Accounting

The basic role of this report is to analyze the financial statements of Coca-cola and PepsiCo, soft drink sector competing companies, this would at the end of the analysis be able to provide vital information on determining the denominator in the soft drinks industry. The two companies have a big slice of the global market in in the industry for over a century now. I will therefore engage comparison in the financial statements of the two companies considering the key ratios, a comparative statistics and figures significantly affecting probability the key methods of analysis are both horizontal and vertical analysis.

All the major key ratios reference data from fiscal year 2003. PE (Priceearnings) are higher for companies having growth prospects, other things constant, but they are on the lower side for the risky ones.  PepsiCos PE ration is standing at 19.7 times, which is lower compared to the industry (21.1) and the average SP 500 (19.8). the Coca-cola company have the higher ratio here, 22.1 times, which is above the industry and the industry (21.1) and (19.8) respectively.

The most significant accounting ration here is the net income to common equity. PepsiCo ROE (Return On Equity) is 34, the SP 500 ROE is (21.0). coca-colas ROE is standing at 27.0 beats both the industry (30.1) and the SP 500. this implies that coca-cola does not deliver to the customers higher value as the PepsiCo. The net income ration to total income measures ROA (Return on Total Assets). Coca-cola at (16.37) once again does better in ROA better than PepsiCo (15.89), coca-cola is even better than the industry ROA (14.70). This may be attributed to long term debt (24.3dependence on debt by PepsiCo to try and maintain continued growth. The coca-colas long term debt is 15.3 against all the liabilities. It further implies that coca-cola is less vulnerable to disasters like war, inflation and recession.

The net profit margin shows us the amount of profit a firm gets for every 1 it makes from the revenues. The higher the firms net profit margin in comparison to its industry competitors, the better. The industry average margin of profit is 15.5 (drinks sector) and SP 500 11.6. coca-colas profit margin is 20.6 while PepsiCos is 14.1.

All of the figures used in the WACC (Weighted Average Cost of Capital) were retrieved from the 10-K reports of the company and some from the Yahoo finance, unless otherwise stated.  Calculation Demonstration

10-Year T-bond3.87
SP 500 RETURN8.05
PepsiCo beta 0.33
Coca-Cola beta  0.6
CAPM Equation Rs  Rrf  (Rpm)b
PepsiCoRs  3.87  (8.08   3.87)0.335.25
Coca-Cola Rs  3.87  (8.05 -3.87)0.6  6.38
Long Term Debt
PepsiCo
Long Term Debt 4203000000 3.5
Common Stock 115360876600 96.5
119563876600100
Coca-Cola
Long term Debt 3277000000 2.4
Common Task 135513142200 97.6
138790142200100

PepsiCo WACC WdRd  WpsRps  WceRs0.035(5.0)  0.965(5.25) 5.24
Coca-Cola WACC WdRd  WpsRps  WceRs 0.024(5.1)  0.965(6.38) 6.35

It is worth noting that neither Coca-Cola nor PepsiCo issue or give the preferred stock, this component was therefore not involved in the computation of WACC. One surprising factor is that both of the companies have low tax rates, 22 for coca-cola and 26 for PepsiCo, attributed to the oversees low tax rates signifying the size of the revenues.

Considering Long term debts for PepsiCo and Coca-Cola bond maturing 15052012 Present Value was 100.63, 5.15 coupon , present yield  5.0 and YTM OF 5.0 for PepsiCo. For Coca-Cola, bond maturing 15052012 Present Value was 102..12, 5.75 coupon, present yield 5.63 and YTM of 5.0. All the bonds were rated AA and therefore not callable.

PepsiCo had a lower WACC of 5.24 against Coca-Colas 6.35 giving it higher latitude in choosing investments projects. There will be greater stock valuation for PepsiCo because of its lower WACC. This have occurred for the past ten years in 1998PepsiCo stock have increased from 68.20, on the other hand Coca-Cola have suffered a fortune reversal in the same period. The Coca-cola prices declined to the current 58.72 from a whooping 78.38.

The tables bellow are the financial statements for PepsiCo and Coca-cola companies, they are used to come up with the final analysis, both horizontal and vertical analysis.
Table 1.

PEPSICO CONSOLIDATED STATEMENT OF INCOME AS AT 31ST DECEMBER.

(In millions except per share amount)
200520042003Net Revenue325622926126971Cost of sales141761267411691Selling, general and administrative expenses123141103110148Intangible assets Amortization150147145Impairment and restructuring charges-150147Merger related costs--59Operating profits592252594781Bottling equity income557380323Interest expenses(256)(167)(163)Interest income1597451Income from continuing operations before income taxes638255464992provision for income taxes230413721224Income from continuing operations407841743568Tax benefit from discontinued operations-38-Net income407842123568Net income per common share- Basic
continuing operations
discontinued operations
2.43
-
2.45
0.02
2.07
-total2.432.472.07Net income per common share-Diluted
continuing operations
discontinued operations
2.39
-
2.41
0.02
2.05
-total2.392.442.05
Table 2.

