Review the Operating Activities section of Starbuck’s Consolidated Statements of

Question

Review the Operating Activities section of Starbuck’s Consolidated Statements of Cash Flows.

a.    Explain why the change in the cash balance does not equal net earnings [net income] by answering each of the following questions:

b.    Which balance sheet account houses the net earnings amount?

c.     Net cash used by investing and financing activities are shown on the Statement of cash flows. Why are these activities excluded from the earning statement?

d.    Do any of the investing or financing activities affect the Retained Earnings account? If so, list the activities that affect the balance of the Retained Earnings account.

Based on your answers to questions 7a. through 7c, explain why the change in the cash balance does not equal net earnings [net income].

Explanation / Answer

A) Net income is the revenues recognized in a reporting period, less the expenses recognized in the same period. This amount is generally calculated using the accrual basis of accounting, under which expenses are recognized at the same time as the revenues to which they relate. This basis of accounting calls for the use of expense accruals to accelerate the recognition of expenses that have not yet been paid, as well as the use of prepaid expenses to defer the recognition of costs that have not yet been consumed. In addition, sales are recognized as they are earned, rather than when the associated amounts of cash payments from customers are received. The result is a net income figure that does not reflect the amount of cash actually consumed or generated in a period.

Net cash flow is the net change in the amount of cash that a business generates or loses during a reporting period, and is usually measured as of the end of the last day in a reporting period. Net cash flow is calculated by determining changes in ending cash balances from period to period, and is not impacted by the accrual basis of accounting.

Given these descriptions of net income and net cash flow, the key differences between net income and net cash flow are:

B)The Balance Sheet is the financial statement that summarizes the value of an entity’s resources and the claims on those resources at any given time. Balance Sheet accounts start accumulating their balances from the beginning of the entity and continue until the end. This contrasts with the Income Statement whose accounts are reset to zero at the end of each fiscal (business) year

Assets – Assets are items of value that are owned by the business and their value is expected to last beyond the current fiscal (business) year.

Liabilities are essentially debts, they are agreements to delay payments and so, are sources of funds because they provide a way to acquire or pay for goods and services without a direct transfer of cash at the time of the exchange.

Equity (Owners Equity) is a source of funds through direct owner investment (stock or owners capital accounts or owner “re-investment” (retained earnings) when some or all of the income from the previous year is retained by the business rather than distributing it to the owners.

The Balance Sheet does not contain any of the same accounts as the Income Statement, but it does summarize the Income Statement on one line called “Net Income” that is inserted (without an account #) at the end of the Equity Section of each Balance Sheet. The Net Income entry completes the Accounting Equation for the Balance Sheet: Assets = Liabilities + (Total) Equity (Owners Equity + Net Income)

C)The financing activity in the cash flow statement focuses on how a firm raises capital and pays it back to investors through the capital markets. These activities also include paying cash dividends, adding or changing loans, or issuing and selling more stock. This section of the statement of cash flows measures the flow of cash between a firm and its owners and creditors. A positive number is going to indicate that cash has come into the company, which boosts its asset levels. A negative figure indicates when the company has paid out capital, such as paying off long-term debt or making a dividend payment to shareholders.

Examples of more common cash flow items stemming from a firm’s financing activities are:

Items that may be included in the investing activities line item include the following:

If a company is reporting consolidated financial statements, the preceding line items will aggregate the investing activities of all subsidiaries included in the consolidated results.

The cash flows from investing activities line item is one of the more important items on the statement of cash flows, for it can be a substantial source or use of cash that significantly offsets any positive or negative amounts of cash flow generated from operations. It is particularly important in capital-heavy industries, such as manufacturing, that require large investments in fixed assets.

D)

Retained earnings are the portion of a company's income that management retains for internal operations instead of paying it to owners in form of dividends. The statement of retained earnings, a basic financial statement under generally accepted accounting principles (GAAP) rules, explains changes in retained earnings over the reporting period - usually the fiscal year. Retained earnings are calculated by adding net income and subtracting dividends from the balance of retained earnings at the beginning of the period.

For example: If you had $5000 when the reporting period started and at the end of the period you realized $4000 in net income and paid out $2000 in dividends, your retained earnings at the end of the period will be:

Retained Earnings = Beginning Balance + Net Income – Dividends

Retained Earnings = $5000 + $4000 - $2000 = $7000.

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