According to the 2005 Annual Report, the company sells beverage products in more than 200 countries. The report further states that of the more than 50 billion beverage servings of all types consumed worldwide every day, beverages bearing the trademarks owned by or licensed to Coca-Cola account for approximately 1.3 billion. Of these, beverages bearing the trademark "" or "Coke" accounted for approximately 55% of the Company's total gallon sales.
Also according to the 2005 Annual Report, Coca-Cola had gallon sales distributed as follows:
- 27% in the United States
- 27% in Mexico, Brazil, Japan and China
- 46% in spread throughout the world
Coca Cola and Pepsi – big rivalry
According to Consumer Reports, in the 1970s, the rivalry continued to heat up the market. Pepsi conducted in stores, in what was called the "". These tests suggested that more consumers preferred the taste of Pepsi (which is believed to have more oil, less oil, and uses rather than ) to Coke. The sales of Pepsi started to climb, and Pepsi kicked off the "Challenge" across the nation.
In 1985, , amid much publicity, changed its . Some authorities believe that , as the reformulated drink came to be known, was invented specifically in response to the Pepsi Challenge. However, a consumer backlash led to Coca-Cola quickly reintroducing the original formula as Coke "Classic".
Overall, Coca-Cola continues to outsell Pepsi in almost all areas of the world. , (Pepsi has been a dominant sponsor of the since the ) and the of and are three exceptions.
By most accounts, Coca-Cola was India's leading soft drink until when it left India after a new government ordered The Coca-Cola Company to turn over its secret formula for Coke and dilute its stake in its Indian unit as required by the Foreign Exchange Regulation Act (FERA). In , PepsiCo gained entry to India by creating a joint venture with the Punjab government-owned (PAIC) and . This joint venture marketed and sold Lehar Pepsi until 1991 when the use of foreign brands was allowed; PepsiCo bought out its partners and ended the joint venture in . In , The Coca-Cola Company returned in pursuance of India's policy. In 2005, The Coca-Cola Company and PepsiCo together held 95% market share of soft-drink sales in India. Coca-Cola India's market share was 60.8%.
Pepsi had long been the drink of Canadian and it continues to hold its dominance by relying on local celebrities (especially , of fame) to sell its product. "Pepsi" eventually became an offensive for Francophones viewed as a lower class by in the middle of the 20th century. The term is now used as an historical reference to French-English linguistic animosity (During the partitionist debate surrounding the 1995 referendum, a pundit wrote, "And a wall will be erected along St-Laurent street [the traditional divide between French and English in Montréal] because some people were throwing Coke bottles one way and Pepsi bottles the other way").
In the U.S., Pepsi's total market share was about 31.7 percent in 2004, while Coke's was about 43.1 percent.
In , Pepsi once had a larger market share than Coca-Cola. However, Pepsi's dominance in Russia was undercut as the ended. PepsiCo had made a deal with the Soviet Union for scale production of Pepsi in 1972. When the , Pepsi, was associated with the old Soviet system, and Coca Cola, just newly introduced to the Russian market in 1992, was associated with the new system. Thus, Coca-Cola rapidly captured a significant away from Pepsi that might otherwise have needed years to build up. By July 2005, Coca-Cola enjoyed a market share of 19.4 percent, followed by Pepsi with 13 percent.
In the same way that Coca Cola has become a cultural icon and its global spread has spawned words like "", Pepsi Cola and its relation to Russia has also turned it into an icon. In the early 1990s, the term, "", began appearing as a pun on "", the reform policy of the Soviet Union under . Critics viewed the policy as a lot of fizz without substance and as an attempt to usher in Western products in deals there with the old elites. Pepsi, as one of the first American products in the Soviet Union, became a symbol of the relationship and the Soviet policy.
