Financial Statement Analysis

1 Financial Statement Analysis Final Paper Company Overview The three companies under consideration, i.e., Coca-Cola, Dr. Pepper Company, and PepsiCo, all operate in the beverage industry. The Coca-Cola Company has products sold in over 200 territories and countries. The purpose of the company has been to refresh the world and make a difference. As such, its portfolio of brands includes soft drinks, Fanta, Sprite, and CocaCola. It also has coffee, sports, hydration, and tea brands, including Gold Peak, Georgia, Costa, Powerade, Topo Choco, Vitaminwater, SmartWater, and Dasani. The company is continuously transforming its product portfolio from reducing sugar in the drinks to bringing new innovative products to the market. The company headquarters are located in Atlanta, Georgia, in the United States. It also has 111 office locations across 49 countries (Singh, Pal, Dey & Mukherjee, 2020).

The company has various competitors such as PepsiCo, Red Bull, Dr. Pepper, Britvic, and Monster Beverage.

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Dr. Pepper became a stand-alone that is publicly traded in 2008. It is one of North America's leading refreshment beverage companies. The market markets over 50 carbonated soft drinks, teas, juices, waters and mixers, and other premium beverages. The company is currently headquartered in Plano, Texas. It manufacturers bottles and has been actively involved in distributing a variety of non-alcoholic drinks. Their portfolio includes flavored carbonated drinks as well as non-carbonated beverages, juice drinks ad juices. The company's brand portfolio includes Venom, Clamato, Squirt, Canada Dry, Sunkist soda (Harrison, 2011). The company operates its business through three major segments: Latin America Beverages, packaged beverages, and beverage concentrate. The company's customers are majorly the retail stores such as Walmart Stores (Harrison, 2011). The major two competitors for the company in the liquid refreshment beverage market are PepsiCo and Coca-Cola. It also competes against other companies such as Kraft Foods, S.A., and Nestle, among others. As a bottler, the company's major competition is with bottlers such as Coca-Cola Enterprises, PepsiAmerias, and Pepsi Bottling Group (Harrison, 2011). In addition, there are various smaller, private and regional label manufacturers with which the company competes, such as the Cott Corporation.

PepsiCo is also among the world leaders in the beverage industry. The company is in over 200 countries across the world, and it is based in New York, America. The company is made up of seven divisions, namely, Frito-Lay North America, PepsiCo beverages North America, Quaker foods North America, Latin America, Africa, Europe, Asia Pacific, Australia/New Zealand, and China (Kadim, Sunardi & Husain, 2020). Each division tends to have its unique history and way of doing business. Considering the products produced by the company, they can be classified into Quaker, which comprises Aunt Jimima, Crunch Cereal, Life

3 Cereal, Quaker Oatmeal, and Life Cereal, among others. Tropicana comprises Naked Juices, Tropicana Twister, Dole, and Premium juices, among other products. Frito-Lay also comprises Flat Earth, True North, Miss Vickie's Potatoe Chips, Oberto Jerky, and Grandmas Cookies (Kadim et al., 2020). Gatorade entails Gatorade Thirst Quencher, Propel Fitness Water, and Tiger Woods Line, among other products. Finally, Pepsi cola comprises popular drinks such as Pepsi, Mountain Dew, Mug Root Beer, Sierra Mist, Slice, Aquafina, SOBE, and Lipton. PepsiCo has a vast product portfolio compared to its competitors (Kadim et al., 2020). Its major competitors are still Coca-Cola and Kraft Foods.

Ratio Analysis Coca-Cola Company had a quick ratio of about 1.13 for the financial quarter under consideration, which ended March 2021. The ratio suggests that the company exhibits good short-term financial resilience and ability. Within the same period, PepsiCo had a quick ratio of about 0.73. This implies that the company is not in a position to meet its current liabilities fully.

Dr. Pepper had a quick ratio of 0.25. This also indicates that the company cannot currently be able to pay back its current liabilities as required. As for the current ratio, Coca-Cola has a current ratio of 1.33. This also indicates good short-term financial health. Dr. Pepper has a current ratio of 0.37. The ratio points towards the company having some difficulties when it comes to meeting its obligations. PepsiCo has a current ratio of about 0.93 (Macrotrends, 2021).

