Starbucks has been working on a closely guarded secret for 20 years â€“ Via Ready Brew instant coffee. A month after its launch, Nestle, the maker of Tasterâ€™s Choice, has begun an aggressive campaign against the new interloper. This campaign includes free samples of Nescafeâ€™s â€œsticks,â€ direct mailings, and Web commercials.
- How should Nestle account for the free samples of coffee?
- Starbucks rolled out Via after 20 years of secretive internal research and development (R&D). Assuming that Starbucks spent a million dollars each year for the R&D, how would this be reflected in their financial statements?
- Use some of the following facts laid out in the article:
Assume that Starbucks and Nestle are the only major companies in the instant coffee industry, which generates $21 billion worldwide in annual sales with 5% in the U.S.
Starbucks sells a 12-pack of single-serve pouches for $9.95.
Nestle sells seven 12-packs of single-serve pouches for $12.16.
If Nestle sells seven 12-packs for every one 12-pack sold by Starbucks, what amount of U.S. sales would each company share? How many pouches should be produced by each company to meet this demand?
SOURCE: Andrejczak, M. â€œInstant-Coffee War: Nestle Takes Aim at Starbucks,â€ Wall Street Journal â€“ Market Watch (Retrievable online at http://www.marketwatch.com/story/instant-coffee-war-brewing-nestle-vs-starbucks-2009-11-18)
In the third quarter of 2009, Sears Holding Corporation narrowed its losses from $146 million in the previous quarter to $127 million. Despite this, shares of Searsâ€™ stock have almost doubled during 2009.
- The article mentioned that because of inventory management, the companyâ€™s gross margin widened by 0.4 percentage points to 27.2%. What are some of the things that were done? Explain how each of these examples you cited would affect the financial statements?
- The article mentioned that Sears cut $101 million of selling, general and administrative expenses. Where does this appear in the financial statements?
- One of the things that Sears has done to increase sales is to bring layaway back to its K-Mart stores. Explain how revenue recognition works in a layaway situation, where a deposit is required to hold merchandise at the store until it is fully paid for. Include journal entries, where possible, in your explanation example.
SOURCE: Cheng, A. â€œSears Loss Narrows As it Controls Inventory, Expenses,â€ Wall Street Journal â€“ Market Watch (Retrievable online at http://www.marketwatch.com/story/sears-loss-narrows-on-cost-controls-2009-11-19)
New rules were announced on November 16, 2009, regarding stricter rules to govern fees and expiration dates for gift cards, gift certificates, and general use pre-paid cards. While the rules have not be enacted and are open for comment for the next month, proposals include the prohibition of dormancy fees for a year and the extension of expiration periods to at least five years from the time the funds were loaded and the card sold and issued.
- How would you classify gift cards on the financial statements?
- If a $50 gift card has a five year period before it expires, how should the company selling the card recognize income on it?
- Under the proposed changes, issuers can still charge inactivity fees for gift cards, are limited to one fine per month after a 12-month period. In addition, monthly maintenance fees, balance-inquiry fees and re-loading fees will be allowed. How should these fees be recorded by the issuing companies?
SOURCE: Jaffe, C. â€œNo Gifts, Please,â€ Wall Street Journal- Market Watch (Retrievable online at http://www.marketwatch.com/story/gift-card-fees-keep-on-giving-to-card-issuers-2009-11-18)
The South Africa-based company, Harmony Gold, is having problems securing ongoing funding after using up more than $1 billion U.S. Its latest quarterly report shows that the company is grappling to produce free cash flow.
- What is free cash flow and why is this a worry for the company?
- With respect to free cash flow, why was it a good sign to analysts that Harmony paid its first dividend in five years on September 21, 2009?
- Explain each of the following in terms of helping or hurting Harmonyâ€™s free cash flow position:
- Cash raised from selling residual shares in Gold Fields, after an earlier bid for the company failed.
- Incremental cash increases earned from the rising price of gold sales
- Significant projects to replace aging assets used in the mining process
SOURCE: Sergeant, B. â€œFor Harmony Gold, Free Cash Flow Remains Elusive,â€ Mineweb â€“ Gold News (Retrievable online at http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=91685&sn=Detail)
Marriott International, the well-known hotelier, saw operating losses in its third quarter of 2009, as a result of its venture to move into financing time-shares during a slowing real estate market. In addition, the sluggish economy has not helped its primary business segment that caters to cash-based lodging for business and leisure travelers. As a result, Marriottâ€™s credit profile shows a somber â€˜BBB-â€˜ debt rating assigned to its long-term debt, which some describe as on the border between investment and junk bond status. In fact, some analysts are worried that Marriott may violate its key loan covenant: its leverage ratio.
- What is a junk bond?
- Why is this borderline rating a bad thing for Marriott?
- Explain what a loan covenant ratio is. Assuming that Marriottâ€™s covenant is tied to either the debt to equity ratio or the cash debt coverage ratio, describe how aggressively managing costs and accelerating debt reduction would help Marriott avoid a violation of its covenant.
SOURCE: Phillips, D. â€œTimeshare Business Unwelcome Guest at Marriott International,â€ BNET â€“ Companies in the Buzz (Retrievable online at http://industry.bnet.com/travel/10003824/timeshare-business-unwelcome-guest-at-marriott-international/)
In an 11th-hour effort to avoid filing for Chapter 11 bankruptcy, commercial lender CIT Group Inc. offered its bondholders a debt exchange. The exchange offer expired on October 29, 2009. According to this exchange plan, CIT bondholders of older notes would receive between $700 and $900 in new debt plus between 0.41 and 3.26 of new preferred shares for every existing $1,000 bond tendered.
- Explain how this exchange would benefit CIT Group Inc. What are the potential costs or benefits for the bondholder?
- Assume that you are a bondholder that takes advantage of the exchange. You hold 5 bonds and exchange them for $800 plus 3 shares of new preferred stock when the stock has a stated value of $1.20 per share. What journal entry would you make?
- Assume the same information as in question 2 and make the journal entry that CIT Group Inc. would record on the exchange date.
SOURCE: Blandeburgo, B. â€œCIT Offers Debt Exchange, Draws Up Bankruptcy Plans,â€ Money Morning (Retrievable online at http://www.moneymorning.com/2009/10/03/cit-banking/)