Financial Reporting Assignment 1

 Description of the different users Stakeholders of financial statements and their needs  Assessing the implications for users of financial statements  Explaining the legal and regula

FINANCIAL REPORTING: FINANCIAL STATEMENTS REGULATORY

FRAMEWORK & INTERPRETATION

Prepared for:

Lecturer, Mr Jun Alejo Bathan

Unit 10: Financial Accounting and Reporting

Assignment Title: Financial Statements Regulatory Framework & Interpretation

Banking Academy, Hanoi

BTEC HND in Business (Finance)

Prepared by: Maple Group

Ngô Thị Huyền Trang - Jess

Vương Thị Quỳnh Anh - Lynn

Nguyễn Phương Thảo - Key Nguyễn Thị Kiều Anh - Snow

Submitted: 4/10/2013

Table of Contents

EXECUTIVE SUMMARY 3

INTRODUCTION 4

1.1 Description the different users (stakeholders) of financial statements and their needs 5

1.1.1 Internal stakeholders 5

1.1.2 External stakeholders 6

1.2 Explanation the legal and regulatory influences on financial statements 7

1.2.1 Company Legislation – Company Act 2006 7

1.2.2 Partnership Act 1890 7

1.2.3 European Directive: 8

1.3 Assessing the implication for user 10

1.3.1 Liquidity ratios 10

1.3.2 Efficiency ratios 10

1.3.3 Profitability ratio 11

1.3.4 Debt and gearing ratio 11

1.3.5 Investment ratios 12

1.4 Explanation how different laws/regulations are dealt with by accounting and reporting standards 13

1.4.1 International Financial Reporting Standards (IFRSs) 13

1.2.2 UK Accounting Standards 13

4.1 Calculation accounting ratios to assess the performance and position of a business 14

4.2 Preparation a report incorporating and interpreting accounting ratios, including suitable comparisons 19

APPENDIX 21

REFERENCES 27

 Description of the different users (Stakeholders) of financial statements and their needs

 Assessing the implications for users of financial statements

 Explaining the legal and regulatory influences on financial statements

 Explaining how different laws/regulations are dealt with by accounting and reporting standards

 Calculation of accounting ratios to assess the performance and position of Starbucks

 Preparing a report incorporating and interpreting accounting ratios, including suitable comparisons

The report also have limitation in conducting analysis because there are some information is not available currently and the using of industry analysis method is limited due to the difficult

in find out information from foreign company

INTRODUCTION

In this report, our group is working in a financial consultancy firm as a client service manager providing advice and assistance to clients on financial accounting and general business issues You have been asked by Director of Finance in your company to prepare an analytical review of the financial position and reporting of a well-known company Starbucks

Starbucks Corporation is an American global coffee company and coffeehouse chain based in Seattle, Washington Starbucks is the largest coffeehouse company in the world (was founding in 1971),Starbucks locations serve hot and cold beverages, whole-bean coffee, micro ground instant coffee, full-leaf teas, pastries, and snacks with 20,891 stores in 62 countries, including 13,279 in the United States, 1,324 in Canada, 989 in Japan, 851 in the People's Republic of China, 806 in the United Kingdom, 556 in South Korea, 377 in Mexico,

291 in Taiwan, 206 in the Philippines, 179 in Turkey, 171 in Thailand, and 167 in Germany

In addition, Starbucks is an active member of the World Cocoa Foundation Starbucks expanded its long-term relationship with Maxim's Group to now operate Starbucks stores in Vietnam, with the first store in Ho Chi Minh City in early February 2013

This report will analyze deeply about the performance and position of Starbucks in the Vietnam market Moreover, provides information about legal and regulatory which influences financial statement from which shows the importance of finance statement to each user of business, company and the ways of using different ratios in assessing Starbucks' performance

by explaining the information from the financial statements

1.1 Description the different users (stakeholders) of financial statements and their needs

Starbucks is one of the largest coffeehouse company in the world Therefore, all users of Starbucks interested so much in financial statements of company because they base on data and information in these reports to assess development of Starbucks Each users have different requirements about data As a result, Starbucks has to prepare financial statements which provide sufficient information for stakeholders to satisfy their needs and wants There

are two types of stakeholders including internal and external users (Catherine, 2008)

