxes and depreciation to net income. Because Starbucks' operating profit equals net income + taxes + interest expense - interest income, the above approach is shorter. Some analysts use EBITDA as a crude approximation of cash flow from operating activities. 8) Please explain the sharp increase in the Net Cash Used in Investing Activities (i.e. the significantly larger cash outflow) from 2009 to 2010. There was a large increase in purchases of securities that was not offset by an increase in cash from selling securities. In 2009, in contrast, purchases and sales of securities nearly offset each other. Starbucks appears to have been selling some securities and reinvesting the proceeds.) 9) From the Notes to Financial Statements, determine what percentage of Starbucks' October 3, 2010 inventory balance is made up of coffee. Coffee 238.3 95.1 333.4 61.4% Total inventory 543.3 543.3 10) Referring to the excerpt from Item 1 of Starbucks' 10-K (annual report) please state the key element of the company's business model. \"Starbucks purchases and roasts high-quality whole bean coffees and sells them, along with handcrafted coffee and tea beverages and a variety of fresh food items, through company-operated retail stores.\" 40 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 IV. Wal-Mart (Assigned case: 3-5 hours) Wal-Mart (Assigned case: 3-5 hours) This case has two parts and is due the start of our second section. PART I: WAL-MART The questions in Part I pertain to Wal-Mart's (NYSE: WMT) annual report for the fiscal year ended January 31, 2014 (available at the course website (WMT 2014 AR.pdf) and http://stock.walmart.com/annual-reports). 1) Show that Total Equity equals Assets net of Liabilities for the year ending January 31, 2014. Assets - Liabilities = Equity 2) Assuming that the name Wal-Mart is valuable, explain why it is not shown as an asset on the company's balance sheet. 3) Determine the total (current and non-current) amount of Debt and Obligations Under Capital Leases as of January 31, 2014. (NOTE: Short-term borrowings are a form of debt.) 4) Determine the total \"contributed capital\" from Wal-Mart shareholders (i.e., ignore non-controlling interests) as of January 31, 2014. 41 ACCT 6305/SYSM 6337 Pre-Skilling Fall 2016 Wal-Mart (Assigned case: 3-5 hours) 5) Show that the difference between the ending and beginning balances of cash and cash equivalents on the company's balance sheet corresponds to the net change in cash and cash equivalents on the cash flow statement for the fiscal year ending January 31, 2014. End. Balance (Balance Sheet) - Beg. Balance (Balance Sheet) - =