Acc 280 - Financial Analysis

Financial Analysis

There are two chief competing organizations that produce soft drink beverages in the United States. The first is PepsiCo, Inc. (Pepsi) and the second is The Coco-Cola Company (Coca-Cola). Both companies continually compete globally to be the number one manufacturer and distributor for soft drink beverages. Both companies are instantly recognizable anywhere in the world. They have so systematically inundated the markets internationally that they revel in widespread acknowledgment for their products and for their companies. Traditionally, these are the major contenders in the "Cola Wars." They both produce flavored water, regular water, and soft drink sodas.

Coca-Cola and Pepsi cater to all income brackets across the world because of their capacity to create products which they have persuaded millions of people that their products have a great taste and sensibly priced. People tend to buy their products notwithstanding their income level.

I will review the Consolidated Statements of Income and Balance Sheets for these companies to divulge the financial situation of both enterprises in relation to one another. After a preparatory conversation of both companies, I will perform vertical and horizontal analysis from their annual report and financial data from 2004-2005, an explanation of which company appears to be more solvent, and last provide recommendations on each corporation that can help improve their financial health.

There is an extensive assortment of distributors in the soft drink market; however, Coco-Cola and Pepsi have remained number one and two for years. They have stretched far beyond the borders of the United States to become a growing concern in production and distribution universally. They have exhibited practices that each have followed to overcome impediments to worldwide manufacturing and distribution.

Coca-Cola and Pepsi both run global operations and compete internationally with one another for customers. They produce similar products and have created distribution and services that are comparable. From the early beginnings when just nine drinks a day were served, Coca-Cola has grown to the world's most ubiquitous brand, with more than 1.4 billion beverage servings sold each day. When people choose to reach for one of The Coca-Cola Company brands, the company wants that choice to be exciting and satisfying, every single time (The Coca-Cola Company, 2008).

PepsiCo is a world leader in convenient snacks, foods and beverages with revenues of more than $60 billion and over 285,000 employees. In 2009, PepsiCo, Inc. was named the Best Companies for Multi-Cultural Women by Working Mother magazine, and was honored with the "Respect Award" for its commitment to diversity by the Gay, Lesbian and Straight Education Network (PepsiCo, Inc. 2010).

Both companies have experienced global legal issues, practices, politics and business models. They have jumped into markets where they were at risk and have had to pull out of certain markets due to difficulties promoting their products. Both organizations design their products and business procedures for specific targeted populaces. Coca-Cola and Pepsi's impact in global markets drives the practices of other competing companies, despite the fact these other companies cannot compete at the level of Coca-Cola and Pepsi.

Vertical Analysis

The figures shown in the discussion of these organizations financial analysis are shown in millions, unless otherwise specified. For example, a number that shows 100 will mean 100 million and 1,000 would be a billion.

I will begin with the vertical analysis for these companies. This vertical analysis is drawn from each company's financial statement and discloses a percentage base figure. The base figure represents the total assets of each company for a specific annual period. I achieved the percentage by dividing each balance sheet line item by the total assets for that company. The total assets for each company are then the starting point for this analysis. Pepsi's total 2004 assets were $27,987. Pepsi's 2005 total assets were $31,727. Coca-Cola's total assets in 2004 were $31,441. Coca-Cola's 2005 total assets were $29,427 (Weygandt, Kimmel, & Kieso, 2008).

Each of these total asset figures can then be related to items from the balance sheet of each company. Cost of sales for Pepsi during 2004 was $12,674 yielding a ratio percentage of 45.3% of their total assets. In 2005, Pepsi's cost of sales was $14,167. This yielded a ratio percentage of 44.7% of their total assets. Coca-Cola's 2004 cost of goods sold was $7,674. This yielded a ratio percentage of 24.4% of their total assets. Coca-Cola's 2005 cost of goods sold was $8,195. This yielded a ratio percentage of 27.8% of their total assets. Pepsi's cost of goods sold differed by only .5% over these two years. Coca-Cola experienced an increase of 3.4% during this same accounting period. An increase does not automatically show a positive analysis since this single figure does not reveal whether the increase is a positive quota. A higher cost of sales may not be offset by higher profits matching or exceeding the increased cost.

Net income is the next item to be examined for each of the two companies. Pepsi had a net income in 2004 of $4,212. This figure yields a ratio percentage of 15.1% of their total assets. In 2005, Pepsi's net income was $4,078. This figure yields a ratio percentage of 13.2% of Pepsi's total assets. This is a decrease in their net income of 1.9% between 2004 and 2005. Pepsi also shows a decrease in cost of sales during this same period. Coca-Cola showed a 2004 net income of $4,847. This figure yields a ratio percentage of 15.4% of their total assets. Coca-Cola shows in 2005 their net income of $4,872. This figure yields a ratio percentage of 16.6% of their total assets. This is an increase of 1.2% over this two year period. Here Coca-Cola's increase in their cost of goods sold is not entirely offset by their revenue, since they experienced only an additional 1.2% during this period. Generally, this is not a positive indication for Coke.

I examined each corporation's consolidated balance sheet to compare each of their current assets and current liabilities to their total assets for each year measured. The vertical analysis yields a percentage of a specific base amount. Our base amount for these discussions is the total assets of each company. Pepsi's total current assets in 2004 were $8,639. This figure yields a ratio percentage of 30.9% of their total assets for this year. Pepsi's total current assets in 2005 were $10,454. This figure