Therefore, there is a possibility that the company may have problems when it comes to meeting its current financial obligations.

The gross profit percentage for PepsiCo for the period which ended March 2021 is about 35.40%. The annualized gross profit for this period was $32,596 Mil, and the average total assets within this period were about $92,071 Mil. Coca-Cola’s gross profit to asset percentage was

4 about 24.89%. The annualized gross profit for the quarter ended March 2021 was about $22,060, while the total assets were $88,645 Mil (Yahoo Finance, 2021). As for Dr. Pepper, this ratio was about 12.78 % (Yahoo Finance, 2021).

The inventory turnover for Coca-Cola Company by March 2021 was about 1.06. The cost of goods sold for Coca-Cola Company for three months was about $3505Mil. The total inventories which were recorded for the same quarter were $3,311 Mil. The inventory turnover for the quarter was therefore 1.06. Dr. Pepper's cost of goods for the three months was approximately $1,302 Mil, while the total inventories for the same period were about $802 Mil (Macrotrends, 2021). This translates to an inventory turnover of about 1.62. For PepsiCo, the inventory turnover for the same period was 1.53, i.e., cost of goods sold amounting to $6,671 Mil and total inventories of about $4,364 Mil. The accounts receivable turnover ratio for Coca-Cola was 8.58, PepsiCo had 8.37, while Dr. Pepper had 10.61 (Macrotrends, 2021).

PepsiCo had an asset turnover ratio of 0.16 (revenue of $14,820 Mil and assets amounting to about $92,071 Mil). Coca-Cola had an asset turnover ratio of 0.39 (i.e., the revenue of $1,270 Mil and total assets amounting to $3,254 Mil). Dr. Pepper had a ratio of 0.06 (i.e., the revenue of $2,902 Mil and total assets amounting to $50,091 Mil) (Yahoo Finance, 2021).

The quick ratio measures the ability of a company to meet its short-term obligations by using its most liquid assets. It is determined by taking the company's total current assets and dividing them by its current liabilities. The quick ratio tends to indicate a short-term liquidity position and measures how well it is endowed with most liquid assets. The higher the ratio, the better the liquidity of the company and financial health. While the lower ratio, the more the company will struggle with paying debts.

5 The current ratios also measure the ability of a company to meet short-term obligations. It is calculated by taking the current assets and dividing them by current liabilities. In this case, low values may not always indicate a critical problem. If a company like Dr. Pepper has good longterm prospects, it is in a better position to borrow against such prospects to meet the current obligations.

Inventory turnover is supposed to measure how fast a company can turn over its inventory in a year. It is calculated by taking the cost of goods and dividing it by the total inventories. Days inventory is supposed to show the number of days of the goods in sales which a company has in the inventory. The inventory turnovers for the companies show a possibility of the companies overstocking or deficiencies in the product line. Therefore, high inventory turnover ratios are an indicator of effective inventory management.

Gross profit to asset percentage can help determine how efficiently a firm will use its assets to generate gross profits — going by this measure, PepsiCo and Coca-Cola. It is said that a double-digit concerning this ratio may indicate some competitive advantage. The accounts receivable turnover ratio is the average accounts receivable for a specific period divided by the net sales. It is supposed to give the business an idea of how efficiently it collects the debts. For the above case, PepsiCo is most efficient in collecting the debts due to a lower ratio. A higher asset turnover ratio is better as it depicts efficiency in the deployment of assets to generate revenue. On that note, Coca-Cola can use the assets most efficiently.

Comparison of Accounting Methods The direct write-off method considers the bad accounts as expenses at the point when it is deemed uncollectible. In contrast, the allowance method is supposed to provide in advance for uncollectible accounts (Miller-Nobles, Mattison, & Matsumura, 2018). The Coca-Cola Company

6 uses the direct write-off method to account for uncollectible. Dr. Pepper uses the allowance method to write off their bad debts. PepsiCo uses both the allowance method and the write-off method for their accounts uncollectible.

