annual reports for The Coca-Cola Company and PepsiCo

·         FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA

Executive Summary
This report compares two dominant companies, PepsiCo and Coca-Cola, in soft
drink/beverage industry in order to recommend the better company for investment. The
introduction covers soft drink/beverage industry economics and different strategies employed by
each company. The financial analysis covers both companies’ common-size income statements
and balance sheets, comparative income statements and balance sheets, and various financial
statement ratios such as liquidity, capital structure and solvency, return on investment, operating
performance, asset utilization and market measures from year 2004 to year 2008. The
conclusions are drawn based upon results of financial analysis. A recommendation is given at the
end of the report.
Both PepsiCo and Coca-Cola are strong leaders in the highly profitable soft
drink/beverage industry. Coca-Cola owns the best-known brand worldwide, whereas PepsiCo
also has great brand-name reorganization but is more diversified than Coca-Cola. From year
2004 to year 2008, PepsiCo achieved slightly better growth rate in sales and net profit, whereas
Coca-Cola have maintained better profit margin with lower cost of sales. PepsiCo posed lower
short-term liquidity risk to its investors compared to Coca-Cola. Both companies exhibited low
long-term solvency risk with PepsiCo’s risk being slightly higher than Coca-Cola’s. PepsiCo’s
overall asset utilization was more efficient than Coca-Cola. Both companies experienced a
similar level of investors’ confidence and stock pricing. Both companies’ stocks are dividend
generating stocks, but Coca-Cola had higher dividend yield and dividend payout rate. CocaCola’s higher profit margin and dividends are certainly very attractive to a potential investor, but
PepsiCo’s growth potentials, business diversification, low short-term liquidity risk, low longterm solvency risk, good return on investment and efficient asset utilization definitely make the
company’s stock a better investment choice.

Introduction
Soft Drink/Beverage Industry
The soft drink/beverage industry is dominated by two major competitors, PepsiCo and
Coca-Cola. The industry is highly profitable, with an average return on assets rate of 14.70%,
much higher than average return on assets rate for S&P 500 companies of roughly 7.00%. In
spite of market maturity and saturation during recent years in the United States, the growth in
international market is very strong and promising. Both PepsiCo and Coca-Cola had large market
shares, dominated distribution channels, well-established brand names and consumer loyalty.
And both companies possess their own secrete formulas. All of these serve as entry barriers that
make it very difficult for a new company to enter soft drink/beverage industry. These high entry
barriers also protect the profitability of the industry.

PepsiCo vs. Coca-Cola Strategies
The competition between PepsiCo and Coca-Cola is intense, but both companies have
successfully avoided price competition in order to maintain high profit margin. Instead, both
companies have focused on improving brand images through effective advertising efforts and
marketing campaigns, and reducing costs and expenses by improving quality of operation and
management. According to Bloomberg BusinessWeek, Coca-Cola remains the best globally
recognized brand across all industries for years, while PepsiCo’s brand ranked number 26 in year
2008. Thus, Coca-Cola is able to charge premiums for its syrup concentrates due to its larger
market shares and better brand-name recognition. In order to compete against Coca-Cola and
increase revenue, PepsiCo has diversified its businesses into other markets such as snacks, chips
and breakfast food, with its core business focusing on soft drink.
Objectives
The main objectives of this report are to compare two major players in soft
drink/beverage industry, PepsiCo and Coca-Cola, and to make recommendation for investment.
The analysis will be made based on each company’s common-size income statement, commonsize balance sheet, comparative income statement, comparative balance sheet and financial
statement ratios from year 2004 to year 2008.

