as compared to
Year-end December 31, 2001
Robin Webb, G. D. Meyers and Company
Allison Heiland, Angela Heyroth, Robin Tieman FBD I Section 4 O b 17 2002
Analysis of Accounting Policies
EXECUTIVE SUMMARY In investigating PepsiCo’s accounting policies for G. D. Meyers and Company, we have focused on nine major areas of the annual report, comparing PepsiCo with Coca Cola throughout our analysis. Through the Balance Sheet, we focused on the major assets and major liabilities of each, and discovered that the primary difference is PepsiCo’s large balance of intangibles. In the Income Statement, we analyzed the major sources of revenue and expenses for both companies, and found that PepsiCo’s recent merger with Quaker Oats accounts for a large part of the difference between the two. In the Cash Flow Statement, we compared the major inflows and outflows for PepsiCo and Coca Cola and discovered that PepsiCo has more outflows for the last year as compared to Coca Cola. In looking at the Audit Report, both companies were audited by “Big 4” accounting firms and both were issued clean opinions. In evaluating Revenue Recognition, we found that the two firms are comparable in the types of revenue transactions and recognition methods, although their geographic diversification varies. When looking at Cost of Goods Sold, we found the two to be virtually identical with regards to elements such as inventory types, inventory turnover, inventory writedowns, and more. Analyzing Property, Plant, and Equipment revealed that PepsiCo and Coca Cola have similar equipment and depreciation. In their Stockholders Equity section, we discovered that PepsiCo has a significant dilutive effect on stock options, while Coca Cola does not. Finally, we found that PepsiCo had the most tantalizing Unusual Items, due to its recent merger with Quaker, and that taking those items into account may help in understanding many of the numbers and analysis throughout this report. Based on this analysis, we believe that G. D. Meyers and Company can place reliance on PepsiCo’s financial statements in their decision to underwrite an additional issue of stock, although further analysis in part II of this report will clarify the matter further. Introduction We have been asked to prepare a report regarding background information on the current financial position of PepsiCo in order to determine whether underwriting an additional issue of stock is a sound financial decision. In particular, we will be analyzing how useful PepsiCo’s financial statements are in representing the company’s financial performance.
Analysis of Accounting Policies
In August 2001, PepsiCo completed a major merger with Quaker Oats Company, positioning them for future growth. Thus, the information presented below from PepsiCo’s financial statements will reflect the combined financial positions of PepsiCo and Quaker Oats Company as if they had always been one. PepsiCo (hereafter known as “Pepsi”) has over 500 products, including fifteen distinct brands in their portfolio which each generate over $1 billion in annual retail sales, more than any other company in its industry. We will use information from Pepsi’s 2001 annual report to determine how their accounting policies compare to those of their major competitor, Coca Cola (hereafter known as “Coke”).
Overview of the Balance Sheet In this section we will examine the major assets, liabilities and equities for both Pepsi and Coke. Pepsi’s two largest assets are: 1. 2. PPE (31.7% of total assets) Intangible Assets (22% of total assets)* Pepsi's Intangible Assets (in millions)
While we have found that Pepsi’s intangible assets are a result of the trademarks associated with the various brands they operate, most of them can be attributed to “goodwill” due to the merger with Quaker. In † fact, Pepsi’s goodwill constitutes almost 70% of their total...