If we were investors in this company, we would consider 5% to be material. The company does not seem to have any high risk of fraud or material misstatement, so we are very comfortable with the quality of its financial reporting. A misstatement of 5% or above in any of the significant company accounts, or a combined misstatement of 5% or above for the company accounts as a whole, would require increased investigation and would reduce our confidence in the records. Any misstatement under 5% would be permissible.
The journal entry for the August 2007 issue of debt at 6. 5% interest rate and the interest expense journal entry for 2007 and 2008 related to this debt are as follows: August 1, 2007 Issue of Debt: Cash549,000,000 Senior N/P Discount 1,000,000 Senior Notes Payable550,000,000 December 31, 2007: Interest Expense14,357,084 Interest Payable14,315,417 (550,000,000 x . 0313 x 5/6) Discount41,667 (50,000 x 5/6) February 1, 2008: Interest Payable14,315,417 Interest Expense2,872,916 Cash17,187,500 Discount8,333 (50,000 x 1/6) August 1, 2008: Interest Expense17,237,500 Cash17,187,500 Discount50,000 December 31, 2008: Interest Expense14,357,084 Interest Payable14,315,417 Discount41,667 3. 3% of the Note is Payable in February and August and 5/6th of this expense is accrued at each year-end.
It is to be paid at the start of the next February. With no knowledge of the market rate, we amortized the discount evenly over the 20 periods and added the $50,000 to total interest expense for each semi-annual period. Interest payable for each 6-month period (August through January, February through July) is 0. 313×550,000 and total interest expense is the payable plus the 50,000 discount amortization. Totals for year-end are the accrued interest expense and discount amortization for 5 months of the 6 month period.
Each ratio we computed for Starbucks, we also computed the same ratio for Caribou Coffee, a competitor of Starbucks. We did this so that we would be able to interpret Starbucks’ ratios by comparing them to another company in the same industry. Current Ratio Starbucks has a current ratio of 0. 787 while its competitor, Caribou Coffee has a current ratio of 0. 723. A higher current ratio is considered to be better as it indicates a more liquid company. So Starbucks is more liquid than Caribou Coffee. Current Ratio = Current Assets Current Liabilities Starbucks = 1,696,487/2,155,566 = 0. 787 Caribou Coffee= 26,620,000/36,820,000 = 0. 23 Cash Debt Coverage Ratio Cash Debt Coverage Ratio provides information on financial flexibility.
This ratio allows for an investor to assess a company’s ability to repay its liabilities from net cash provided by operating activities without having to liquidate the assets employed in its operations. Starbucks cash debt coverage ratio is 67. 94% and Caribou Coffee has 41. 85%. This means that Starbucks is less likely to experience difficulty in meeting its obligations as they come due than Caribou Coffee. Starbucks: Cash Debt1,331,221,000. 00 = 1,331,221,000. 00 =67. 94% Coverage Ratio 3,059,761,000. 0 – 2,200,435,000. 00 $1,959,543,500. 00 2 Caribou Coffee: Cash Debt$11,970,000. 00 11,970,000. 00 =41. 85% Coverage Ratio 52,550,000. 00 – 47,900,000. 00 28,600,000.
Inventory Turnover Ratio As with the current ratio, the higher the inventory turnover ratio is for a company, the better. This ratio measures the liquidity of the inventory. Caribou Coffee has a greater inventory turnover ratio of 20. 9961 and Starbucks is only at 6. 0233. This shows that Starbucks is not moving its inventory as quickly as Caribou Coffee is. In the income statement, Starbucks states inventory at Lower of Cost or Market.
Primary average moving cost is used to allocate costs. Some items that may impact the decision for Starbucks to write-off long term purchase agreements for inventory may be things such as certain flavors of coffee beans or teas. If a certain kind of coffee bean or tea is not popular then Starbucks may not want to keep large amounts of it in its inventory due to expiration dates. So they would write-off their long term purchase agreements. Inventory agreed to be purchased in the future may be written off due to lack of quality, loss of market value, stoppage of use in operations, or a breach of ontract by the supplier.
Specific items that make up Starbucks’ inventory include coffee cups, coffee beans, lids, cutlery, napkins, straws, shopping bags; corrugated paper boxes tea leaves, milk, pastries, sandwiches or ice. Inventory Turnover Ratio = COGS/ [(Beg. Inventory + End. Inv. )/2] Starbucks: 3,999,124/ [(636,222+691,658)/2] = 6. 0233 Caribou Coffee: 215,420,000/ [(10,230,000+10,290,000)/2] = 20. 9961 Gross Margin Ratio When calculating the Gross Margin Ratio for Starbucks we used Total Net Revenues minus Cost of sales including occupancy costs divided by net revenues.