Financial Analysis

Common-size Analysis
Common-size Income Statement Analysis
The common-size income statement shows PepsiCo’s cost of sales to sales percentage
rose slightly from 43.31% in year 2004 to 47.05% in year 2008 with a five-year average of
44.89%. Coca-Cola’s five-year average cost of sales to sales percentage was only 35.26%, much
lower than PepsiCo. Coca-Cola was able to obtain higher gross profit margin with lower cost of
sales to sales percentage, the result of its stronger pricing power than PepsiCo and other soft
drink companies. Coca-Cola is able to charge premiums for its syrup concentrates due to its
larger market shares and better brand-name recognition in soft drink/beverage industry.
PepsiCo’s slightly increasing trend of cost of sales as a percentage of sales from year 2004 to
year 2007 should not be a concern, but there was a relatively larger increase to 47.05% in year
2008 from 45.70% in previous year. According to PepsiCo’s Management's Discussion and
Analysis, this was due to “the unfavorable net mark-to-market impact of their commodity
hedges”.
PepsiCo and Coca-Cola’s five-year average selling, general and administrative expenses
to sales percentages are 36.85% and 37.61% respectively. With only slightly higher selling,
general and administrative expenses as a percentage of sales than its rival PepsiCo, Coca-Cola
was able to maintain higher operating profit margin and net profit margin from its higher gross
profit margin. PepsiCo’s net profit margin averaged at 13.84%, 6.83% less than Coca-Cola’s
average net profit margin of 20.67%. In year 2008, PepsiCo’s profit margin decreased to
11.89%. According to PepsiCo’s Management's Discussion and Analysis, reduced profit margin
in year 2008 was caused by “unfavorable net mark-to-market impact of their commodity hedges,
the absence of the tax benefits recognized in the prior year, their increased restructuring and
impairment charges and their share of Pepsi Bottling Group 's restructuring and impairment
charges”.

Comparative Balance Sheet Analysis
PepsiCo’s five-year average total current assets growth rate was 10.13%, higher than its
average total short-term liabilities growth rate of 8.77%, consistent with the common-size

analysis of the company’s capability to cover short-term liabilities with its current assets. Its rival
Coca-Cola’s higher average short-term liabilities growth rate of 13.38% than its average current
assets growth rate of 11.22% was also consistent with the common-size analysis of the
company’s higher risk in short-term liabilities coverage.
PepsiCo’s account and notes receivable grew 10.69% on average each year, faster than its
average sales growth rate of 9.92%. This could indicate a slight increase in number of days it
takes for the company to collect from its customers. With an average growth rate of 12.36%
yearly, PepsiCo’s inventories also grew fast than its sales. This could be the result of an increase
in number of days needed to sell its inventories over years.
On average, PepsiCo’s property, plant and equipment grew 8.40% yearly, supporting its
average sales growth rate of 9.05%. But long-term debt grew 39.87% on average each year. The
debt seemed to grow too fast in effort to finance its property, plant and equipment growth. This
shows PepsiCo relied more and more heavily on debt financing toward year 2008.
PepsiCo’s total liabilities growth rate averaged at 13.69%, whereas total liabilities and
shareholder’ equity growth rate only averaged at 7.57%. This also signals the company’s
elevated long-term solvency risk.
Financial ratio analysis
Liquidity
Current Ratio and Acid-test Ratio
PepsiCo’s five-year average current ratio of 1.25 and acid-test ratio of 0.89 were better
than Coca-Cola’s 0.99 and 0.66, indicating PepsiCo had a larger margin of short-term assets to
cover its short-term liabilities and thus was less risky in short-term liquidity.
PepsiCo’s current ratio from year 2004 to year 2008 always stayed well above 1.0. A
current ratio under 1.0 suggests a company experiencing possible difficulties meeting its shortterm obligations and having a high level of potential liquidity risk. Thus, PepsiCo did not have
much short-term liquidity risk. The trend of PepsiCo’s acid-test ratio was consistent with the
trend of its current ratio, indicating its inventory level remained relatively stable over years.

