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1. Starbucks Corporation - 2007
Learning Objectives:
• Find requested information in financial statements and the associated notes (and thus
become familiar with the information reported in financial statements and associated
notes).
• Generate common-size financial statements.
• Calculate and interpret return on assets.
• Apply DuPont analysis.
Starbucks Corporation’s financial statements are located on the course LMES website.
To complete some requirements, you will need to use the notes to Starbucks’ financial
statements.

2. 1. Overview of financial statements.
a. What four financial statements do companies typically prepare for external
reporting purposes? What name does Starbucks use for each of these statements?
4 financial statements The name Starbucks use
Consolidated Balance Sheets
Balance Sheet
As of September 30, 2007, and October 1, 2006
Consolidated Statements of Earnings
Income Statement for the fiscal years ended September 30, 2007,
October 1, 2006, and October 2, 2005
Consolidated Statements of Cash Flows
Statement of Owner’s Equity for the fiscal years ended September 30, 2007,
October 1, 2006, and October 2, 2005
Consolidated Statements of Cash Flows
Statement of Cash Flows for the fiscal years ended September 30, 2007,
October 1, 2006, and October 2, 2005
b. What does “consolidated” mean?
Emerged (connected) statement of United State’s and Internations’sfinantial sheet
c. How often do listed companies in the United States, such as Starbucks, typically
prepare financial statements for external reporting purposes?
4 times per year(Quarterly)
What about listedcompanies in Hong Kong such as Hutchison Whampoa?
2 times per year(Biannual)
d. How does Starbucks define segments for financial reporting purposes?
ListStarbucks’ segments. Which operating segment had the highest ratio of revenues
to identifiable assetsfor fiscal year 2007?
List of Starbucks’ segments
1) United States : 7,348,993 ( 78% ) / 2,454,619 = 2.99
2) International : 1,696,159 ( 18% ) / 1,116,054 = 1.5
3) Global Consumer Product Group : 366,345 ( 3.8%) / 91,614 = 3.99
Segment of highest ratio of revenues : CPG

3. 2. Auditors.
a. What accounting firm issued Starbucks audit opinion (i.e., what accounting firm
is Starbucks’ external auditors)?
DELOITTE & TOUCHE LLP ( Seattle, Washington)– p.74
One of the four largest international professional services networks in accountancy and
professional services, which handle the vast majority of audits for publicly traded companies as
well as many private companies, creating an oligopoly in auditing large companies.
b. Briefly state in your own words what Starbucks’ audit opinion means. That is,
use everyday language to explain how a reader of Starbucks’ financial statements
should interpret what the audit opinion says.
The financial statements are credible, fairly written based on the guidance of US accounting rule.
c. Why is the audit opinion dated several months after Starbucks’ year-end?
To review the financial sheet
d. Why are audit opinions issued by external auditors?
To make the credibility of the financial sheets high

4. 3. Consolidated statement of earnings (i.e., income statement).
a. Consider the statement found page 39. Which of the following types of accounts
are reported on an income statement: assets, liabilities, shareholders’ equity,
revenues, expenses, gains, and losses?
assets, liabilities, shareholders’ equity,revenues, expenses, gains, and losses?
b. Based on the income statements for fiscal years 2007 and 2006, did Starbucks
experience a significant change in any of it operating expenses from fiscal year
2006 to fiscal year 2007? If so, list the operating expenses that experienced a
significant change.
Cost of sales and including occupancy costs, Depreciation and amortization expense,
Store operating expenses
c. Starbucks provide a common-size(백분비) income statements for Starbucks for fiscal
years 2007 and 2006 (page 22).Explain the logic of this spreadsheet. The ratio
associated with “General and administrative expenses” is 5.2%. Recalculate this
ratio.
Using consolidated income sheet, calculated % of revenues,
Operating income = total net revenues – total operating expenses + income from equity invest
Net earnings = operating income – taxes
489,249 / 9,411,497 = 5.2%
d. Based on the common-size income statements for fiscal years 2007 and 2006, did
Starbucks experience a significant change in any of it operating expenses from
fiscal year 2006 to fiscal year 2007? If so, list the operating expenses that
experienced a significant change.
Cost of sales and including occupancy costs

