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Financial Analysis In this paper I’ve reviewed the annual reports for PepsiCo, Inc. and The Coca-Cola Company and attempted to analyze the financial statements of two industry leaders in the field of

Financial Analysis

In this paper I’ve reviewed the annual reports for PepsiCo, Inc. and The Coca-Cola

Company and attempted to analyze the financial statements of two industry leaders in the field of

soft drinks or also known as “cola or sodas”. These two major companies have for years compete

to be the number one soft drink not only in the United States but as well as international. Both,

PepsiCo, Inc. and Coca-Cola Company have been rivals for many years and the outcome of my

financial analysis will determine which one is the strongest and gains more profit.

In doing the financial analysis, I will conduct a Vertical Analysis (also called common-

size analysis) which is a technique that expresses each financial statement item as a percent of a

base amount. This would include the base for assets is Total Assets, for liabilities and

stockholders’ equity, the base is the Total Liabilities, and Stockholders’ Equity, and finally for

Income Statement accounts, the base is Net Sales or Net Revenues.

I have also concluded a Horizontal Analysis (also known as Trend Analysis) which is a

technique for evaluating a series of financial statement data over a period of time. Its purpose is

to determine the increase of decrease that has taken place. This change may be expressed as

either an amount or a percentage. The comparisons are performed using the Balance Sheet,

Retained Earnings, and Income Statement. And last I will provide recommendations on each

corporation that can help improve their financial health.

Through examining the financial statements of PepsiCo, Inc. and Coca-Cola Company, I

would like to present the following analysis and when it is completed you will notice that both

companies seem to be improving in one area according to the Horizontal Analysis and Vertical

analysis on the Appendix A and B. Almost all item on the PepsiCo’s balance sheet have

FINANCIAL ANALYSIS

favorable increased between 2004 and 2005; yet it is obvious that current assets have not

increased with the same rate as current liabilities, which would explain why the current ratio

have decreased from 2004 to 2005.

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For Coca-Cola Company, however current assets have decreased from $12,281 in 2004

to $10,250 in 2005, while current liabilities have decreased from $11,133 in 2004 to $9,836 in

2005.

PepsiCo, Inc, Inventories have increased from $1,541 in 2004 to $1,693 in 2005; this

could be a favorable sign especially when we see the improvement in the inventory turnover

ratio and day’s sales in inventory. The increase in inventory is unfavorable at times, but in this

case it appears that the increase in inventory is to meet increased demand for the company’s

products.

For the Coca-Cola Company, Inventories have increased from $1,420 in 2004 to $1,424

in 2005, which shows that the expected demand Coca-Cola’s management is expecting is not as

high as the one expected by PepsiCo’s management team leaders.

For PepsiCo, Inc., Cash and Cash Equivalents have increased from $1,280 in 2004 to

$1,716 in 2005 (34.06% increase), while Accounts Receivables have increased from $2,999 in

2004 to $3,261 in 2005 (an 8.74% increase) while sales have increased from $29,261 in 2004 to

$32,562 in 2005 (an 11.28% increase). This explains the increase in inventory as PepsiCo, Inc.

seems to be an increase in the demand for its products. The larger increase in Cash and Cash

Equivalents in comparison to the increase in receivables is probably due to stricter measures in

the company’s credit policy.

FINANCIAL ANALYSIS

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Also, as a result of the increase in demand, PepsiCo Inc is probably in a stronger position

and can therefore ask its customers to purchase its products in cash.

For the Coca-Cola Company, Cash and Cash Equivalents have decreased form $6,707 in

2004 to $4,701 in 2005 (29.91% decrease), while receivables have increased from $2,244 in

2004 to $2,281 in 2005 (8.2% increase). This is couple with an increase in sales from $21,742 in

2004 to $23,104 in 2005 (6.26% increase).

Coca-Cola Company management should seek new ways to regain its market share as

PepsiCo, Inc. has been acquiring more market share as clear form comparing the percentage

increase in sales of the two companies.

The Retained Earnings as a percentage of Total Liabilities and Stockholders’ Equity have

decreased from 66.92% in 2004 to 66.56% in 2005 for PepsiCo, Inc., which indicates that

PepsiCo is maintaining a constant payout ratio of dividends.

However for Coca-Cola Company the Retained Earnings as a percentage of total

Liabilities and Stockholders’ Equity has increased from 92.57% in 2004 to 106.36% in 2005

(7.54% increase), this indicates that Coca-Cola Company is decreasing its payout ratio so as to

meet future expansion needs.

Conducting a Ratio Analysis of both PepsiCo, Inc. and Coca-Cola Company, the

outcome of the analysis is as follow:

Liquidity Ratios:

FINANCIAL ANALYSIS

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After thoroughly examining the Current Ratio (measures the company’s short-term debt-

paying ability), and the Acid Test Ratio (quick ratio which measures the immediate short-term

debt-paying ability ), then was it noticeable that both companies have suffered a drop in their

current and quick ratios, yet most companies their receivables turnover ratio (measures the

liquidity of receivables), days sales in receivables (measures the number of days it takes the

company to convert its receivables into cash), inventory turnover (measures the liquidity of

inventory), and days’ sales in inventory (the number of days merchandise remain in inventory

until sold) ratios have improved.