The five-year average current ratio of Coca-Cola was roughly 1 (0.99). This should raise
some concerns whether the company was in good financial health to pay off its short-term
obligations. The trend showed that current ratio of the company decreased from 1.10 at the end
of year 2004 to 0.92 at the end of year 2007. There was a slight increase to 0.94 at the end of
year 2008 from the previous year. Considering Coca-Cola as a solid company with a 9.05%
average sales growth rate and a 6.22% average net income growth rate each year, we can
speculate that the company was well aware its short-term financial health and would make an
effort to bring its current ratio above 1 in order to reduce its short-term liquidity risk. As a matter
of fact, Coca-Cola’s current ratio did increase dramatically in year 2009 to 1.28 at the year end.
But the effort made to improve current ratio should not be the only reason of such a large
increase. Another factor of this dramatic increase in current ratio could be recession in year 2009
when the company experienced some degree of difficulties in selling its inventories or collecting
cash from accounts receivable. The trend of acid-test ratio of Coca-Cola highly correlated with
the trend of its current ratio, decreasing from 0.81 at the end of year 2004 to 0.58 at the end of
year 2007, followed by a slight increase to 0.62 at the end of year 2008. Further increase of acidtest ratio to 0.9 in year 2009 supports the speculation of Coca-Cola making an effort to improve
financial health by increasing its current assets to current liabilities ratio.
Collection Period
The collection period measures how many days that accounts receivable are outstanding.
PepsiCo and Coca-Cola had similar collection period, 36.70 and 36.59 on average respectively.
Both companies had longer collection period than 30 days. PepsiCo and Coca-Cola sell syrup
concentrates mainly to their bottling companies rather than directly through retail channels. This
allows both companies to grant their business partners more favorable payment terms than
average. The collection period was relatively steady with a very slight increasing trend from year
to year for both companies. The healthy business cycle and relationship with their major
customers, bottling companies, made this minor fluctuation less of a concern as the collection
period stayed within a certain range. Overall, the collection period was stable and predictable.

Market Measures

Price-to-earnings Ratio and Earnings Yield
PepsiCo’s five-year average price-to-earnings ratio was 20.30, slightly lower than CocaCola’s 21.34. This indicates Coca-Cola’s investors had slightly higher expectations to the
company from year 2004 to year 2008, and thus were willing to pay a little bit more to acquire
the company’s stock. On the other hand, PepsiCo’s relatively lower price-to-earnings ratio
presented a good buying opportunity to a potential investor when the company demonstrated
better liquidity, return on investment and asset utilization than Coca-Cola.
Earnings yield is the inverse of price-to-earnings ratio. PepsiCo’s slightly higher fiveyear average earnings yield 4.96% than Coca-Cola’s 4.70% indicates PepsiCo generated a bit
more earnings than Coca-Cola on each dollar invested. This once again presented a good reason
to acquire PepsiCo’s stocks as it was properly priced in terms of earnings yield in those years.
Dividend Yield and Dividend Payout Rate
Coca-Cola delivered average dividend yield rate of 2.59% and dividend payout rate of
55.08%, whereas PepsiCo had relatively lower dividend yield rate of 1.99% and dividend payout
rate of 38.74% on average. It was definitely an added bonus to Coca-Cola’s investors to get
much more dividends out of their investments. But PepsiCo’s dividend yield and payout were
good and strong as well, even though Coca-Cola’s were much better.
Price-to-book
PepsiCo’s average price-to-book ratio was 6.86, slightly higher than Coca-Cola’s average
price-to-book ratio of 6.24. This measure indicates that PepsiCo’s investors paid slightly higher
price for its stocks due to relatively higher expectation on the company. PepsiCo’s price-to-book
jumped to 8.49 in 2008 due to investors’ confidence into the company.