Chapter III – The data and its analysis
- Used types of analysis
We used PepsiCo’s Annual Report for the year ended December 31, 2006. Also we included comparative data for the 2005 and 2004 financial years restated in accordance with the same rules. Several types of analysis can be performed on a company’s financial statements. All these analyses rely on comparisons or relationships of data because comparisons enhance the utility, or practical value, of accounting information. In data analysis we used three types of financial statement analysis: horizontal analysis, vertical analysis, and ratio analysis. To be most useful, ratios should be analyzed over a period of years to take into account a representative group of these factors. Any one, or even any two years, may not be representative of the company’s performance over the long-term. That is why we used three financial years for comparison. We analyzed the main financial statements, such as income statement and balance sheet. Horizontal, vertical and ratio analyses cannot predict the future, but knowledge gained by a study of ratios and related information can help the investors to make informed decision.
b. Horizontal analysis
Many business decisions hinge on whether the numbers – in sales, income, expenses, and so on – are increasing or decreasing over time. The study of percentage change in comparative statements is called horizontal analysis. Computing percentage change in comparative statements requires two steps:
- Compute the money amount of the change from the earlier (base) period to the later period.
- Divide the money amount of change by the base period amount and this relationship in percentage.
We used 2006 and 2004 years to show and analyse the changes in two financial statements of PepsiCo, Inc.: income statement and balance sheet.
PepsiCo, Inc. Income Statement Years Ended December 31, 2006 and 2004, in millions of dollars (Horizontal analysis)
The comparative income statement reveals that net sales increased by 20 percent during two years, but the cost of goods sold grew by more. As a result, gross profit rose only by 16.8 percent. Note that provision form continuing operations actually decreased, and so the company significantly increased net income during 2005-2006 years. Our analysis shows that 2006 was much better year than 2004. But we see that the growth in income resulted more from boosting sales revenue than from decreasing in expenses.
PepsiCo, Inc. Balance Sheet Years Ended December 31, 2006 and 2004, in millions of dollars (Horizontal analysis)
The comparative balance sheet shows that 2005 and 2006 were years of growing for PepsiCo, Inc. Property, plant, and equipment increased from $8,639,000,000 to $9,130,000,000, a growth rate of 12 percent. Total assets increased by 7 percent, while total liabilities remained unchanged, only 0.5 percent increases. The company increased assets without borrowing, but it was financed by profitable operations, as show by the 32 percent increase in retained earnings.
Total current assets increased by 5.5 percent, consisting a largely of a 30 percent increase in cash, while total current liabilities increased only by 1.5 percent.
The 32 percent increase in retained earnings and the 30 percent increase in cash may indicate that higher dividends can be paid in the future.
- Vertical analysis
Horizontal analysis highlights changes in an item over time. However, no single technique provides a complete picture of a business. Another way to analyze a company is called vertical analysis.
Vertical analysis of a financial statement reveals the relationship of each statement item to the total, which is the 100 percent figure.
Percentages on income statement are computed by dividing all amounts by net sales. The vertical analysis, therefore, present each amount as a percentage of net sales.
The vertical analysis of the balance sheet shows all amounts as a percentage of total assets or the sum of liabilities and stockholder’s equity (recall that total assets equal total liabilities and stockholders’ equity).
PepsiCo, Inc. Income Statement Years Ended December 31, 2006, 2005, 2004, in millions of dollars (Vertical analysis)
The PepsiCo’s income statement reports that cost of PepsiCo, Inc. Gross profit percentage changes
good sold went up to 44.85 percent of net sales from 43.3 percent in 2004. This explains why gross profit percentage dropped to 55.15 percent in 2006 from 56.7 percent in 2004. The gross profit percentage is one of the most important pieces of information in financial analysis because it shows the relationship between net sales and cost of good sold. A company that can steadily increase its gross profit percentage over a long period is more likely to succeed than a business whose gross profit percentage is steadily declining.
So, PepsiCo, Inc. has a steadily dropping gross profit PepsiCo, Inc. Gross profit percentage changes
percentage and this is, certainly, the weakness. If you look only at gross profit amount you can see that it is increasing and it looks good. But with vertical analysis you can see different picture: gross profit percentage is steadily declining. Vertical analysis gives a view of the income statement that is different from the view provided by horizontal analysis. Decision makers use these two forms of analysis together. Also they use ratios….
