Absorption Costing the Financial Results for Starbucks

Absorption Costing

The financial results for Starbucks and McDonalds over the past couple of years are as follows:

Starbucks

McDonalds

% Change

% Change

Revenue

COGS

AR

Inventory

This analysis shows that Starbucks has seen its revenues grow faster than its cost of goods sold, which is normally taken as an encouraging sign. When firms are able to grow their margins, they are able to have better bottom line profitability, and it also shows that the company's market power is improving. For McDonalds, the COGS grew at a slightly faster rate than the revenues. This means that to a minor extent, McDonalds was less able than Starbucks to pass along cost increases in factor inputs than Starbucks was last year.

An interesting point of analysis is that Starbucks saw all of its balance sheet line items increase much more quickly last year than the revenue or COGS. The receivables, payables and inventory increased fairly rapidly, indicating perhaps a change in policies, or simply that the company was facing some challenges at the end of the year that will show more clearly on the income statement in the next year.

There are significant links, after all, between the income statement and balance sheet. The figures on the balance sheet are driven by the income statement. We know that the income statement is temporary, capturing just a snapshot in time. The balance sheet is a current record of the company's financial condition and this condition is affected by the buildup effects of the income statements over the years.

For McDonald's, the growth in the balance sheet line items is fairly reasonable, all things considered. The growth rate of these items is in line with the growth in revenue and COGS. This is expected, and bodes well for the company's cash flow to have better stability. Remember than rapid growth in an item like receivables means that the company is not collecting on its bills as quickly. Growth in payables means it is not paying its bills as quickly. Often, if a company cannot collect as quickly it will delay payments to ensure a stable amount of cash on hand.