Introduction
The information relayed by financial statements is the mirror through which an entity is viewed by the owners, shareholders, creditors, the regulatory authorities (governments), potential investors and all other stakeholders. The information obtained from these financial statements forms a reliable basis for the interested parties to evaluate the efficiency, profitability, and general performance of the business in a periodic manner, usually annually, semi-annually or quarterly. This paper seeks to examine the usefulness of such financial statements as the income statement, balance sheet and cash flows for Starbucks Corporation.
The income statement is an analytical presentation of the total amount of revenues generated by the business over the year and the specific incomes and expenses that are attributed to the revenues. The net earnings/ loss usually indicate the amount of money earned or lost by the company over the year. The income statement for star bucks shows that the company made net profits of $ 2,757.4 million in 2015, which was higher than the profits of 2014 ($ 2,068.1 millions). This can be attributed to the increase in revenues which is accompanied by a minimal increase in the costs of sales. The net revenues generated by the business increase by $ 2,714.9 million against a $ 928.7 increase in the cost of sales. The consolidated statement of earnings for Starbucks Corporation for the year 2015, therefore, show increased sales revenues, net profits, reduced costs of sales and other expenses for the business. ("Starbucks Annual reports", 2016)
The decisions that can be made based on the statements of earnings for the company are those with a direct link to the profitability of the business. Such decisions would include determination of the necessary, avoidable and unnecessary costs in the business. In this decision, the business may decide which costs to continue incurring and which to avoid so that the business can remain profitable. The business may also decide which part of the business to invest more funds depending on the profitability. In this regard, the business will decide whether to invest more in the company-operated stores or the licensed stores or the CPG, foodservice and others.
The balance sheet is a presentation of the company's financial position at a specific time. It presents the total assets, liabilities and equity attributed to the business. It, therefore, shows how stable or unstable a business is. The balance sheet for Starbucks shows that the total assets held by the business as at the end of 2015 ($ 12,446.1million) exceed the total liabilities owing at the same time ($ 6,626.3 million). This is an indicator for relative stability in terms of the business' ability to meet its liabilities out of its assets. This also represents a favorable debt to equity ratio of 0.5. This implies that the total assets are approximately twice the value of the liabilities.
Debt to equity ratio = total liabilities/ Total assets
=6626.3/12446.1
= 0.5.
("Starbucks Annual reports", 2016)
The kinds of decisions that can be made based on the information contained in the balance sheet include the level of debt financing. Despite the fact that debt financing will be linked with the business profitability, the business can evaluate the ability to repay the debt obligations from the assets held by the company; profitability is not always guaranteed but the debt has to be repaid. The balance sheet can also be useful to other parties such as creditors and potential investors. Creditors and lenders will evaluate the asset base and any existing liabilities to assess the ability of the business to repay its debts. Potential investors will also evaluate the company's assets, liabilities and capital structure to estimate how secure their investments will be in the company. (Drake, 2015).
Therefore, creditors and lenders can decide whether to lend or not lend while investors will decide whether or not to invest in the company. The business may apply information from the balance sheet for the purpose of budget management. For example, if the business is not making much profit, it could be due to high leverage which attracts more interests and thus, the management may use such information to assess the business' ability to afford other debts before undertaking. The business can also make clearance and investment decisions out of information contained in the balance sheet. (Drake, 2015).
The statement of cash flows shows how the business generated and used its cash (cash inflows and outflows). The cash flow statement of Starbucks shows that the total cash generated from operating events is $ 3,749.1, investing activities $ (1,520.3) and financing activities $ (2,256.5) million. It shows that the company's major source of operating income is the net income from business operations. A significant amount of the cash generated is applied to investing activities; additional property, plant, and equipment, $1,303.7 million). A significant amount of the cash utilized by financing activities was $ 1,436.1 million for repurchase of common stock. ("Starbucks Annual reports", 2016)
The information contained in the cash flow statements can be used to arrive at certain business decisions such as the acquisition of capital equipment. Such acquisition will depend on the financial muscles of the company and the ability of that asset to generate more cash. Cash flow statements also present the business with better key performance indicators for financial performance. It creates the need to generate more cash for the business and this can be achieved by several means such as:
Increasing the rate of collections from the debtors.
Negotiating for longer credit periods with less interest rate from the creditors.
These decisions can help the business generate more cash to meet its operations needs and also increase profits. The business may also decide to cut the unnecessary expenses, get rid of nonperforming assets, and pump more investments into the performing business sectors. (Drake, 2015).
The financial statements are only presentations of the internal business operations and therefore give a lot of focus and emphasis on the business' internal environment. The profitability of the business, cash flows, assets, liabilities and capital structures presented in the statements are critical in decision making. However, the sole reliance on the financial statements for the purposes of decision making is crippled by the absence of external information. They don't present market information such as the existing and potential competitors, government regulations and the recent technological developments. The absence of this external information serves as a shortcoming for the sole reliance on financial statements in managerial decision making.
References
Drake, P. (2015). Financial Ratio Analysis. Retrieved from http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf
Starbucks Annual reports. (2016). Starbucks Coffee Company. Retrieved 15 May 2016, from http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsannual
