a. What are the primary lines of business of these two companies as shown in their notes to the financial statements?
The COKE is the largest manufacturer of nonalcoholic soft drinks, while the PEPIS has various businesses which include the nonalcoholic soft drink, food and snacks.
b. Which company has the dominant position in beverage sales?
The Coca Cola has the dominant position in beverage sale with an amount of $29 billion in 2007.
c. Which company has the greater percentage increase in total assets from 2006 to 2007?
Coke total assets increased by around 44% as compared to 15% of PEPSI in 2007 from 2006
In $ in billions / 2007 / 2006 / Difference / % ChangePepsi / 34.6 / 30 / 4.6 / 15%
Coke / 43.3 / 30 / 13.3 / 44%
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d. Which company had more depreciation and amortization expense for 2007? Provide a rationale as to why there is a difference in these amounts between the two companies.
The COKE is showing $1.2 billion and PEPSI is showing $1.4 billion. The difference in not very significant, but it may be due to difference in useful lives of the total fixed assets.
e. What type of income format(s) is used by these two companies? Identify any differences in income statement format between these two companies.
Both companies have used the multiple income statement formats showing profit at different levels of activities such as gross profit, operating profit, and earnings before taxes and net income.
f. What are the gross profits, operating profits, and net incomes for these two companies over the three-year period 2005-2007? Which company has had better financial results over this period of time?
All figures are in $ in billions
Coke / 2007 / 2006 / 2005 / PEPSI / 2007 / 2006 / 2005Gross Profit / 18.5 / 15.9 / 14.9 / 14.2 / 12.7 / 12.3
Operating Income / 7.3 / 6.3 / 6.1 / 7.2 / 6.5 / 6
Net Income / 6 / 5.1 / 4.9 / 5.7 / 5.6 / 4.1
The COKE has shown better results as compared to PEPSI in 2007 and 2005, while in 2006, the PEPSI was better than COKE.
g. What format(s) did these companies use to present their balance sheets?
They have used the reporting format showing all assets and liabilities according to its liquidity therefore the current assets are shown first then the fixed assets and the current liabilities are shown before long term liabilities and shareholders equity has been shown at the end of balance sheet.
h. How much working capital did each of these companies have at the end of 2007? Speculate as to their rationale for the amount of working capital they maintain.
The PEPSI has working capital of $2.4 billion while the COKE has negative working capital of $1.1 billion. The main reason for negative working capital is the financing of fixed assets from short term sources by COKE, while the PEPSI has financed its current assets from long term sources of finance.
i. What is the most significant difference in the asset structure of the two companies? What causes this difference?
All figures in $ in billions
Current Assets / 12.1 / 28% / 10.2 / 29%Fixed Assets / 31.2 / 72% / 24.4 / 71%
The COKE has around 28% of current assets out of total assets while the PEPSI has 29% of current assets out of total assets; therefore there is no significant change in structure of the two companies.
j. What were the two companies’ trends in net cash provided by operating activities over the period 2005 to 2007?
All figures in billions in $ / COKE / PEPSI2007 / 2006 / 2005 / 2007 / 2006 / 2005
Operating cash flow / 7.2 / 6 / 6.4 / 6.9 / 6.1 / 5.9
The PEPSI is showing increasing trend while the COKE has mix trend as in 2006 it went down but in 2007 it went up.
k. What were the cash and cash equivalents reported by Coca-Cola and PepsiCo at the end of 2007? What does each company classify as cash equivalents?
The COKE is showing $4.1 billion and PEPSI is showing $0.91 billion. The COKE includes cash and marketable securities with can be converted into cash in three months and PEPSI is showing cash and investment with maturity of less than three months.
l. What were the accounts receivable (net) for Coca-Cola and PepsiCo at the end of 2007? Which company reports the greater allowance for doubtful accounts receivable (amount and percentage of gross receivable) at the end of 2007?
The COKE is showing $3.3 billion and PEPSI is showing $4.1 billion. The allowance for doubtful debts is $.056 billion for COKE and 0.069 billion for PEPSI. Therefore the PEPSI has higher amount, but the COKE has higher percentage of doubtful debts as compared to PEPSI, which is 1.7% while PEPSI has 1.6%.
m. What is the amount of inventory reported by Coca-Cola at December 31, 2007, and by PepsiCo at December 29, 2007? What percent of total assets is invested in inventory by each company?
The COKE is showing $2.2 billion and PEPSI is showing $2.3 billion. For COKE it is around 5% and for PEPSI it is around 7% of total assets.
n. What inventory costing methods are used by Coca-Cola and PepsiCo? How does each company value its inventories?
Both companies use the FIFO or Weighted average method to value their all inventory and then apply the principle of lower of cost or market value method.
o. Compute and compare the inventory turnover ratios and days to sell inventory for Coca-Cola and PepsiCo for 2007. Indicate why there might be a significant difference between the two companies.
The coke is showing ratio of 5.48 and 67 days, while PEPSI is showing ratio of 8.57 and 43 days. IT is due to difference in nature of business as the COKE is only selling alcoholic soft drinks.
p. What amount is reported in the balance sheets as property, plant, and equipment (net) of Coca-Cola at December 31, 2007, and of PepsiCo at December 29, 2007? What percentage of total assets is invested in property, plant, and equipment by each company?
The COKE is showing $8.5 billion and PEPSI is showing $11.2 billion. It is around 20% for COKE and 32% for PEPSI.
q. What depreciation methods are used by Coca-Cola and PepsiCo for property, plant, and equipment? How much depreciation was reported by Coca-Cola and PepsiCo in 2007, 2006, and 2005?
All in $ in billions / COKE / PEPSI2007 / 2006 / 2005 / 2007 / 2006 / 2005
Depreciation / 0.96 / 0.76 / 0.75 / 1.34 / 1.24 / 1.15
Both company uses straight line method for property, plant and equipment over their respective lives.
r. Compute and compare the following ratios for Coca-Cola and PepsiCo for 2007: Asset turnover, Profit margin on sales, and Rate of return on assets.
COKE / PEPSIAssets Turnover / 67% / 114%
Profit Margin / 21% / 14%
Return on Assets / 14% / 16%
The PEPSI has higher return on total assets which shows that PEPSI has used its assets effectively and efficiently than COKE.
s. What amounts for intangible assets were reported in their respective balance sheets by Coca-Cola and PepsiCo? What percentage of total assets is each of these reported amounts?
The COKE is showing $12.3 billion and PEPSI is showing $7.2 billion. It is around 28% for COKE and 21% for PEPSI.
t. On what basis and over what periods of time did Coca-Cola and PepsiCo amortize their intangible assets?
All intangible assets of both with definite lives are amortized using the straight line method with a life ranging from 1 to 20 years for COKE and 3-40 years for PEPSI, but the goodwill and other intangible asset with indefinite lives are not amortized.
u. What were Coca-Cola’s and PepsiCo’s net revenues (sales) for the year 2007? Which company increased its revenues more (dollars and percentage) from 2006 to 2007?
In $ in billions / 2007 / 2006 / Difference / % ChangeCOKE / 29 / 24 / 5 / 21%
PEPSI / 39.5 / 35.1 / 4.4 / 13%
The COKE has shown higher in both terms in dollars and in percentage
v. Are the revenue recognition policies of Coca-Cola and PepsiCo similar? Explain.
Both companies recognize revenues when products are delivered to the location of bottling partner, resellers or other customers and its collectability is reasonably assured.