In the straight-line method of depreciation, the asset's original cost is not supposed to change over the life of its use in the business. The double-declining method front-loads the depreciation in such a way that you expense more in the earlier years than in the later years of the useful life of an asset. The unit of production method depreciates an asset in line with a specific unit of output, e.g., the miles every year for a vehicle. A company like PepsiCo uses the straight-line method to calculate depreciation, and the company property, plant, and equipment are recorded as the historical cost (Kadim et al., 2020). Coca-Cola and Dr. Pepper also depreciate their assets on a straight-line basis.

FIFO ensures that the oldest products in the inventory of a company have been sold, while LIFO ensures that the most recent products in the company's inventory are first sold, and these costs are used instead (Miller-Nobles et al., 2018). PepsiCo uses the LIFO method for the subsidiaries and uses the FIFO when it comes to costs of inventories. Coca-Cola emphasizes the use of resources in order of purchase and therefore embraces the FIFO method. Dr. Pepper Company uses LIFO. The companies have intangible assets which are captured in their financial statements.

Taking Coca-Cola, for instance, the intangible assets have been classified as goodwill, trademarks, indefinite-lived intangible assets such as customer relationships, and definite lived intangible assets such as accumulated amortization and impairment charges (Singh, Pal, Dey, & Mukherjee, 2020). Dr. Pepper and PepsiCo also have these categories of intangible assets.

Considering the procedures in which these intangibles are treated, the patents received through

7 the company’s work do not show up on the balance sheet even though it has value. If it is sold to another company, it is captured on its balance sheet as an intangible asset. Some intangible assets are subjected to amortization, i.e., they are depreciated, while some are still written down when the company decides the assets are impaired. As a result, intangibles appear on the balance sheet at fair value.

Recommendations The liquidity ratios of the companies indicated that they were able to settle their shortterm obligations using their current assets. While Coca-Cola has a very stable quick ratio, Dr. Pepper and PepsiCo should improve their ability to settle their short-term obligations using their liquid assets. Dr. Pepper and PepsiCo also have very low current ratios. To improve these liquidity ratios, the companies can put in place a few measures. For instance, they can use sweep accounts, which transfer funds into high-interest rate accounts when they are not needed, and back to the accessible accounts when they are needed. The ratios can also be improved by paying the liabilities quickly and reducing the short-term overhead expenses. When it comes to enhancing the liquidity in the long term for a company like Coca-Cola that is already doing well in the short term, the company should implement long pay cycles for accounts payable and invoicing customers very fast for receivables.

Conclusions The three companies have exhibited different trajectories as far as their liquidities are concerned. Coca-Cola has been strong as far as the liquidity ratios are concerned, except for inventory turnover, of which it is performing dismally compared to the competitors. As far as the current ratios and the quick ratios are concerned, Dr. Pepper and PepsiCo are not doing well; therefore, their short-term financial health should be addressed. Some of the recommended

8 measures include paying the liabilities quickly, reducing the short-term overhead expenses, and using sweep accounts. The companies also employ different procedures, e.g., Dr. Pepper and PepsiCo use the allowance method while Coca-Cola embraces the direct-write-off method. CocaCola uses the FIFO method for inventory; Dr. Pepper uses LIFO, while PepsiCo uses both.

9 References Harrison, J. S. (2011). Dr. Pepper Snapple Group: Fighting to prosper in a highly competitive market. https://scholarship.richmond.edu/cgi/viewcontent.cgi? article=1004&context=robins-case-network Kadim, A., Sunardi, N., & Husain, T. (2020). The modeling firm's value based on financial ratios, intellectual capital and dividend policy. Accounting, 6(5), 859-870.

Macrotrends (2021). PepsiCo Balance Sheet 2005-2021 | PEP. https://www.macrotrends.net/stocks/charts/PEP/pepsico/balance-sheet Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2018). Horngren’s accounting (12th ed.). Pearson.

Singh, M., Pal, A., Dey, L., & Mukherjee, A. (2020). Innovation and revenue: deep-diving into the temporal rank-shifts of fortune 500 companies. In Proceedings of the 7th ACM IKDD CoDS and 25th COMAD (pp. 268-274).

Yahoo Finance (2021). The Coca-Cola Company (KO). https://finance.yahoo.com/quote/KO/balance-sheet/

10 Appendices Coca-Cola balance sheet

(Yahoo Finance, 2021)

11 Dr Pepper balance sheet

(Macrotrends, 2021)

12 PepsiCo

(Macrotrends, 2021)