PepsiCo Inc. and The Coca Cola Company’s Financial Analysis

📄 Words:	1932
📝 Subject:	Accounting
📑 Pages:	7
💼 Companies:	Coca-Cola, PepsiCo

Introduction

In this report, a comparative financial analysis of PepsiCo International and The Coca Cola Company has been presented, while keeping in view the financial statements of the respective companies for the financial years 2004 and 2005. The financial analysis presented herein includes vertical analysis and horizontal analysis. Based on the financial analysis of the said companies, for the two years under consideration, it has been concluded that PepsiCo’s performance has declined in 2005 as compared to 2004, whereas Coca-Cola has been more able to show sustainability in its operations and financial performance. Moreover, based on this conclusion, it has been recommended that the financial performance of PepsiCo International can be improved by focusing on the proportions of income statement items to total sales revenues and controlling the increase in total liabilities of the company in proportion to total liabilities and equity.

Vertical Analysis for PepsiCo Incorporation and The Coca Cola Company

Vertical Analysis of Income Statement

The vertical analysis of PepsiCo International’s income statement indicates that there has been no significant change in income statement items’ proportion to total sales revenues. The most significant change noted is for net income, which implies that the net profit margin of the company has declined in 2005 as compared to the previous year(Weygandt, Kimmel, & Kieso, 2008).

PepsiCo Incorporation
Amount in millions except for percentages	2005	2004
Net Revenue	100.00%	100.00%
Cost of Sales	43.54%	43.31%
Selling, General and Administrative expenses	37.82%	37.70%
Amortization of intangible assets	0.46%	0.50%
Restructuring and Impairment Costs	0.00%	0.51%
Merger-related Costs	0.00%	0.00%
Operating Profit	18.19%	17.97%
Bottling Equity Income	1.71%	1.30%
Interest Expense	-0.79%	-0.57%
Interest Income	0.49%	0.25%
Income from Continuing Operations before Income Taxes	19.60%	18.95%
Provision for Income Taxes	7.08%	4.69%
Income from Continuing Operations	12.52%	14.26%
Tax Benefit from Discontinued Operations	0.00%	0.13%
Net Income	12.52%	14.39%

For Coca Cola, the proportion of all items has remained same during the years 2004 and 2005 with respect to revenues from sales. However, there are only slight declines noted in gross and net profit margins. However, they are considerably higher than PepsiCo’s profit margins(Weygandt, Kimmel, & Kieso, 2008).

The Coca Cola Company
Amount in millions except for percentages	2005	2004
Net Operating Revenues	100.00%	100.00%
Cost of Goods Sold	35.47%	35.30%
Gross Profit	64.53%	64.70%
Selling, General and Administrative Expenses	37.82%	36.29%
Other Operating Charges	0.37%	2.21%
Operating Income	26.34%	26.21%
Interest Income	1.02%	0.72%
Interest Expense	1.04%	0.90%
Equity Income – Net	2.94%	2.86%
Other Loss – Net	-0.40%	-0.38%
Gains on Issuances of Stock by Equity Investees	0.10%	0.11%
Income Before Income Taxes	28.96%	28.62%
Income Taxes	7.87%	6.32%
Net Income	21.09%	22.29%

Vertical Analysis of Balance Sheet

The vertical analysis of the balance sheet shows that the current assets’ proportion to total assets has increased for PepsiCo in 2005. On the other hand, non-current assets proportion to total assets has declined. Similarly, non-current liabilities and total equity’s proportions to total liabilities and equity have decreased, whereas it has increased for current assets(Weygandt, Kimmel, & Kieso, 2008).

PepsiCo Incorporation
Amount in millions except for percentages	2005	2004
Assets
Current Assets
Cash and Cash Equivalents	5.41%	4.57%
Short-term Investments	9.98%	7.74%
	15.39%	12.31%
Accounts and Notes Receivables, Net	10.28%	10.72%
Inventories	5.34%	5.51%
Prepaid Expenses and Other Current Assets	1.95%	2.34%
Total Current Assets	32.95%	30.87%
Property, Plant and Equipment, Net	27.36%	29.12%
Amortization Intangible Assets, Net	1.67%	2.14%
Goodwill	12.88%	13.97%
Other Nonamortizable Intangible Assets	3.42%	3.33%
Nonammortizable Intangible Assets	16.31%	17.30%
Investments in Noncontrolled Affiliates	10.98%	11.73%
Other Assets	10.73%	8.84%
Total Assets	100.00%	100.00%
Liabilities and Shareholders’ Equity
Current Liabilities
Short-Term Obligations	9.11%	3.77%
Accounts Payable and Other Current Liabilities	18.82%	20.01%
Income Taxes Payable	1.72%	0.35%
Total Current Liabilities	29.65%	24.13%
Long Term Debt Obligations	7.29%	8.56%
Other Liabilities	13.63%	14.65%
Deferred Income Taxes	4.52%	4.34%
Total Liabilities	55.08%	51.68%
Commitments and Contingencies	0.00%	0.00%
Preferred Stock, No Par Value	0.13%	0.15%
Repurchased Preferred Stock	-0.35%	-0.32%
Common Shareholders’ Equity	0.00%	0.00%
Common Stock, par value 1 2/3c per share	0.09%	0.11%
Capital in excess of par value	1.94%	2.21%
Retained Earnings	66.56%	66.92%
Accumulated other Comprehensive Loss	-3.32%	-3.17%
	65.27%	66.07%
Less: Repurchased Common Stock, at cost	-20.13%	-17.58%
Total Common Stockholders’ Equity	45.14%	48.49%
Total Liabilities and Shareholders’ Equity	100.00%	100.00%