Conclusions and Recommendation for Investment
Both PepsiCo and Coca-Cola are strong industry players in soft drink/beverage industry.
From year 2004 to year 2008, Coca-Cola’s sales grew 9.05% each year on average and net profit
grew 6.22% each year on average. PepsiCo achieved even better average sales growth rate of
9.92% yearly and average net profit growth rate of 8.88% yearly. As the soft drink/beverage
market approaches maturity and saturation, the rapid growth and potential strength in
international markets keep earnings strong for both companies.
With a common understanding to avoid price competition in order to protect profitability,
both companies spent a great deal of effort to boost their brand images domestically and
internationally through advertisement and effective marketing. Coca-Cola, possessing the best
recognized brand worldwide, incurred a lower average cost of sales to sales percentage of
35.26% compared to PepsiCo’s average 44.89%, by charging premiums for its syrup
concentrates and by reducing the cost of raw ingredients with the help of favorable commodity
hedging. Coca-Cola exhibited higher net profit margin than PepsiCo due to its lower cost of sales
to sales percentage. PepsiCo’s also experience a downward trend in its gross profit margin. But,
through slightly decreasing selling and administrative expenses to sales percentage, PepsiCo was
able to stabilize its profit margin and pretax profit margin from year to year without a declining
trend. Higher net profit margin certainly made Coca-Cola attractive to a potential investor, but it
should be noted that both companies were highly profitable even in the times of economic
downturn. And it also should be noted that PepsiCo was able to deliver slightly higher sales
growth rate and net profit growth rate from year 2004 to year 2008, which could make the
company a better candidate for potential growth.
PepsiCo, in an effort to battle its rival Coca-Cola, diversified its businesses into other
products such as snacks, chips and breakfast food with core business focusing on soft drinks. But
Coco-Cola has been staying primarily in soft drink/beverage industry. PepsiCo’s diversity is
directly related to lower business risk. This is certainly an added bonus to a potential investor.
PepsiCo’s current assets averaged 30.73% of its total assets, and short-term liabilities
averaged 24.70% of its total liabilities and shareholders’ equity. Thus, it had a healthy average
current ratio of 1.25. Coca-Cola’s current assets average of 31.99% and short-term liabilities .

Capital Structure and Solvency
Total Debt to Equity Ratio and Long-term Debt to Equity Ratio
PepsiCo’s five-year average of total debt to equity ratio was 1.24. On average, Pepsi had
more debt financing than equity financing. Coca-Cola had a lower average total debt to equity
ratio of 0.90, which indicating the company’s use of more equity financing than debt financing.
The long-term debt to equity ratio for PepsiCo averaged at 0.68, much higher than the 0.29
average long-term debt to equity ratio for Coca-Cola. PepsiCo’s higher debt to equity ratio put
the company in a riskier position in the times of rising interest rates.
PepsiCo’s debt to equity ratio increased sharply in year 2008. The economic downturn in
year 2008 that led to depression in year 2009 brought down the company’s stock price
significantly. As shown in its comparative balance sheet, in order to finance the asset growth of
3.94% in year 2008, PepsiCo increased its debt borrowing by 37.33% from previous year. The
major source of this increase in debt borrowing was long-term. Thus, the decreased shareholders’
equity and increased debt financing, especially long-term debt financing, raised PepsiCo’s debt

to equity ratio in year 2008 significantly. Having a high 1.96 total debt to equity ratio and a 1.24
long-term debt to equity ratio, PepsiCo appeared to have experienced greater long-term solvency
risk in year 2008. With recession arrived in year 2009 and interest rate decreased to all-time low
through 2010, this higher debt to equity ratio should not be too much a cause of concern as long
as PepsiCo could manage to stop the increasing trend. In fact, PepsiCo did improve its debt to
equity ratio with a slight decrease in year 2009.
Coca-Cola, PepsiCo’s rivalry company, adopted a different strategy to deal with the
economic downturn in year 2008. Coca-Cola was able to stabilize its debt to equity ratio from
year 2004 to year 2008, with only slight increases in year 2007 and 2008. Coca-Cola’s
comparative balance sheet shows that with only 5.85% decrease in shareholders’ equity from
year 2007, the company did not have to increase debt borrowing when its assets decreased at a
slightly higher rate of 6.36% than shareholders’ equity. Coca-Cola was able to keep total debt to
equity ratio under 1.0, positioning the company at a less risky level regarding long-term capital
structure and solvency.
Times Interest Earned
Times interest earned ratio shows how well a company could cover its interest expense
on a pretax base. PepsiCo had a better five-year of average of 29.56 than Coca-Cola’s average of
25.75, indicating PepsiCo had enough operating profitability to cover its interest payments with a
slightly larger cushion than Coca-Cola. But, both companies’ times interest earned ratios were
well above 2.0, which is a margin value typically considered a warning sign of high long-term
solvency risk. Thus, both PepsiCo and Coca-Cola exhibited very low long-term solvency risk
considering each company’s times interest earned ratio was at a very high level.
PepsiCo experienced decreases in times interest earned ratio in year 2005 and 2008,
mainly due to decreased profitability and increased debt level in those two years. These same
factors also caused sharp decrease in Coca-Cola’s times interest earned ratio from 30.90 in year
2006 to 18.27 and 17.98 in year 2007 and year 2008 respectively. The economic downturn in
2008 should play an important role in the decreased times interest earned ratio of that year for
both PepsiCo and Coca-Cola. But these ratios were well above 2.0. So it should not cause any
concern to be raised at this point other than this downward trend should be noted and
continuously monitored.

