June 13, 2007
AC550 May 2007
The purpose of this comparative analysis is to provide a summary of financial and accounting information to a potential investor who is looking to invest in either Coca-Cola or PepsiCo. This research will cover some facts from the financial statements of both companies for the year of 2004. 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’s 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 Coke’s figures.
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,...