- Ratio analysis
PepsiCo, Inc. Ratio analysis Years Ended December 31, 2006, 2005, 2004
The Coca-Cola Company, Ratio analysis Years Ended December 31, 2006, 2005, 2004
Chapter IV - Conclusion
Financial strengths and weaknesses revealed by the financial statements
and financial ratios
After the deep analysis of financial statements we come up with the conclusion that PepsiCo, Inc. does not have any significant weaknesses that we came across. The company is constantly growing which is shown on the stock performance and the computed financial ratios. The deterioration in profitability from 14 percent in 2004 to 13% in 2005 resulted from an increase in taxes from 26% in 2004 to 38% in 2005. An increase in taxes was 12%. But in 2006 we can see an improvement in profitability, it was 16%. It could be a result of decreasing taxes to 19%. The profitability ratio also resulted from changing in operating expenses as a percentage of sales and in CGS as a percentage of sales. Return on Invested Capital increased by 6%. Return on Equity (ROE) also increased by 6% from year 2004. From the stockholder’s point of view, ROE is an important measure of the income producing ability of a company. The increase in the ratio from 28% to 37% was regarded favourably by stockholders are interested in the ratio of total income to total assets as a measure of management’s efficient use of assets.
Activity ratios of PepsiCo indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Low activity ratios or deterioration in the activity ratios may indicate uncollectible accounts receivables or obsolete inventory or equipment. Activity ratios of PepsiCo: total asset turnover, the average collection period, and the inventory turnover increased during year 2006. The fixed asset turnover ratio, which measures the effectiveness of the company in utilizing its plant and equipment, increased also.
As we can see from the Liquidity ratios, company is in a health liquid position. Pepsi’s Current ratio, that defined as current assets divided by current liabilities, is 1.33, an improvement from the ratio of 1.11 at year-end 2005. The same happens with Quick ratio, defined similar to the current ratio but excludes inventory from the current assets. The quick ratio at year-end 2006 is 1.05, an improvement from the ratio of 0.93 at year-end 2005. These two ratios measure a company’s ability to meet financial obligations as they become current.
Good results Pepsi archived with the Leverage ratio which compares the total debt to total owner’s equity. It increases the riskiness of the business and, if used in excessive amounts, can result in financial embarrassment. So, the lower the ratio the better, meaning the company is able to repay its long term debt from its current operating income. One leverage ratio is the debt ratio. It measures the total funds provided by creditors as a percentage of total assets. In 2005 total liabilities made 55% of total assets, now in 2006 the debt ratio is only 48%. Hence the company is in health Financial Position and good for investing in.
The price of PepsiCo share went up from $55,05 in 2005 to $61.08 in 2006. The price of The Coca-Cola Company share was $42,59 in 2005 and $43,6 in 2006. If we compare the prices and changes in prices of shares of Pepsi with the prices and changes in prices of competitor we see that PepsiCo has much higher prices. It is clear that PepsiCo, Inc. is doing better if they judge such high prices for their stock. PepsiCo’s results of financial ratios with results of competitor, we also see that Pepsi has the leading position.
We conclude that the company sure does a good job on financial reporting, and the financial statements are comprehensive and very useful to the shareholders and to the people interested in financial performance of the company including potential investors.