For Coca-Cola, changes have been on the contrary. The current assets’ proportion to total assets has decreased, whereas the non-current assets’ proportion has increased. On the other hand, current liabilities and total equity’s proportions have increased, whereas it has declined for non-current liabilities in 2005(Weygandt, Kimmel, & Kieso, 2008).

The Coca Cola Company
Amount in millions except for percentages	2005	2004
Assets
Current Assets
Cash and Cash Equivalents	15.98%	21.33%
Marketable Securities	0.22%	0.19%
Trade Accounts Receivable, Less Allowances of $72 and $69, respectively	7.75%	7.14%
Inventories	4.84%	4.52%
Prepaid Expenses and Other Assets	6.04%	5.88%
Total Current Assets	34.83%	39.06%
Investments
Equity Method Investments
Coca-Cola Enterprises Incorporation	5.88%	4.99%
Coca-Cola Hellenic Bottling Company S.A.	3.53%	3.39%
Coca-Cola FEMSA, S.A. de C.V.	3.34%	2.52%
Coca-Cola Amatil Limited	2.54%	2.34%
Other, principally bottling companies	7.01%	5.51%
Cost Method Investments, principally botlling companies	1.22%	1.13%
Total Investments	23.52%	19.88%
Other Assets	9.00%	9.48%
Property, Plant and Equipment – Net	19.66%	19.37%
Trademarks with indefinite lives	6.61%	6.48%
Goodwill	3.56%	3.49%
Other Intangible Assets	2.81%	2.23%
Total Assets	100.00%	100.00%
Liabilities and Shareowners’ Equity
Current Liabilities
Accounts Payable and Accrued Expenses	15.27%	14.00%
Loans and Notes Payable	15.35%	14.41%
Current Maturities of Long-Term Debt	0.10%	4.74%
Accrued Income Taxes	2.71%	2.26%
Total Current Liabilities	33.43%	35.41%
Long-Term Debt	3.92%	3.68%
Other Liabilities	5.88%	8.95%
Deferred Income Taxes	1.20%	1.28%
Shareowners’ Equity
Common Stock	2.98%	2.78%
Capital Surplus	18.66%	15.67%
Reinvested Earnings	106.36%	92.57%
Accumulated other Comprehensive Income (Loss)	-5.67%	-4.29%
Treasury Stock	-66.76%	-56.06%
Total Shareowners’ Equity	55.58%	50.68%
Total Liabilities and Shareowners’ Equity	100.00%	100.00%

Horizontal Analysis for PepsiCo Incorporation and The Coca Cola Company

Horizontal Analysis of Income Statement

For PepsiCo International, there has been a considerable increase in the majority of the income statement items in 2005 as compared to 2004. The increase in operating costs has been adjusted by the increase in revenues; in fact increase in revenues was more than the change in operating costs, and as a result, there has been an increase noted in the operating profits of the company. On the other hand, interest expense and provision for income tax increased significantly from 2004 to 2005, and therefore resulted in a decline in the net income of the company in 2005(Weygandt, Kimmel, & Kieso, 2008).

PepsiCo Incorporation
Amount in millions except for percentages
Net Revenue	11.28%
Cost of Sales	11.85%
Selling, General and Administrative expenses	11.63%
Amortization of intangible assets	2.04%
Restructuring and Impairment Costs	-100.00%
Merger-related Costs
Operating Profit	12.61%
Bottling Equity Income	46.58%
Interest Expense	53.29%
Interest Income	114.86%
Income from Continuing Operations before Income Taxes	15.07%
Provision for Income Taxes	67.93%
Income from Continuing Operations	-2.30%
Tax Benefit from Discontinued Operations	-100.00%
Net Income	-3.18%

For Coca Cola, more or less similar trends have been noted, as per horizontal analysis. The income statement shows increase in almost every item in 2005, apart from decline noted in other operating charges and gains on issuances of stock by equity investees(Weygandt, Kimmel, & Kieso, 2008).

The Coca Cola Company
Amount in millions except for percentages
Net Operating Revenues	6.26%
Cost of Goods Sold	6.79%
Gross Profit	5.98%
Selling, General and Administrative Expenses	10.76%
Other Operating Charges	-82.29%
Operating Income	6.79%
Interest Income	49.68%
Interest Expense	22.45%
Equity Income – Net	9.50%
Other Loss – Net	13.41%
Gains on Issuances of Stock by Equity Investees	-4.17%
Income Before Income Taxes	7.52%
Income Taxes	32.22%
Net Income	0.52%

Horizontal Analysis of Balance Sheet

The balance sheet of PepsiCo Incorporation shows an overall increase in the assets of the company in 2005. The most significant increase has been recorded in current assets intangible assets. On the other hand, total liabilities of the company have also increased considerably, due to increase in current liabilities and deferred income taxes. Lastly, total equity also shows an increase of 5.51% in 2005(Weygandt, Kimmel, & Kieso, 2008).

