Interpretation Financial Statements

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Chapter 13: Problem BYP 13-4
INTERPRETING FINANCIAL STATEMENTS

BYP13-4 The Coca-Cola Company and PepsiCo, Inc. provide refreshments to every corner of the world. Selected data from the 2004 consolidated financial statements for the Coca-Cola Company and for PepsiCo, Inc., are presented here (in millions).

Coca-Cola PepsiCo
Total current assets 12,094 8,639
Total current liabilities 10,971 6,752
Net sales 21,962 29,261
Cost of goods sold 7,638 13,406
Net income 4,847 4,212
Average (net) receivables for the year 2,1312,915
Average inventories for the year 1,336 1,477
Average total assets 29,335 26,657
Average common stockholders’ equity 15,013 12,734 Average current liabilities 9,429 6,584
Average total liabilities14,322 27,917 Total assets 31,327 27,987
Total liabilities 15,392 14,464
Income taxes 1,375 1,372
Interest expense 196 167
Cash provided by operating activities 5,9685,054
Capital expenditures 755 1,387
Cash dividends2,429 1,329
Problem (a)
Compute the following liquidity ratios for 2004 for Coca-Cola and for PepsiCo and comment on the relative liquidity of the two competitors.

Answer
Current ratio = Current assets
Current liabilities

Coca- Cola PepsiCoYear

21,094 = 1.10:1 8,639 =1.28:12004
10,971 6,752

(1)Receivables turnover = Net Credit Sales
Average Account Receivables

Coca- Cola PepsiCoYear
21,962=10.3129,261=10.042004
2,131 2,915

(2)Average collection period = 365
Receivable turnover

Coca- Cola PepsiCoYear
365 =35.4 Days365 = 36.4 Days2004
10.3110.04

(3)Inventory turnover = Cost of Goods Sold
Average Inventory

Coca- Cola PepsiCoYear

7,638 = 5.7213,406 = 9.172004
1,336 1,477

(5) Days in inventory = 365
Inventory

Coca- Cola PepsiCoYear
365 = 2.7 Days365 = 2.5 Days2004
1,3361,477

(6)Current cash debt coverage = Cash flow from operations - dividends
Average current liabilities

Coca- Cola PepsiCo Year 5,968 – 2,429 = 0.375 5,054-1,329 = 0.566 2004 9,429 6,584

Weygandt and Kieso (2007)

Analysis - Liquidity Ratios
Liquidity refers to the availability of resources to meet short-term requirements. Liquidity can be affected by the timing of cash inflows and outflows. A lack of liquidity can endanger a company’s personal assets, effecting their supplies and creditors. After analyzing Pepsi and Coke-Cola’s liquidity Pepsi is the more profitable company.

Problem (b)
Compute the following solvency ratios for the two companies and comment on the relative solvency of the two competitors.

Answer

(1) Debt to total assets ratio= Total Liabilities
Total Assets

Coca- Cola PepsiCoYear
10,971=0.9076,752 = 0.7812004
12,0948,639

(2) Times interest earned = Net income + Interest Expense + Tax Expense Interest Expense

Coca- Cola PepsiCo Year 4,847+196+1375 = 18.7 times 4212+167+1372 = 18.0 times 2004 196167

(3) Cash debt coverage ratio = Cash flow from operations - dividends...
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