Question

Starbucks Corporation is the premier roaster, marketer, and retailer of specialty coffee in the world, operating in 68 countries. Starbucks generates revenues through company-operated stores, licensed stores, and consumer packaged goods. In 2015, revenues from company-operated stores accounted for 79% of total revenues. Starbucks states that its retail objective is to be the leading retailer and brand of coffee and tea by selling the finest quality coffee, tea, and related products. In addition, the company strives to provide the Starbucks Experienceby exemplifying superior customer service and providing clean and well maintained stores. Part of this experience involves providing free internet service to customers while they are enjoying their food and beverages.

Requirements

1. How would the cost of internet service be reported by Starbucks and on which financial statement?

2. Suppose Starbucks receives a bill from its internet service provider but has not yet paid the bill. What would be the effect on assets, liabilities, and equity when Starbucks receives this bill?

3. What would be the effect on assets, liabilities, and equity when Starbucks pays its internet service bill?

4. Suppose Starbucks expects that the cost of internet service will increase by 4% in the coming year. What would be the impact on Starbucks’ net income? How might Starbucks overcome this impact?

Short answer

The cost of internet service is a part of operating expenses and impacts the net income of the company. To overcome this impact, the company may increase its revenue or lower other costs.

Step-by-step solution

Cost of internet

The cost of internet service is the selling and distribution expense and would be reported in the profit and loss statement under the operating expenses category.

Effect on assets, liabilities and equity without payment

If the bill has not been paid it would create a liability for Starbucks. Thus the liability section of Starbucks would increase. At the same time as the expense has been incurred the net income on the profit and loss account would be reduced by the same amount. So as result equity would also be reduced by the same amount because net income is part of the equity.

So unpaid bills would increase the liability and lower the equity value on the financial statements.

Effect on assets, liabilities and equity after payment

When the bill is paid, the liability would be written off. At the same time, cash would also reduce.

So payment of bills would reduce the liability and asset value on the financial statement.

Impact on net income

The increase in the cost of the internet would reduce the net income for Starbucks. To overcome this impact Starbucks may increase its selling price for the coffee product or reduce any other operating or direct expenses.