PepsiCo Incorporation
Amount in millions except for percentages
Assets
Current Assets
Cash and Cash Equivalents	34.06%
Short-term Investments	46.24%
	41.71%
Accounts and Notes Receivables, Net	8.74%
Inventories	9.86%
Prepaid Expenses and Other Current Assets	-5.50%
Total Current Assets	21.01%
Property, Plant and Equipment, Net	6.53%
Amortization Intangibel Assets, Net	-11.37%
Goodwill	4.58%
Other Nonamortizable Intangible Assets	16.40%
Nonammortizable Intangible Assets	6.86%
Investments in Noncontrolled Affiliates	6.12%
Other Assets	37.49%
Total Assets	13.36%
Liabilities and Shareholders’ Equity
Current Liabilities
Short-Term Obligations	174.10%
Accounts Payable and Other Current Liabilities	6.64%
Income Taxes Payable	451.52%
Total Current Liabilities	39.31%
Long Term Debt Obligations	-3.50%
Other Liabilities	5.46%
Deferred Income Taxes	17.93%
Total Liabilities	20.82%
Commitments and Contingencies
Preferred Stock, No Par Value	0.00%
Repurchased Preferred Stock	22.22%
Common Shareholders’ Equity
Common Stock, par value 1 2/3c per share	0.00%
Capital in excess of par value	-0.65%
Retained Earnings	12.74%
Accumulated other Comprehensive Loss	18.85%
	11.98%
Less: Repurchased Common Stock, at cost	29.82%
Total Common Stockholders’ Equity	5.51%
Total Liabilities and Shareholders’ Equity	13.36%

The balance sheet for Coca Cola shows a decline in the total assets, mostly due to decline in current assets, property, plant and equipment, and intangible assets. On the other hand, both current and non-current liabilities have declined in 2005. However, total equity of the company has increased slightly in 2005 as compared to previous year due to increase in capital surplus and reinvested earnings(Weygandt, Kimmel, & Kieso, 2008).

The Coca Cola Company
Amount in millions except for percentages
Assets
Current Assets
Cash and Cash Equivalents	-29.91%
Marketable Securities	8.20%
Trade Accounts Receivable, Less Allowances of $72 and $69, respectively	1.65%
Inventories	0.28%
Prepaid Expenses and Other Assets	-3.84%
Total Current Assets	-16.54%
Investments
Equity Method Investments
Coca-Cola Enterprises Incorporation	10.33%
Coca-Cola Hellenic Bottling Company S.A.	-2.62%
Coca-Cola FEMSA, S.A. de C.V.	23.99%
Coca-Cola Amatil Limited	1.63%
Other, principally bottling companies	18.98%
Cost Method Investments, principally botlling companies	1.41%
Total Investments	10.72%
Other Assets	-11.17%
Property, Plant and Equipment – Net	-5.01%
Trademarks with indefinite lives	-4.47%
Goodwill	-4.56%
Other Intangible Assets	17.95%
Total Assets	-6.41%
Liabilities and Shareowners’ Equity
Current Liabilities
Accounts Payable and Accrued Expenses	2.04%
Loans and Notes Payable	-0.29%
Current Maturities of Long-Term Debt	-98.12%
Accrued Income Taxes	12.41%
Total Current Liabilities	-11.65%
Long-Term Debt	-0.26%
Other Liabilities	-38.52%
Deferred Income Taxes	-12.44%
Shareowners’ Equity
Common Stock	0.23%
Capital Surplus	11.44%
Reinvested Earnings	7.54%
Accumulated other Comprehensive Income (Loss)	23.81%
Treasury Stock	11.46%
Total Shareowners’ Equity	2.64%
Total Liabilities and Shareowners’ Equity	-6.41%

Recommendations to Improve Financial Performance

Based on the horizontal and vertical analysis presented in this report, it is recommended that PepsiCo International shall consider controlling its operating and non-operating expenses so as to improve its profitability. Since there is a similar increase noted in both revenues and expenses, the overall impact of revenue increase has been negligible. On the other hand, the management of the company shall also consider improving the balance sheet strength by controlling total liabilities’ in proportion to total assets, because increase in total liabilities proportion to total liabilities and equity also means that liabilities cover share a larger proportion of total assets of the company. For Coca Cola, on the other hand, analysis of income statement and balance sheet indicate favorable performance trends. However, based on the observation in horizontal analysis, it is recommended that consideration shall be given to slight increments noted in the operating and other costs of the company.

Reference List

Weygandt, J., Kimmel, D., & Kieso, E. (2008). Financial Accounting. Hoboken: Wiley.