Starbucks 2002 Annual Report Download - page 13

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 29, 2002, September 30, 2001,
and October 1, 2000
Note 1: Summary of Significant Accounting Policies
Description of Business
Starbucks Corporation (together with its subsidiaries,
“Starbucks” or the “Company”) purchases and roasts high-
quality whole bean coffees and sells them, along with fresh,
rich-brewed coffees, Italian-style espresso beverages, cold
blended beverages,a variety of pastries and confections, coffee-
related accessories and equipment, a selection of premium teas
and a line of compact discs primarily through its Company-
operated retail stores. Starbucks sells coffee and tea products
through other channels of distribution, and, through certain of
its equity investees, Starbucks also produces and sells bottled
Frappuccino®and Starbucks DoubleShot™coffee drinks and a
line of premium ice creams. These non-retail channels are
collectively known as “Specialty Operations.”The Company’s
objective is to establish Starbucks as the most recognized and
respected brand in the world. To achieve this goal, the
Company plans to continue rapid expansion of its retail
operations, grow its Specialty Operations and selectively
pursue other opportunities to leverage the Starbucks brand
through the introduction of new products and the
development of new distribution channels.
Principles of Consolidation
The consolidated financial statements reflect the financial
position and operating results of Starbucks, which includes
wholly owned subsidiaries and investees controlled by
the Company.
Investments in entities which the Company does not control,
but has the ability to exercise significant influence over
operating and financial policies, are accounted for under the
equity method. Investments in entities in which Starbucks
does not have the ability to exercise significant influence are
accounted for under the cost method.
All significant intercompany transactions have been eliminated.
Fiscal Year End
The Company’s fiscal year ends on the Sunday closest to
September 30. The fiscal years ended September 29, 2002,
September 30, 2001, and October 1, 2000, each included
52 weeks.
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses.Actual results may differ from
these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a
maturity of three months or less at the time of purchase to be
cash equivalents.
Cash Management
The Company’s cash management system provides for the
reimbursement of all major bank disbursement accounts on a
daily basis. Checks issued but not presented for payment to the
bank are reflected as “Checks drawn in excess of bank balances”
on the accompanying consolidated financial statements.
Short-term Investments
The Company’s short-term investments, which generally have
maturities of more than three months and less than one year,
consist primarily of investment-grade marketable debt and
equity securities as well as bond and equity mutual funds, all
of which are classified as trading or available-for-sale.Trading
securities are recorded at fair value with unrealized holding
gains and losses included in net earnings. Available-for-sale
securities are recorded at fair value, and unrealized holding
gains and losses are recorded, net of tax, as a separate
component of accumulated other comprehensive income.
Unrealized losses are charged against net earnings when a
decline in fair value is determined to be other than temporary.
Realized gains and losses are accounted for on the specific
identification method. Purchases and sales are recorded on a
trade date basis.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents approximates
fair value because of the short-term maturity of those
instruments. The fair value of the Company’s investments in
marketable debt and equity securities as well as bond and
equity mutual funds is based upon the quoted market price on
the last business day of the fiscal year.
For equity securities of companies that are privately held, or
where an observable quoted market price does not exist, the
Company estimates fair value using a variety of valuation
methodologies. Such methodologies include comparing the
security with securities of publicly traded companies in similar
lines of business, applying revenue multiples to estimated
future operating results for the private company and estimating
discounted cash flows for that company. For further
information on investments, see Notes 4 and 7. The carrying
value of long-term debt approximates fair value.
Derivative Instruments
The Company manages its exposure to foreign currency risk
within the consolidated financial statements according to a
hedging policy. Under the policy, Starbucks may engage in
transactions involving various derivative instruments with
maturities generally not longer than five years, to hedge assets,
liabilities, revenues and purchases denominated in foreign
currencies.
The Company follows Statement of Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended and
interpreted, which requires that all derivatives be recorded on
the balance sheet at fair value. The accounting for changes in
the fair value of derivative instruments depends on the
intended use and resulting designation. The Company
designates its derivatives based upon the criteria established by
SFAS No.133. For a derivative designated as a fair value hedge,
the gain or loss generated from the change in fair value is
recognized in net earnings in the period of change together
with the offsetting loss or gain on the hedged item. For a
derivative designated as a cash flow hedge, the effective portion
of the derivative’s gain or loss is initially reported as a
component of other comprehensive income (“OCI”) and
subsequently reclassified into net earnings when the hedged
exposure affects net earnings. For a derivative designated as a
net investment hedge, the effective portion of the derivative’s
gain or loss is reported as a component of the foreign currency
translation adjustment, a component of OCI. For a derivative
not designated as a hedging instrument, the gain or loss is
recognized in net earnings in the period of change.
Cash flow hedges related to anticipated transactions are
designated and documented at the inception of each hedge by
matching the terms of the contract to the underlying
transaction. Once established, cash flow hedges are generally
not removed until maturity. The Company classifies the cash
flows from hedging transactions in the same category as the
cash flows from the respective hedged items.
Forward contract effectiveness for cash flow hedges is
calculated by comparing the fair value of the contract to the
change in value of the anticipated transaction using forward
rates on a monthly basis. For net investment hedges, the spot-
to-spot method is used to calculate effectiveness. Any
ineffectiveness is recognized immediately in “Interest and
other income, net” on the accompanying consolidated
statements of earnings.
Inventories
Inventories are stated at the lower of cost (primarily moving
average cost) or market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less
accumulated depreciation. Depreciation of property, plant and
equipment, which includes assets under capital leases, is provided
on the straight-line method over estimated useful lives,generally
ranging from two to seven years for equipment and 30 to 40