1.1.1 Internal stakeholders

Internal stakeholders consist of Managers, Employees, and Shareholders

 Managers: These are the people appointed by the Starbucks’ owners to supervise the

day-to-day activities of the company; responsible for planning and directing the work

of a group of individuals and monitoring their work (Starbuck, 2012)

The manager of Starbuck is Howard Schultz He and others managers in

subsidiaries of Starbucks has direct relationship with the operation of organization

 Manager require financial statements to manage the affairs of the company by assessing its financial performance and position and taking important business decisions, adjust company’s strategies timely (Catherine, 2008) In financial statement

of Starbucks (2012), total revenue of 2012 is higher than 2011 (increase about $10 billion), meaning that manager of Starbucks implement business strategy well

 Employees: are human resources joining directly into the work for Starbuck

Employees need to know about information related to financial position of company, because their future careers and the level of their wages depend on it (Catherine, 2008) For Starbucks, employees are people are very important in creating product Employees of Starbucks also interested in financial stability and profitability of the company which also influences to their benefits If data in financial reporting of Starbucks is good, it expressed the company operate well From this information, employees can assess the ability of Starbuck in providing salaries, welfare policies (commodities discounts, medical insurance…) retirement benefits and employment opportunities (training programs, promotion…) for them

 Shareholders: are owners who hold shares of stock of Starbucks They interested in

information which help them assess how effectively management is performing its function, how profitable the company’s operations are and how much profit they can afford to withdraw from the business for their own use Based on evaluation through the figures from financial statements in annual reports, FMR, LLC - one of the main

shareholders of Starbucks can decide whether to continue to hold, sell or buy more shares (Starbuck, 2012)

1.1.2 External stakeholders

External stakeholder including trade contacts, providers of finance, and government

 Trade contacts include two types of stakeholders: suppliers and customers

 Suppliers are individuals or organizations who provide goods to the company on

credit (Catherine, 2008)

Yunnan Arabica coffee bean is company which supplies raw material (coffee bean) for Starbucks will need to consider the financial statements of the enterprises such as profitability….to ensure about Starbucks’ ability to pay its debts, and identify how much credit can safely be given for making decisions whether should make contract with Starbucks or not

 Customers are people who purchases goods and services provided by the

company (Catherine, 2008)

Starbucks’ customers need the guarantee from the company about the quality of products and services  They are concerned about financial statements which provide useful information about the reliability of the enterprise as confirm the capacity of the entity in terms of non-current assets or financial position to prove the strength of enterprise to meet any customers’ requirement to decide whether to continue buying product of company or not If Starbucks have high profit and high positive in competitive market, meaning that Starbucks provide high quality product, customer will trust in company to choose using their products

 Providers of finance include investors and creditors

 Investors is people who make investment into the company and expect to gain

financial returns (Catherine, 2008)

Starbucks’ investors are Capital World Investors, Northern Trust Corporation They are concerned about the risk and the return of their

investment Before making investment decisions, they need find out information about Starbucks such as assets, liabilities, historical business growth, share prices and financial strengths Based on this information in Starbucks’ financial statement, they can assess the ability of the business to pay dividends for them

 Creditors include present or potential creditors who have lent or may lend money

to a business (Catherine, 2008)

Bank of New York Mellon is one of Starbucks’ creditors They need

information from financial statements in order to identify whether their money can

be used effectively and ability to perform Starbucks’ commitment such as ensuring that Starbuck can keep up with interest payments and eventually to repay the money Starbucks has borrowed

 Government: The government makes rules in order to ensure that the company runs

its business legally and interested in the allocation of resources and therefore in the

activities of business entities (Catherine, 2008)

The Government Taxation Agency requires Starbucks to publish annual report, and

ensure that financial statements must be accurate to calculate tax payments of the enterprise such as business tax, VAT tax…

1.2 Explanation the legal and regulatory influences on financial statements

1.2.1 Company Legislation – Company Act 2006

Company Act is an Act of Parliament which regulates the workings of companies, stating the legal limits within which companies may do their business (BusinessDictionary, n.d.) Company Act 2006 was fully completed on October 2009 According Company Act