5. 4. Consolidated balance sheet.
a. Which of the following types of accounts are reported on a balance sheet: assets,
liabilities, shareholders’ equity, revenues, expenses, gains, and losses?
assets,liabilities, shareholders’ equity, revenues, expenses, gains, and losses?
b. On its October 1, 2007 balance sheet, Starbucks reported $2,890,433 thousand for
“Property, plant and equipment, net.”List the sub-accounts (and their respective
October 1, 2007 balances) that comprise the $2,890,433 thousand for “Property,
plant and equipment, net.” Where did you find this information?
The sub-accounts of “Property, plant and equipment, net”
: 1) Land, 2) buildings, 3) leasehold improvements, 4) store equipment, 5) roasting equipment,
6) furniture, fixtures, and other 7) less accumulated depreciation and amortization 8) work in
progress
Found in Page 56. Note 7
c. Construct common size-balance sheets for Starbucks for fiscal years ended
October 1, 2007 and October 2, 2006. Common-size balance sheets scale each
line item by total assets. That is, in a common-size balance sheet, each balance
sheet line item is stated as a percentage of total assets. Thus, to construct a
common-size balance sheet, divide each balance sheet line item by total assets.
State each line item as a percentage, and round to two decimals.

6. BALANCE SHEETS – FISCAL 2007 COMPARED TO FISCAL 2006
Sep 30, 2007 % of Oct 1, 2006 % of
Fiscal Year Ended
In thousands, Total Assets, In thousands, Total Assets,
ASSETS
Current assets:
Cash and cash equivalents $281,261 5.26% $312,606 7.06%
Short-term investments — available-for-sale securities 83,845 1.57% 87,542 1.98%
Short-term investments — trading securities 73,588 1.38% 53,496 1.21%
Accounts receivable, net 287,925 5.39% 224,271 5.06%
Inventories 691,658 12.94% 636,222 14.37%
Prepaid expenses and other current assets 148,757 2.78% 126,874 2.86%
Deferred income taxes, net 129,453 2.42% 88,777 2.00%
Total current assets 1,696,487 31.75% 1,529,788 34.54%
Long-term investments — available-for-sale securities 21,022 0.39% 5,811 0.13%
Equity and other investments 258,846 4.84% 219,093 4.95%
Property, plant and equipment, net 2,890,433 54.09% 2,287,899 51.66%
Other assets 219,422 4.11% 186,917 4.22%
Other intangible assets 42,043 0.79% 37,955 0.86%
Goodwill 215,625 4.03% 161,478 3.65%
TOTAL ASSETS $5,343,878 100.00% $4,428,941 100.00%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Commercial paper and short-term borrowings $710,248 13.29% $700,000 15.81%
Accounts payable 390,836 7.31% 340,937 7.70%
Accrued compensation and related costs 332,331 6.22% 288,963 6.52%
Accrued occupancy costs 74,591 1.40% 54,868 1.24%
Accrued taxes 92,516 1.73% 94,010 2.12%
Other accrued expenses 257,369 4.82% 224,154 5.06%
Deferred revenue 296,900 5.56% 231,926 5.24%
Current portion of long-term debt 775 0.01% 762 0.02%
Total current liabilities 2,155,566 40.34% 1,935,620 43.70%
Long-term debt 550,121 10.29% 1,958 0.04%
Other long-term liabilities 354,074 6.63% 262,857 5.93%
Total liabilities 3,059,761 57.26% 2,200,435 49.68%
Shareholders’ equity:
Common stock ($0001 par value) 738 0.01% 756 0.02%
Other additional paid-in-capital 39,393 0.74% 39,393 0.89%
Retained earnings 2,189,366 40.97% 2,151,084 48.57%
Accumulated other comprehensive income 54,620 1.02% 37,273 0.84%
Total shareholders’ equity 2,284,117 42.74% 2,228,506 50.32%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $5,343,878 100.00% $4,428,941 100.00%

7. d. Based on your common-size balance sheets, did Starbucks experience a
significant change in any of its assets or liabilities from October 2, 2006 to
October 1, 2007? If so, list the assets and/or liabilities that experienced
significant changes.
Property, plant and equipment, net
Long-term debt
Retained earnings
e. Starbucks’ shareholder equity reports $54,620 as “Accumulated other
comprehensive income”? Where can you find the details of this amount?
Page.60
f. What was the total shareholders’ equity at the end of 2006 and 2007? Can you
reconcile the two numbers? Where did you find the information?
2,284,117 in 2007 and 2,228,506 in 2006
g. Explain how the balance in Retained Earnings changed from 2,151,084 to
2,189,366.
p.42
balance in 2006 2,151,084
+ net earning in 2007 672,638
- repurchase of common stock (634,356)
------------------------------------------------------------------------------
$2,189,366