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Both companies are using the multiple-step format in presenting
income statement information. Companies use the multiple-step income
statement to recognize additional relationships related to revenues
and expenses. Both companies distinguish between operating and
nonoperating transactions. As a result, trends in income from continuing
operations should be easier to understand and analyze.

There are many factors to review when comparing these two companies. They are two of the top manufacturers of CSDs (carbonated soft drinks) in the world. Coke’s portfolio is weighted more heavily in the soft drink beverage industry, whereas PepsiCo has tried to diversify itself by merging with companies such as Quaker, Tropicana, and Gatorade.
As one reads the data below, one may keep in mind these calculations and summaries. From the analysis, PepsiCo turns its inventory into sales faster than Coke, 40 days and 64 days respectively. More sales mean more receivables and theoretically, more cash into the company. Additionally, PepsiCo is slightly better at managing its receivables. Once those inventories are turned into sales, PepsiCo receives cash on accounts receivables five days more quickly than Coke.
PepsiCo is also beating Coke in Working Capital (Current Ratio) as well as the Current Cash Debt Coverage Ratio. Liquidity ratios provide insight as to how easily a company can pay off its short-term obligations without having to obtain additional financing.
Coke on the other hand has a smaller amount of sales, but generates a larger amount of net income. Net income for Coke grew by about 60% over the three years ending in 2004, whereas PepsiCo is net income only grew about 40%. A concern for PepsiCo may be their cost of goods sold as it continues to be approximately 10% higher than Coke’s cost of goods sold. Another factor for PepsiCo was the restructuring and impairment charge incurred during 2004 due to Frito Lay North America consolidating its manufacturing network as part of on ongoing productivity program. PepsiCo is generating a lower profit and their net cash from operations continues to lag behind.



The main change that occurred in 2004 at Coca-Cola is the change due to application of FASB “Consolidation of Variable Interest Entities”, Interpretation No.46 (FIN 46). This resulted in change of the equity method of accounting for certain entities, primarily bottlers. The change caused consolidation of $383 in assets and liabilities that were not previously recorded on the consolidated balance sheet. The cumulative effect was not recorded and prior periods were not restated. However, the results of operations of those entities were consolidated in April and didn’t have material impact for the year ended December 31, 2004. The impact of this method though can be seen in certain financial ratios and complicate comparability between the two companies.

A. PepsiCo reports and increase from $25,327 to $27,987 in total asses between the years of 2003 to 2004, or 10.5%. Coca-Cola’s statements show an increase as well. In 2003 total assets were in the amount of $27,342 and $31,327 in 2004, or 15%. The increase in current assets has the most effect on the increase of total assets for this company, specifically an increase in Cash and Cash Equivalents from $3,362 to $6,707. This change was due to operating activities mostly transactions in locations outside of US as stated in the company’s notes.

B. Calculations based on Selected Financial Data, PepsiCo’s 5-year compound growth rates related to sales is 5.6%. The compound growth of Coca-Cola is 5.5%. As we see both companies are very competitive and keep their sales going up at the same rate. A 5-year compound growth from continuing operations is not available from the data provided. PepsiCo is only reporting income from continuing operations starting as of 2002. Coca-Cola is providing a 5-year compound growth for income from operations, therefore these data is not comparable.