2006, limited liability companies must prepare the financial statement follow the requirement: prepare accounts annually for distribution for company’s shareholders and the account should show a “true and fair view” (Frost, 2010) In Company Act 2006, the director’s responsibilities are: the members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476 and the directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts In addition, company must prepare and published account annually

 By using Company Act 2006 financial statement of Starbucks to the Law firms will become easier This legal will not affect too much on the reporting Starbucks because

it based on the data after business, not on the segmentation of major customers Using

it help Starbuck make it easier to set up and run a company; and provide flexibility for the future

1.2.2 Partnership Act 1890

A partnership is established whenever two or more people set up in business together with the intention of sharing profits and losses and do not form either a limited Company or a Limited Liability Partnership (LLP) Even if they do not intend to form a partnership, if they enter into this type of relationship a partnership is formed

Partnerships formed under the Act are often unwieldy and can lead to disputes between partners For instance, under the default provisions of the Act:

- A partner is not obligated to participate in the running of the business in any way, which means that they do not have to turn up to work

- Partners cannot retire If a partner dies or decides to leave the partnership, the partnership must be dissolved, assets distributed equally, and then a new partnership (or other business) created The process is by no means simple, and can be extremely costly

- Partners cannot be expelled from a partnership

The Partnership Act 1890 (c.39) is an act of the UK Parliament, which governs the rights and duties of business people who do business with a common view of profit

It has a least membership of two and a maximum of unlimited since the year 2002 The most important influence of Partnership Act 1890 to accounting standard is the income allocation It requires loss or profit of partnership has to distribute to each partner, based on their proportion of capital contribution (Anon, 2009)

 By using Partnership Act 1890 Starbucks have the lack of formality that surrounds it

An agreement of Starbucks is drawn up to counteract the restrictions of the Partnership Act1890

1.2.3 European Directive:

The European Commission has released its proposals for a fourth money laundering directive (4th Directive) All countries in the European Union area must comply with the regulations, the rules of the alliance including UK The scope of activities

undertaken by legal professionals that are within the 4th Directive and the protection of legal professional privilege has not changed The key components of client due

diligence and the money laundering offences also stay the same such as:

The annual accounts are to comprise a balance sheet, a profit and loss account and the notes to the accounts, these documents constitute a composite whole The Directives lay down the principles which govern the drawing up of these documents

The Directives list the information which must be provided in the notes to the accounts The annual report must include a fair review of the development of the company's business and of its position

 The Directives provide for a system of auditing under which Starbuck must have their annual accounts audited by one or more persons authorized by national law to audit accounts Besides that, it’s still have some key changes about: Risk assessments,

enhanced due diligence, simplified due diligence, record keeping requirements,

minimum sanctions, the vexing issue of beneficial ownership

1.2.3 Generally Accepted Accounting Practice (GAAP)

Generally Accepted Accounting Practice (GAAP) is the common set of accounting principles, standards and procedures that companies use to compile their financial statements GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information (Investopedia, n.d.) In the UK, GAAP does not have any statutory or regulatory authority or definition unlike others countries such as US The term is mentioned rarely in legistation and only in fairly limited terms GAAP include four basic principles that influence on financial statement Four principles are:

 Historical cost principle: requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities (Luxottica, n.d.)

 Revenue recognition principle: requires companies to record when revenue is realized or realizable and earned, not when cash is received This way of accounting is called accrual basis accounting (Luxottica, n.d.)

 Matching principle: expenses have to be matched with revenues as long as it is reasonable to do so Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue Depreciation and Cost of Goods Sold are good examples of application of this principle (Luxottica, n.d.)

 Full Disclosure principle: amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information costs more to prepare and use Information is presented in the main body of financial statements, in the notes or as supplementary information (Luxottica, n.d.)

 With Starbucks Corporation, to meet the requirment of GAAP, company should use acquisition cost instead of using market value of good or product to prepare financial statement In addition, in income statement, the revenue of Starbucks have to include revenue in cash and revennue in account receivable Moreover, expense of company have to record when it happens instead of when finish work It means that, the expense of depreciation of equipment and machine in Starbucks Corporation have to include in income statement of company All above activities help Starbucks can meet the requirment of Generally Accepted Accouting Practice (GAAP)

1.3 Assessing the implication for user

Financial ratios are useful indicators of a firm's performance and financial situation Financial ratios can be used to analyze trends and to compare the firm's financials to those

of other firms In some cases, ratio analysis can predict future bankruptcy Financial ratios can be classified according to the information they provide (NetMBA, n.d.)