Appendix 1 – PepsiCo, Inc., Financial Statements
Consolidated Statement of Income
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004
(In millions except per share amounts) 2006 2005 2004
Net Revenue…………………………………………………….... $35,137 $32,562 $29,261
Cost of sales………………………………………………............. 15,762 14,176 13,406
Selling, general and administrative expenses…………………….. 12, 774 12,314 11,031
Amortization of intangible assets………………………………… 162 150 147
Restructuring and impairment charges…………………………… - - 150
Operating Profit…………………………………………………... 6,439 5,922 5,259
Bottling equity income…………………………………………… 616 557 380
Interest expense…………………………………………………... (239) (256) (167)
Interest income…………………………………………………… 173 159 74
Income from Continuing Operations before Income Taxes……… 6,989 5,922 5,259
Provision for Income Taxes……………………………………… 1,347 2,304 1,372
Income from Continuing Operations……………………………... 5,642 4,078 4,174
Tax Benefit from Discontinued Operations……………………… - - 38
Net Income……………………………………………………….. $5,642 $4,078 $4,212
Net Income per Common Share – Basic
Continuing operations………………………………………… $3.42 $2.43 $2.45
Discontinued operations………………………………………. - - 0.02
Total…………………………………………………………... $3.42 $2.43 $2.47
Net Income per Common Share – Diluted
Continuing operations………………………………………… $3.34 $2.39 $2.41
Discontinued operations……………………..………………... - - 0.02
Total…………………………………………………………... $3.34 $2.39 $2.44
Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004
(In millions except per share amounts) 2006 2005 2004
ASSETS
Current Assets
Cash and cash equivalents………………………………………… $ 1,651 $ 1,716 $ 1,280
Short-term investments…………………………………………… 1,171 3,166 2,165
Accounts and notes receivable, net……………………………….. 3,725 3,261 2,999
Inventories………………………………………………………… 1,926 1,693 1,541
Prepaid expenses and other current assets………………………… 657 618 654
Total Current Assets…………………………………………... 9,130 10,454 8,639
Property, Plant and Equipment, net……………………………….. 9,687 8,681 8,149
Amortizable Intangible Assets, net……………………………….. 637 530 598
Goodwill…………………………………………………………... 4,594 4,088 3,909
Other nonamortizable intangible assets………………………….... 1,212 1,086 933
Nonamortizable Intangible Assets…………………………...... 5,806 5,174 4,842
Investments in Noncontrolled Affiliates………………………….. 3,690 3,485 3,284
Other Assets………………………………………………………. 980 3,403 2,475
Total Assets…………………………………………………… $29,930 $31,727 $27,987
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term obligations……………………………………………. $ 274 $ 2,889 $ 1,054
Accounts payable…………………………………………………. 5,271 5,357 4,594
Other Current Liabilities………………………………………….. 1,315 1,160 1,104
Income taxes payable…………………………………………….. 90 546 99
Total Current Liabilities………………………………………. 6,860 9,406 6,752
Long-Term Debt Obligations…………………………………….. 2,550 2,313 2,397
Other Liabilities…………………………………………………... 4,624 4,323 4,099
Deferred Income Taxes………………………………………….... 528 1,434 1,216
Total Liabilities………………………………………………... 14,483 17,407 14,415
Commitments and Contingencies
Preferred Stock, no par value…………………………………….. 41 41 41
Repurchased Preferred Stock………………………….................. (120) (110) (90)
Common Shareholders’ Equity
Common stock, par value 1 2/3c per share (issued 1,782 shares).. 30 30 30
Capital in excess of par value……………………………………. 584 614 618
Retained earnings………………………………………………... 24,837 21,116 18,730
Accumulated other comprehensive loss…………………………. (2,246) (1,053) (886)
23,205 20,707 18,492
Less: repurchased common stock, at cost (144 and 126 shares, respectively)…. (7,758) (6,387) (4,920)
Total Common Shareholders’ Equity………………............... 15,447 14,320 13,572
Total
Total Liabilities and Shareholders’ Equity……………….... $29,930 $31,727 $27,987