This all means that both PepsiCo, Inc., and Coca-Cola Company are collecting their

money faster, and therefore are able to turnover its receivables quicker in 2005 than 2004. The

same can be noticed for the inventory turnover figures, for PepsiCo, Inc.; however the

percentage of current assets to total assets has increased from 30.9% in 2004 and 32.9% in 2005.

This is a good sign that signifies PepsiCo, Inc. is trying to lower its investments in noncurrent

assets.

The Profitability Ratios:

After examining the analysis in the appendix A and B and reviewing the Ratio, Vertical

and Horizontal Analysis form week Seven CheckPoint, one can see that the profit margin ratios

(which measures the percentage of net income that is generated by each dollar of sales) of both

companies PepsiCo, Inc., and Coca-Cola Company has dropped between 2004 and 2005, this

could be the result of these two companies always trying to compete against each other. The cost

of goods sold has increased for both these companies between 2004 and 2005.

FINANCIAL ANALYSIS

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The Asset Turnover (which measures how efficient is management in managing its asset

base to generate sales) for PepsiCo had dropped from 1.05 in 2004 to 1.03 in 2005, while the

Coca-Cola Company the Asset Turnover has increased from 0.69 in 2004 to 0.79 in 2005. This

indicates that Coca-Cola Company has a better managing the assets base than PepsiCo Inc, At

the same time PepsiCo, Inc, return on assets (measures the overall profitability of assets) has

dropped from 15.05% in 2004 to 12.85% in 2005, while it increased for Coca-Cola from 15.42%

to 16.56% for the same period.

One of the most important measures of profitability for many investors is the Return on

Equity, for this measures the profitability of their investment has dropped for PepsiCo, Inc, and

Coca-Cola Company between 2004 and 2005; probably due to the drop in the profit margin for

both companies.

Next the earnings per share (a ratio that measures net income earned by each share of

stock) has dropped for PepsiCo, Inc. from $2.48 in 2004 to $2.44 in 2005, while the price

earnings ratio (the ratio of the market price per share to earnings per share). The higher the price

earnings ratios the higher interest of investors in the companies operations have increased from

25.15 in 2004 to 25.57 in 2005 which is an indication that the investors have an increased

confidence in the company’s future performance.

For Coca-Cola where the earnings per share have increased form $2.00 in 2004 to $2.04

in 2005, yet the price earning ratio have dropped form 26.39 to 25.88 for the same period, which

can also indicate that not too many investors were interested in the company’s operations. With

these figures and analysis of increase and ratio drop is not a good sign that management for both

of these companies need to evaluate their options and keep a balance of increase and decrease in

FINANCIAL ANALYSIS

the profitability ratios.

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Solvency Ratios:

We will look at the debt to assets ratio (the percentage of total assets financed by

creditors as opposed to the percentage financed by investors) for PepsiCo Inc. had an increased

form 0.52 in 2004 to 0.55 in 2005, I suggest that management should evaluate their capital

structure because the increase of debt in the capital structure is not a good sign. An increase in

the debt ratio signifies a heavier reliance on debt; the interest paid on debt obligations have to be

paid whether the company’s operations are successful or not. A large increase in this ratio could

expose the company to the threat of bankruptcy if it can’t meet its obligations. The times interest

earned ratio has also decreased from 34.21 in 2004 to 25.93 in 2005, this proves that the debt

ratio since the times interest earned ratio measure the company’s ability to meet interest payment

obligations as they are due.

Coca-Cola, however the debt to assets ratio have decreased from 0.49 in 2004 to 0.44 in

2005, which is a favorable outcome because the debt ratio measures the percentage of total assets

provided by creditors and the lower the ratio the safer the company will be from any threat. The

times interest earned ratio have also decreased from 32.74 in 2004 to 28.88 in 2005. This is

probably due to an increase in the cost of debt although the debt had decreased; the interest paid

on debt had increased from $196 in 2004 to $240 in 2005. Management should conduct and

evaluate all necessary analysis to investigate as to why there is an issue and try to lower its

interest payment.

Conclusion

FINANCIAL ANALYSIS

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In the conclusion, I want to point out that both mogul corporations PepsiCo Inc. and

Coca-Cola Company are successful and even though PepsiCo Inc, has succeeded in gaining

more customers than Coca-Cola Company. Good marketing, advertisement, and promotions are

probably responsible for the success of PepsiCo, Inc. From my analysis, I believe that if both

companies continue to engage in stock repurchases plans which can result with increase in the

earnings per share since the amount of shares outstanding is now lower. If they continue with

this and work on keeping their percentage low on the solvency, both of these companies will

succeed as they are already successful.

I would also recommend that management try to analyze the components of their current

assets so as to increase both the current and acid test ratios, maybe lower their inventories a bit

will be great. Both of these companies PepsiCo Inc, and Coca-Cola Company should try to

increase their acid test ratio to at least 1:00 to 1:00 to ensure they have enough liquidity to meet

sudden short-term financing needs in the future.