1.3.1 Liquidity ratios

Liquidity ratio is a class of financial metrics that is used to determine a company's

ability to pay off its short-terms debts obligations Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts (Anon, 2012)

 Current ratio is “a measure of the solvency or liquidity of your business”. The higher the current ratio, the better the capacity to meet short term financial

commitments

 Quick ratio “measures the level of all assets that can be quickly convertible into

cash and used to meet short term liabilities”.The higher the ratio, the higher the

level of liquidity for business (Anon, 2006)

Users: Investors, suppliers, creditors, shareholders

- Using to measure the capacity of Starbucks to meet the short term financial commitments Based on this data, investors and suppliers can consider whether continue invest in Starbucks or not

- Show how liquid is the current assets of Starbucks converted to cash comparing with the present current liability

1.3.2 Efficiency ratios

Efficiency ratios are ratios that are typically used to analyze how well a company uses its assets and liabilities internally (Anon, 2007)

 Receivables payment period measures the average number of days customers

take to pay their bills, indicating the effectiveness of credit and collection

policies of the business

 Inventory turnover illustrates “how well a company manages its inventory

levels” If inventory turnover is too high, it suggests that a company may be overbuilding its inventory or that it may be having issues selling products to

customers (Anon, 2007)

Users: Stakeholders, investors

Stakeholders, investors’ concern about the effectiveness of credit and collection policies

of the business and how well business manages inventory levels For example, based on this data from inventory turnover, stakeholders, investors can give suggestions for company that company such as if it too low, business can overbuilding its inventory, expand market to sell products to new customers

1.3.3 Profitability ratio

Profitability ratio is a class of financial metrics that are used to assess a business's ability

to generate earnings as compared to its expenses and other relevant costs incurred during

a specific period of time (Anon, 2012)

 ROE (Return on equity) “measures the rate of return on the money invested by

common stock owners and retained by the company thanks to previous profitable years It demonstrates a company’s ability to generate profits from stakeholders’ equity ROE show how well a company uses investment funds to generate

growth” (Kennon, n.d.)

 ROCE (Return on capital employed) “measures the profitability of a company

by expressing its operating profit as a percentage of its capital employed” A higher value of return on capital employed is favorable indicating that the company generates more earnings per dollar of capital employed A lower value

of ROCE indicates lower profitability (Anon, 2012)

 Net profit is a measure of the profitability of a venture after accounting for all costs (Anon, 2002)

 Asset turnover: Asset turnover “measures a firm's efficiency at using its assets

in generating sales or revenue” The higher number the better (Anon, 2002)

 Gross profit indicates how efficiently management uses labor and supplies in the production process (Anon, 2007)

Users: Employees, managers, government

- Indicating the efficiency and profitability of Starbucks’ capital investments

- Show for manager to know ability to generate profit from capital

- Based on profitability ratios, government can know control tax payable of

company

1.3.4 Debt and gearing ratio

Gearing ratio is a group of ratio which demonstrating the degree to which a firm's

activities are funded by owner's funds versus creditor's funds This ratio compares some

form of owner's equity (or capital) to borrowed funds Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds (Anon, 2013)

 Debt ratio: is “a measure of a company’s financial leverage” If the ratio is

greater than 1, the majority of assets are financed through debt If it is smaller

than 1, assets are primarily financed through equity (Anon, 2003)

 Gearing ratio (Capital gearing ratio): “measures the percentage of capital

employed that is financed by debt and long term financing” The higher the level

of gearing, the higher the level of financial risk due to the increased volatility of

profits (Anon, 2003)

 Cash flow ratio is a measure of how well current liabilities are covered by the cash flow generated from a company's operations (Anon, 2007)

Users: Suppliers

- Suppliers can identify the long-term financing of the business

- Suppliers can measure of Starbucks’ financial leverage or risk

 In order to easy give decision whether should continue supplies materials for Starbucks in the future or not

1.3.5 Investment ratios

Investment ratios are ratios that can be used by investors to estimate the attractiveness of

a potential or existing investment and get an idea of its valuation (Richard, 2012)