PEPSICO CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31ST

(in millions except per share amounts)20052004ASSETS
CURRENT ASSETSCash and cash equivalents17161280Short term investments3166216548823445Accounts and notes receivable, net32612999inventories16931541Prepaid expenses and other current assets618645TOTAL CURRENT ASSETS104548639Property, plant and equipment net86818149Amortized intangible assets, net530598Good will40883909Other non-amortizable intangible assets1086933Non-armotizable intangible assets51744842Investments in non controlled affiliates34853284Other assets34032475Total assets3172727987LIABILITIES AND SHAREHOLDERS EQUITY
current liabilitiesShort term obligations28891054Accounts payable and other current liabilities59715599Income taxes payable54699Total current liabilities94066752Long term debt obligations23132397Other liabilities43234099Deffer ed income taxes14341216Total liabilities1747614464Commitment and contingenciesPreferred stock, no par value4141Repurchased preferred stock(110)(110)Common shareholders equitiesCommon stock (issued 1782 shares)3030Capital in excess of par value614618Retained earnings2111618730Accumulative other cumulative loss(1053)(886)Less repurchased common stock2070718492Total common shareholder equity(6387)(4920)Total liabilities and shareholders equity14320135723172727987
Table 3.

THE COCA COLA COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31ST

(In millions except per share data)200520042003NET OPERATING REVENUES231042174220857Cost of Goods Sold819576747776GROSS PROFIT149091406813081Selling, general and administrative expenses873978907287Other operating charges85480573OPERATING INCOME608556985221Interest income235157176Interest expense240196178Equity income-net680621406Other loss-net(93)(82)(138)Gains on issuance of stock by equity investors23248INCOME BEFORE TAXES669062225495Income taxes181813751148NET INCOME487248474347BASIC NET INCOME PERSHARE2.042.001.77DILUTED NET INCOME PER SHARE2.042.001.77AVERAGING SHARES OUTSTANDING239224262459Effect of dilutive securities133
Table 4.

THE COCA-COLACOMPANY ANDSUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31

(in millions except par values)20052004ASSETSCURRENT ASSETSCash and cash equivalents47016707Marketable securities6661Trade accounts receivables22812244inventories14241420Prepaid expenses and other assets17781849TOTAL CURRENT ASSETS1025012281INVESTMENTS
equity methods investmentsCoca-cola enterprises inc.17311569Coca-cola Hellenic bottling Co. S.A.10391067Coca-cola FEMSA, S.A. De C.V.982792Coca-cola Amatil Limited748736Other principally bottling companies20621733Cost method investments, principally bottling companies360355TOTAL INVESTMENTS69226252OTHER ASSETS26482981PROPERTY, PLANT AND EQUIPMENT net57866091TRADEMARKS WITH INDEFINITE LIVES19462037GOODWILL10471097OTHER INTANGIBLE ASSETS828702TOTAL ASSETS2942731441LIABILITI AND SHARE OWNERS EQUITY.
CURRENT LIABILITIESAccount payable and accrued expenses44934403Loans and notes payable45184531Current maturities of long term debt281490Accrued income taxes797709TOTALCURRENT LIABILITIES98361113LONG TERM DEBT11541157OTHERLIABILITIES17302814DERRERED INCOME TAXES352402SHAREOWNERS EQUITYCommon stock, 0.25 par value authorized- 5600 sharesIssued-3507 and 3500 shares respectively877875Capital surplus54924928Reinvented earnings3129929105Accumulated other comprehensive income (loss)(1669)(1348)Treasury stock, at cost- 1138 and 1091 shares respectively(19644)(17625)TOTAL SHAREWONERS EQUITY1635515935TOTAL LIABILITIES AND SHAREOWNERS EQUITY2942731441

Table 5.
THE VERTICAL AND HORIZONTAL ANALYSIS RESULTS FOR  PEPSICO AND COCACOLA COMPANIES.

Type of AnalysisToolPepsiCoCoca-ColaHorizontal analysisPercent change total assets (2005  2004)(31,72 27,987)  27,987  13.4(29,427   31,441)  31,441  6.4Percent change total liabilities (2005  2004)(17,476-14,464)  14,464  20.8(13,072 - 15,506)  15,506  16Vertical analysisCurrent assets  total assets in 200510,454  31,727 10,250  29,427  34.832.90Current assets  total assets in 20048,639  27,987 12,281  31,441 30.9039.10Ratio analysisCurrent ratio for 200510,454  9,406 10,250  9,836 1.111 or 1.11 to 11.041 or 1.04 to 1Current ratio for 20048,639  6,752 12,281  11,133 1.281 or 1.28 to 11.101 or 1.10 to 1