C. Depreciation and Amortization Expense were $1,264 PepsiCo and $893 on Coca-Cola statements. Depreciation is the practice of allocating the cost of assets to a number of years. Both companies are recognizing depreciation and amortization on straight-line basis over an asset’s useful life. The difference in the amount of depreciation expense can be explained by the difference in the amount and type of non current assets. It appears that PepsiCo s..

Critical Analysis of Investment

The three financial statements required for external reports are the income statement, balance sheet, and statement of cash flows. The statement of cash flow highlights the major activities that impact cash flows, which affect the overall cash balance (Garrison, Noreen & Brewer, 2012). Equity investors utilize these financial statements for a critical analysis of the firm’s financial stability before making an investment.

Based on a comparison of the income statements to the statements of cash flows for Coca-Cola and PepsiCo, the following accounts report the greatest differences between net income and cash flow from operations.

Coca-Cola Company

2010 2009 2008

* Gain from Sale of Asset $(5,358) $(43) $(130)

* Income of Equity Investments (671) (359) 1,128

* Change in Accounts Payable 656 319 (576)

* Change in Other Working Capital (161) (510) (41)

PepsiCo

2010 2009 2008

* Income on Equity Investment $(916) $(235) $(202)

* Change in Accounts Receivable (268) 188 (549)

* Change in Accounts Payable 488 (133) 718

* Change in Other Working Capital 12 (408) (459)

Relative profitability is concerned with ranking products, customers, and other business segments to determine which should be emphasized (Garrison, Noreen & Brewer (2012). In 2010 Coca-Cola reported a profit of $2.06 billion, or 88 cents a share, up from $1.9 billion, or 81 cents a share, a year earlier. Excluding restructuring and other impacts, earnings climbed to 92 cents from 82 cents as revenue increased 5% to $8.43 billion. Sparkling beverages, which include Coke's carbonated-drinks business, had world-wide volume growth of 3% in the quarter from last year, including 4% growth internationally. In the company's still beverages segment, which includes Dasani water and sports-drink brand Powerade, volume rose 11% amid 13% growth abroad (Cordeiro, 2010).

After the 2nd Quarter in 2010, PepsiCo earned $1.60 billion, or 98 cents per share, in the second quarter, its first full quarter owning its largest bottlers. That compared with $1.66 billion, or $1.06 a share, a year earlier and was weighed down by higher interest expense. Excluding one-time items, earnings per share were $1.09, compared with the analysts' average view of $1.08, according to Thomson Reuters I/B/E/S. Revenue rose 40 percent to $14.80 billion, helped by the acquisition of the bottlers. Analysts on average were expecting $14.41 billion (Dorfman, 2010).

PepsiCo closed the acquisition of the bottlers in late February, a move meant to cut costs and give it more control over the distribution of its drinks in North America, where sales have been sluggish for some time. The $7.8 billion purchase gave PepsiCo a head start over Coca-Cola (Dorfman, 2010).

Coca-Cola utilizes an Audit Committee Charter to represent and assist the Board in fulfilling its oversight responsibility to the shareowners and others relating to the integrity of the Company's financial statements and the financial reporting process, the systems of internal accounting and financial controls, the internal audit function, the annual independent audit of the Company's financial statements, the Company's compliance with legal and regulatory requirements, and its ethics programs as established by management and the Board, including the Company's Code of Business Conduct. The Company reports its financial results in accordance with generally accepted accounting principles (GAAP) (Coca-Cola).

PepsiCo conducts audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). The audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. The internal controls over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk (PepsiCo).

The two companies release different disclosures when comparing in terms of clarity and completeness. The research shows Coca-Cola provides a more detailed list of disclosures offered to stockholders and stakeholders. Some of these disclosures include quantitative and qualitative, financial using (GAAP), and global reporting (Coca-Cola). Whereas, the research shows PepsiCo utilizes disclosures for the audit committee and Board of Directors (PepsiCo).

