XACC280/Financial Accounting Concepts and Principles
July 10, 2010
The Coca-Cola company has been in business since its inventor began selling it in drug stores in 1886 (The Coca-Cola Company, 2009). Pepsi-Cola was invented a short time later in 1898, but at the time it was called “Brad’s drink.” It was later renamed Pepsi-Cola in 1902 (Butler, 2006). Since those early days when the sodas were invented, Coca-Cola and Pepsi have been in competition with each other for the domination of the world’s soda market. Over the course of more than a century, sales have continued to rise for both companies, and they both consistently earn a profit. Both companies have expanded into new product markets in more recent years. They have chosen to invest their earnings in new ventures like bottled water, snack foods, and iced tea, and they each strive to continue increasing their profits in many ways. In order to maintain this continued growth in the coming years, these companies are both in need of investors who will fund their efforts. Comparison of Current Assets and Current Liabilities
Investors and potential investors in these companies will look at and consider a multitude of information before deciding which of these two companies would be a better investment. For instance, most investors will look at each company’s current assets and liabilities amounts. In 2004, Coca-Cola had more than 12 million dollars in current assets, while PepsiCo showed only 8.6 million dollars in their current assets. In 2005, Coca-Cola faced a decrease while PepsiCo had an increase in current assets. PepsiCo recorded 10.4 million dollars in current assets, while Coca-Cola dropped to 10.2 million dollars. Their current liabilities faced similar comparisons. In 2004, Coca-Cola had 11.1 million dollars in current liabilities, and then dropped that number to 9.8 million dollars in 2005. This drop in liabilities allowed Coca-Cola to retain a profit in spite of their lowered amount of current assets. PepsiCo, on the other hand, had 6.7 million dollars in current liabilities in 2004, and they increased those liabilities in 2005 to 9.4 million dollars. However, by increasing their current assets during this time, they were able to balance out these liabilities to some degree, and PepsiCo was still able to retain a profit. Comparison of Total Assets and Total Liabilities through Horizontal Analysis
In addition to considering each company’s current assets and liabilities, investors may also want to compare the total assets and liabilities of each company. Similar to the changes they had in current assets and liabilities, Pepsi was able to increase their total assets by 13.4% between 2004 and 2005. However, they also increased their total liabilities by 20.8% during the same period. Because their liabilities were increased by more than their assets, PepsiCo actually lowered their working capital during this time. The Coca-Cola company, on the other hand, lowered their total assets by 6.4% between 2004 and 2005. They were also able to lower their total liabilities by 16% during the same period. Because they were able to lower their debts by a higher percentage than the amount lost in their assets, they were able to retain a larger percentage of their earnings as working capital. Comparison of Current Ratio and Liquidity
The current ratios for Coca-Cola and PepsiCo also contain some figures that investors might be interested in reviewing. These ratios measure the liquidity of each of the two companies, which affects the companies’ ability to pay their respective short-term debts. Both PepsiCo and Coca-Cola were able to increase their current ratios from 2004 to 2005. PepsiCo had a ratio of 1.11 to 1 in 2004, and increased that to 1.28 to 1 in 2005. Coca-Cola had a slightly smaller change in this area, but they were still able to increase their...