Starbucks 2007 Annual Report Download - page 46

Cash Management
The Company’s cash management system provides for the funding of all major bank disbursement accounts on a
daily basis as checks are presented for payment. Under this system, outstanding checks are in excess of the cash
balances at certain banks, which creates book overdrafts. Book overdrafts are presented as a current liability in
“Accounts payable” on the consolidated balance sheets.
Short-term and Long-term Investments
The Company’s short-term and long-term investments consist primarily of investment-grade marketable debt
securities as well as bond and equity mutual funds, all of which are classified as available-for-sale or trading.
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. Available-for-sale securities with
remaining maturities of less than one year and those identified by management at time of purchase for funding
operations in less than one year are classified as short-term, and all other available-for-sale securities are classified
as long-term. Unrealized losses are charged against net earnings when a decline in fair value is determined to be
other than temporary. Management reviews several factors to determine whether a loss is other than temporary, such
as the length of time a security is in an unrealized loss position, the extent to which fair value is less than amortized
cost, the impact of changing interest rates in the short and long term, the financial condition and near term prospects
of the issuer and the Company’s intent and ability to hold the security for a period of time sufficient to allow for any
anticipated recovery in fair value. 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.
Declines in fair value below the Company’s carrying value deemed to be other than temporary are charged against
net earnings. For further information on investments, see Notes 3 and 6. The carrying value of short-term and long-
term debt approximates fair value.
Derivative Instruments
The Company manages its exposure to various risks within the consolidated financial statements according to an
umbrella risk management policy. Under this policy, Starbucks may engage in transactions involving various
derivative instruments, with maturities generally not longer than five years, to hedge interest rates, commodity
prices, and foreign currency denominated revenues, purchases, assets and liabilities.
The Company follows Statement of Financial Accounting Standard (“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. For 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 net investment hedge, the effective portion of the derivative’s
gain or loss is reported as a component of OCI.
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. The Company classifies the cash flows from
hedging transactions in the same categories as the cash flows from the respective hedged items. Once established,
cash flow hedges are generally not removed until maturity unless an anticipated transaction is no longer likely to
occur. Discontinued or dedesignated cash flow hedges are immediately settled with counterparties, and the related
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