Common stockholders use financial ratios related to net income, dividends, and stockholders’ equity to assess a company’s financial performance. These seven financial ratios are earnings per share, price-earnings ratio, dividend payout ratio, dividend yield ratio, return on total assets, return on common stockholders’ equity, and book value per share (Garrison, Noreen & Brewer, 2012). Utilizing these ratios an equity investor can analyze the financial documents with ratios to determine which company is the better investment.

Coca-Cola PepsiCo

Earnings per share 3.49 1.05

Price-earnings ratio 12.9 15.3

Dividend payout ratio 34.4% 48.3%

Dividend yield ratio 2.7% 2.9%

Return on total asset 9.44% 8.91%

Return on common stockholders’ equity 41.05% 29.86%

Book value per share 13.05 1.31

Equity investors utilize these financial statements for a critical analysis of the firm’s financial stability before making an investment. Coca-Cola produces a return on common stockholder equity of over 40%, which is a 10% increase over PepsiCo. Coca-Cola has consistently increased and generated cash over PepsiCo in the last three years. The research and critical analysis determines that Coca-Cola is the company of choice for an equity investment.

Comparative Analysis Case: The Coca-Cola Company and PepsiCo, Inc.

Chapter 2: Conceptual Framework Underlying Financial Accounting

A. PepsiCo is a manufacturer, marketer and seller of snacks and beverages. The company is organized in four divisions: Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International, and Quaker Foods North America.
Coca-Cola Company is a manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups as well as some finished beverages. Most of the company’s products are carbonated soft drinks, but it also a variety of noncarbonated beverages, including water and juice products.

B. The total PepsiCo sales for the year of 2004 are $29,261 which includes revenue generated by all PepsiCo divisions. Of the total, 63% are the sales related to beverages. So the amount generated by beverages sale is $18,142. Looking at the financial reporting of Coca-Cola, the revenue generated by the company is $21,962.
Even though the total sales of PepsiCo are higher than Coca-Cola’s, Coca-Cola takes a dominant position in beverage sale as their revenue generated by beverage sale is $3,820 higher than PepsiCo’s. Further in the research we will consider the total sales of PepsiCo without adjustment for sales supported by beverages.

C. PepsiCo’s inventories in the amount of $1,541. Inventories are valued at the lower of cost or market. Cost is determined using the FIFO and LIFO methods. Approximately 16% of PepsiCo’s inventories in 2004 and 10% in 2003 of was computed using the LIFO method. PepsiCo is also stating in their notes that the difference in cost of inventory after reconciliation of LIFO and FIFO methods is not material.
Coca-Cola reports the cost if inventory of $1,420. Inventories consists primary of raw materials, supplies, concentrates and syrups and are valued at the lower of cost or market. All inventories are valued on the basis of FIFO method. The comparability of the inventories could be complicated by the fact that PepsiCo is using a combination of both LIFO and FIFO method. However, as PepsiCo states in their notes the difference is not material. Therefore the inventories are comparable. PepsiCo’s ending inventories are $121 higher than they are at Coca-Cola, but this difference is not significant.

D. Both companies are following a full disclosure principal and provide detailed explanations to the items presented in the financial statements. It appears that PepsiCo had not reported any major accounting policies changes for the year of 2004. Coca-Cola refers to the changes adopted in 2002 for SFAS No.142 which “required an initial impairment assessment involving a comparison of the fair value of goodwill, trademarks and other intangibles assets to current carrying value.” (willey.com/college/kieso). This change makes it difficult to compare historical data from the company’s financial statements. However, since PepsiCo had adopted the same requirement back in 2002, the data related to these assets is comparable between the companies.
The main change that occurred in 2004 at Coca-Cola is the change due to application of FASB “Consolidation of Variable Interest Entities”, Interpretation No.46 (FIN 46). This resulted in change of the equity method of accounting for certain entities, primarily bottlers. The change caused consolidation of $383 in assets and liabilities that were not previously recorded on the consolidated balance sheet. The cumulative effect was not recorded and prior periods were not restated. However, the results of operations of those entities were consolidated in April and didn’t have material impact for the year ended December 31, 2004. The impact of this method though can be seen in certain financial ratios and complicate comparability between the two companies.

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