# Pepsico Evaluation Paper

Pages: 5 (1334 words) Published: December 11, 2010
Running head: COMPANY EVALUATION PAPER – PEPSICO

Company Evaluation Paper – PepsiCo

University of Phoenix

Company Evaluation Paper – PepsiCo.

This paper provides calculated ratios of liquidity, activity, debt and profitability of Pepsi Co for the fiscal years 2007-2008. This information was obtained from the financial statements. Liquidity

The current ratio is considered to be the most simplified liquidity test. It essentially signifies a company's capacity to satisfy its short-term liabilities utilizing its short-term assets. A current ratio which is larger than or equal to one shows that current assets should have the ability to satisfy its short-term obligations. A current ratio that is less than one may entail that the company has issues with its liquidity. Pepsico’s current ratio in 2007 was 1.3. In 2008 the current ratio was 1.2. As such, Pepsico’s current assets should have had the ability to satisfy its short-term obligations for both years.

Current Ratio = (Current Assets) / Current Liabilities

2007 = 10,151.0 / 7,753.0 = 1.3

2008 = 10,806.0 / 8,787.0 = 1.2

Activity
Accounts receivable turnover is computed by AR/Total daily sales credits. The daily credit sales was not available on the income statements for Pepsi Co, only one line for revenue; therefore, we can assume that all sales are performed through credit, meaning no cash sales.  The total Revenue for Pepsi Co is reflected below: 2008  Total Revenue            2007  Total Revenue 43252                                  39474 The total receivable for Pepsi Co is reflected below:

2008  Total A/R           2007  Total A/R
4683.0                                 4389.0 43252 = 11.0                       39474 = 11.0

Total Receivable Net (or total sales) divided by the Total Revenue for both years is 11%. This equates to 40.15 days sales outstanding; meaning customers generally pay for product purchased on credit in 40 days. Accounts Receivable turnover can answer questions whether or not collecting on sales after providing credit to customers is happening within an acceptable timeframe. The formula is dividing sales made on credit by average accounts receivable. I discovered that many companies do not disclose total sales on credit; therefore there is a shortcut one can use by using “total sales” instead. When comparing with other companies it is important that the process remains consistent figuring ratios. In other words, comparing credit based with total sales would be misleading. It is also important to know if the firm operates on a cash basis only or not. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies. The Accounts Receivable Turnover ratio for Pepsi Company for both 2008 and 2007 was 11.0. This ratio reflects that Pepsi Co turns its receivables 11 times per year which indicates good management of credit and collections. Inventory Turnover for 2008 was 17.15 and 17.24 for 2007. It is calculated by taking the total revenue and dividing it by the total inventory. For Pepsi Co the calculations for 2007 and 2008 are reflected as follows: 43252  39474

2522=17.15               2290=17.24

When a product is sold for the equal to the amount of money invested in the product, we have “turned” on inventory. The inventory turnover rate measures the total times we turned over the inventory during a 12 month period. Here is an example: (process only; not related to Pepsi) |Annual Cost of Goods Sold |Inventory Investment |Annual Inventory Turns | | | | | |\$10,000 |\$10,000...

References: Keown, Arthur J., Martin, John D., Petty, J. William, and Scott, David F.. Financial Management: Principles and Applications, 10th ed.. copyright © 2005 Pearson Prentice Hall, Inc.
MSN Money, Pepsico Inc: Financial Statement, retrieved August 2009 from moneycentral.msn.com/investor
http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=pep&lstStatement=Balance&stmtView=Ann
Website: Investopia http://www.investopedia.com/terms/r/receivableturnoverratio.asp
Website: http://financial-education.com/2007/01/31/accounts-receivable-turnover-and-days-sales-outstanding/