 P/E ratio: Price earnings ratio “is the measure of the share price relative to the

annual net income earned by the firm per share PE ratio shows current investors demand for the company share A high PE ratio generally indicates increases

demand because investors anticipate earnings growth in the future” (Anon, 2011)

 Dividend yield: “It is a measure of the ability of a company to maintain the level

of dividend paid out” The higher the cover, the safer of dividend is The higher P/E ratio is, the more willing market pay for company’s earning is, and vice versa

(Anon, 2008)

Users: Investors, Shareholders

- Know how many profit for investors/ shareholder can earn per share of Starbucks

- Know how much earning for each dollar invested in Starbucks

- Know how many times over the profits could be paid the dividend

 Identify risk and profits from your investment in Starbucks

1.4 Explanation how different laws/regulations are dealt with by accounting and

reporting standards

 The Companies Act 2006 is a piece of primary legislation that Starbuck largely applies to their companies directly Using it help Starbuck make it easier to set up and run a company; and provide flexibility for the future

 By using Partnership Act 1890 Starbucks have the lack of formality that surrounds it

An agreement of Starbucks is drawn up to counteract the restrictions of the Partnership Act1890

 The Directives provide for a system of auditing under which Starbuck must have their annual accounts audited by one or more persons authorized by national law to audit accounts Besides that, it’s still have some key changes about: Risk assessments, enhanced due diligence, simplified due diligence, record keeping requirements,

minimum sanctions, the vexing issue of beneficial ownership

1.4.1 International Financial Reporting Standards (IFRSs)

International Financial Reporting Standards (IFRSs) is a set of international accounting standards stating how particular types of transactions and other events should be reported

in financial statements IFRS are issued by the International Accounting Standards Board

IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced (IAS was issued from 1973 to 2000) (Investopedia, n.d.) Financial statements prepared under IFRSs are required to present the financial position, financial performance and cash flows of the entity

 As a result, financial statements of Starbuck prepared under IFRSs are required to present fairly like the requirement of Company Act This standard is very useful for Starbuck, it seem to be a national requirement, international benchmark and regulatory authorities for domestic and foreign companies

1.2.2 UK Accounting Standards

In current, UK Accounting Standards have four parts: The Financial Reporting Council (FRC), The Accounting Standard Board (ASB), The Financial Reporting Review Panel (FRRP) and The Urgent Issues Task Force (UITF):

 The Financial Reporting Council (FRC) is the UK's independent regulator for

corporate reporting and governance Its five key objectives are to promote: high quality corporate reporting; high quality auditing; high standards of corporate

governance; the integrity, competence and transparency of the accountancy profession; and its own effectiveness as a unified independent regulator In April 2006

it added the Board for Actuarial Standards to its stable (Glossary, n.d.) As a result, FRC is responsible for funding and ensures the smooth running of the standard setting process and has an important role in indicating accounts that do not meet the requirements of accounting standard and the company act

 The Accounting Standard Board (ASB): UK organization (similar to the US

Financial Accounting Standards Board) responsible for drafting and establishing accounting standards ASB is a subsidiary of Financial Reporting Council; one of its committees publishes the International Accounting Standards (Andrea, 2007) ASB has responsible in helping FRC in setting accounting standard for companies in UK

 The Financial Reporting Review Panel (FRRP): The Panel sought to ensure that

the annual accounts of public companies and large private companies comply with the requirements of the Companies Act 2006 and applicable accounting standards (FRC, n.d.) This panel has legal backing It means that if company is not follow the accounting standard, the panel may go to the courts

 The Urgent Issues Task Force (UITF): The UITF was disbanded on 2 July 2012 as

a result of the FRC Reform (FRC, n.d.) Its role is to assist the ASB in areas where an accounting standard or company Act provision already exists, but where unsatisfactory or conflicting interpretations have developed This system is able to act quickly when an authoritative ruling is urgently needed (Phillip, 2007)

 Starbuck will choose using UK accounting standard system, IFRSs or Company Act

to prepare their accountant Normally, Starbuck choose UK accounting standard and Company Act instead of IFRSs because those regulations are more simply and easier

to understand than IFRSs It helps accountant of Starbuck working easily in preparing financial statement for their company

4.1 Calculation accounting ratios to assess the performance and position of a business