8. 5. Consolidated statement of cash flows.
a. What are the three major sections of Starbucks cash flow statement?
Operating activities, Investing activities, Financing activities
b. How much cash did Starbuck generate from operating activities during fiscal year
2007? Was this amount more or less than the amount of net income the company
generated?
Cash : 1,331,221
Net income : 672,638
More : 658,583
c. What were Starbucks’ three largest non-operating cash flows during fiscal year
2007?
Repayments of commercial paper (16,600,841)
Proceeds from issuance of commercial paper 17,311,089
Repayments of short-term borrowings (1,470,000)
6. Ratio analysis.
a. Use the component approach (explained below) to calculate Starbucks’ return on
assets (ROA) for fiscal years 2007 and 2006 (i.e., calculate asset turnover and
profit margin, and then use those two to calculate ROA).
On its October 3 2005balance sheet, Starbucks reported $3,513,693 thousand for its total
assets.
ROA is a ratio commonly used to assess a company’s profitability. This ratio
compares the profit the company generated during the period to the resources
available to the company during the period. There are several different ways to
calculate this ratio. We will calculate it as follows.
NOPATROA =Average Total Assets

9. • NOPAT means “Net Operating Profit After Tax.”
It measures how muchprofit the company generated during the period, independent of the
company’scapital structure (i.e., independent of how much of the company’s assets are
financed by debt versus shareholders’ equity).
NOPAT is calculated asfollows.
NOPAT = Net income + Interest expense (1 – Tax rate)
You can estimate the tax rate using the following formula (you will find the
amounts for the items in the formula on Starbucks’ income statement).
Estimated tax rate = Income taxes ÷ Earnings before income taxes
• Average total assets measures the resources available to the company during
the period. Average total assets are calculated as follows.
Average total assets = (Start-of-period total assets + End-of-period total assets) ÷ 2
To better understand a company’s ROA, you can decompose ROA into two
components: (1) asset turnover and (2) profit margin, as follows.
ROA = Asset turnover x Profit margin
• Asset turnover measures a company’s efficiency and effectiveness at using its
assets to generate gross wealth (i.e., revenue). This ratio tells us how many
sales dollars the company generates per dollar of assets. It is calculated as
follows.
Asset turnover = Sales ÷ Average total assets

10. • Profit margin measures a company’s efficiency and effectiveness at managing
its expenses. This ratio tells us how much of each sales dollar the company
keeps after covering all its expenses except interest. It is calculated as follows.
Profit margin = NOPAT ÷ Sales
Thus, the component approach for calculating ROA uses the following formula.
Sales NOPAT
ROA = Average TotalAssetsx Sales
tax rate tax/earning 0.363251682 2007
0.358369665 2006
1-tax rate 0.636748318 2007
0.641630335 2006
net income(net earning) p.22 672,638 2007
2006
564,259
interest expence p.58 2007
38,200
2006
8,400
avg total asset (2006+2007)/2 2007
4,886,410
(2005+2006)/2 2006
3,971,317
NOPAT net income + interest expense(1-tax rate) 2007
696,962
2006
569,649
NOPAT / AVG ASSET 0.1426327
ROA
0.14344075

11. b. Use the full DuPont model (explained below) to calculate Starbucks return on
equity (ROE) for fiscal years 2007 and 2006 (i.e., calculate each component of the
DuPont modal and then use them to calculate ROE).
On its October 3, 2005balance sheet, Starbucks reported $3,513,693 thousand for its total
assets and$2,090,262 thousand for its total common shareholders’ equity.
ROE is another ratio commonly used to assess a company’s profitability. This
ratio compares the profit the company generated during the period for common
shareholders to the resources invested in the company by common shareholders.
ROE is calculated using the following formula:
ROE = Net income ÷ Average common shareholders’ equity
The DuPont model is a tool for analyzing ROE. Specifically, the DuPont model
decomposes ROE into components. There are several variations of the DuPont
model. The variation we will use is as follows.
ROE = Leverage x ROA x Interest efficiency
• Leverage measures the company’s capital structure. This ratio tells us how
many dollars of assets the company has relative to each dollar of common
shareholders’ equity. It is calculated as follows.
Leverage = Average total assets ÷ Average common shareholders’ equity
• As discussed above, ROA is comprised of two components: (1) asset turnover
and (2) profit margin
• Interest efficiency measures a company’s efficiency and effectiveness at
managing its interest expense. This ratio tells us how much of each NOPAT
dollar the company keeps after covering its interest expenses (and income tax
expense related to the interest). It is calculated as follows.

12. Interest efficiency = Net income ÷ NOPAT
Thus, the full DuPont model is as follows.
ROE = Leverage x Asset turnover x Profit margin x Interest efficiency
Average TotalAssets Sales NOPAT Net income= Average CommonShareholders’Equityx
AverageTotal Assetsx Sales x NOPAT
ROE NET INCOME / AVG EQUITY
net income(net earning) p.22 672,638 2007
564,259 2006
average common stock share holder's equity 2,256,312 2007
2,159,384 2006
ROE NET INCOME / AVG EQUITY 0.29811398 2007
0.26130554 2006