Appendix 2 – The Coca-Cola Company, Financial Statements
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 2006 2005 2004
(In millions except per share amounts)
NET OPERATING REVENUES $ 24,088 $ 23,104 $ 21,742
Cost of good sold 8,164 8,195 7,674
GROSS PROFIT 15,924 14,909 14,068
Selling, general and administrative expenses 9,431 8,739 7,890
Other operating charges 185 85 480
OPERATING INCOME 6,308 6,085 5,698
Interest income 193 235 157
Interest expense 220 240 196
Equity income – net 102 680 621
Other income (loss) – net 195 (93) (82)
Gains on issuances of stock by equity method investees - 23 24
INCOME BEFORE INCOME TAXES 6,578 6,690 5,222
Income taxes 1,498 1,818 1,375
NET INCOME $ 5,080 $ 4,872 $ 4,847
BASIC NET INCOME PER SHARE $ 2.16 $ 2.04 $ 2.00
DILUTED NET INCOME PER SHAR $ 2.16 $ 2.04 $ 2.00
AVERAGE SHARES OUTSTANDING 2,348 2,392 2,426
Effect of dilutive securities 2 1 3
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,350 2,393 2,429
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Year Ended December 2006 2005 2004
(In millions except par value)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,440 $ 4,701 $ 6,707
Marketable securities 150 66 61
Trade accounts receivable 2,704 2,281 2,171
Inventories 1,641 1,424 1,420
Prepaid expenses and other assets 1,506 1,778 1,735
Total Current Assets 8,441 10,250 12,094
INVESTMENTS
Equity method investments:
Coca-Cola Enterprises Inc. 1,312 1,731 1,569
Coca-Cola Hellenic Bottling Company S.A. 1,251 1,039 1,067
Coca-Cola FEMSA, S.A.B. de C.V. 835 982 792
Coca-Cola Amatil Limited 817 748 736
Other, principally bottling companies 2,095 2,062 1,733
Cost method investments, principally bottling companies 473 360 355
TOTAL INVESTMENT 6,783 6,922 6,252
OTHER ASSETS 2,701 2,648 3,054
PROPERTY, PLANT AND EQUIPMENT 6,903 5,786 6,091
TRADEMARKS WITH INDEFINITE LIVES 2,045 1,946 2,037
GOODWILL 1,403 1,047 1,097
OTHER INTANGIBLE ASSETS 1,687 828 702
TOTAL ASSETS $29,963 $29,427 $31,327
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,622 $ 5,290 $ 4,751
Loans and notes payable 3,268 4,546 6,021
Current maturities of long-term debt 33 28 1,490
Accrued income taxes 567 797 667
TOTAL CURRENT LIABILITIES 8,890 9,836 10,971
LONG-TERM DEBT 1,314 1,154 1,157
OTHER LIABILITIES 2,231 1,730 2,814
DEFERRED INCOME TAXES 608 352 450
TOTAL LIABILITIES 13,043 13,072 15,392
6
SHAREOWNERS’ EQUITY
Common stock, $0.25 par value; Authorized – 5,600 shares;
Issued – 3,511 and 3,507 shares, respectively 878 877 875
Capital surplus 5,983 5,492 4,928
Reinvested earnings 33,468 31,299 29,105
Accumulated other comprehensive income (loss) (1,291) (1,669) (1,348)
Treasury stock, at cost – 1,193 and 1,138 shares, respectively (22,118) (19,644) (17,625)
TOTAL SHAREOWNERS’ EQUITY 16,920 16,355 15,935
Total
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY $ 29,963 $ 29,427 $ 31,441
Appendix 3 - The bibliography
Printed sources:
“Introduction to Financial Accounting” (seventh edition) Prentice Hall, Upper Saddle River, NJ 07458, 1999
“Financial Accounting a Business Perspective” Roger H. Hermanson, Ph.D., CPA; James Don Edwards, Ph.D., CPA, 1995
“Accounting Principles” Hermansin, Edwards, Salmonson, 1989
Web sources:
The Coca-Cola Company, Annual report 2005,www.cola.com
Personally computed and formatted
Personally computed and formatted
Personally computed and formatted
Personally computed and formatted
Personally computed and formatted
PepsiCo, Inc. Annual report 2006, www.pepsico.com
The Coca-Cola Company, Annual report 2006, www.coka.com
PepsiCo, Inc. Annual report 2006, www.pepsico.com
The Coca-Cola Company, Annual report 2006, www.coka.com