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Demonstrative Communication Paper Communication can be verbal or nonverbal, written or visual. With verbal communication it is oral or written form of communicating, as to nonverbal communicative includes such as facial expressions, body posture, eye contact, or gestures. Demonstrative communication includes nonverbal and unwritten communications

 

Demonstrative Communication Paper

Communication can be verbal or nonverbal, written or visual. With verbal

communication it is oral or written form of communicating, as to nonverbal communicative

includes such as facial expressions, body posture, eye contact, or gestures. Demonstrative

communication includes nonverbal and unwritten communications. Demonstrative

communication entails sending a receiving wordless message. Facial expressions are the most

common among all nonverbal communication. Demonstrative communication reinforces verbal

communication.

According to Livestrong.com (2010),” Verbal communication makes up 7 percent of

your message, according to the College of DuPage’s management department, and “the

remainder is composed of 38 percent tone and 55 percent nonverbal cues.” Nonverbal

communications signals one sends are equally important as the words one speaks. Verbal

communication is when spoken words and includes actual words with tone and vocal inflection,

for example if one ask their children, “Where are you going?” can be interpret in a positive or

negative depending on the tone one uses.

Nonverbal communication is when one uses their body language and this includes facial

expressions. For example, when one says good morning to you they normally have a smile on

their face and they use their hand gesture to say hello, but if you say, “Good morning” and the

receiver does not give you eye contact and their body language is turning away, this sends a

negative message. According to Livestrong.com (2010), “Verbal and nonverbal communication

are interrelated. Steve Duck and David McMahan’s text “Basics of Communication” maintains

that “the function of nonverbal communication” is to engage the “interconnection with verbal

DEMONSTRATIVE COMMUNICATION PAPER

communication”.

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Effective communication between the sender and the receivers is the shared

understanding of information, feeling, thoughts, wants, needs, and the intention of what was

being communicated, according to Cheesebro, O’Connor, and Rios, (2010, p.5). Communication

can be effective and ineffective, positive or negative, and requires effective listening to the

sender and receiver. Other key points for effective communication is the understanding of

barriers, concepts, principles and technology,” according to Cheesebro, O’Connor, and Rios,

(2010, pp.3-21).

It’s important for people to use active listening when receiving any type of message. This

involves cultivating an interest in both the sender and the message (Cheesebro, O’Connor, and

Rios, 2010). This will allow a person to give a more proper response and feedback to the sender

of the message. Feedback is a very important part of communication, for it is one way the sender

and receiver of the message will understand one another and most importantly understand the

message.

One example showing how demonstrative communication can be effective and positive

for the sender and receiver will be; You are in the panel of hiring for a position in the office,

your first potential candidate is a woman in her early forties, your assistance brings the woman

to your office and you stand to introduce yourself with a smile and reach out your hand to shake,

the receiver reaches out her hand to meet yours and has a very big smile and introduces herself in

a exciting tone of her voice. This nonverbal communication is telling you this person is a happy

person and will do well for the company.

DEMONSTRATIVE COMMUNICATION PAPER

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An example of how demonstrative communication can be ineffective and negative for the

sender and receiver is; a woman finds out her husband has been cheating with one of his co-

workers. When her husband gets home, he notices that his wife seems upset by her facial

expressions, she gives him the silent treatment, serves his dinner and leaves the dinner table

without eating and slams the door to her room. The husband does not know what is going on

with his wife for she fails to respond to his question and her body language along with her facial

expressions is a signal that she is upset.

Demonstrative communication is a nonverbal and unwritten communication and involves

such things as facial expressions, tone of voice, body language, so forth. The body language we

make for example, eye contact, gestures, posture, body movements and the tone of voice we use

sends a message positively or negatively. Listening effectively, looking, moving, and reacting to

tell the sender of the message whether or not the receiver of the message cares and how well the

receiver is listening.

According to Livestrong.com (2010), “Communication and relationships are an

intertwined process” and that “communication creates a world of meaning.” Communication is

very important in the business or personal life of any individual and utilizing effective

communication will lead to sending a message to the receiver in a positive manner.

Demonstrative communication is essential and it reinforces verbal communication.

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Ratio, Vertical, and Horizontal Analysis Ratio, Vertical, and Horizontal are the three tools of financial statement analysis that helps determine whether the company has increased or decreased and also helps to measure the financial stability of a company. The three tools of financial statements analysis are:

Ratio, Vertical, and Horizontal Analysis

Ratio, Vertical, and Horizontal are the three tools of financial statement analysis that

helps determine whether the company has increased or decreased and also helps to measure the

financial stability of a company. The three tools of financial statements analysis are: Horizontal

(Trend) Analysis which evaluates the performance of the company from one accounting period

to the next. The comparisons are performed using the balance sheet, retained earnings, and

income statements, Second: Vertical (Common Size) Analysis which expresses each financial

statement as a percentage of a base amount, according to Weygandt, Kimmel, and Kieso (2008).

It is obtained by the division of each balance sheet item by the company’s total assets.

This yields a number (.xxxx) which is then translated to a percentage by shifting the decimal two

places. This percentage shows the growth patterns that the company is exhibiting, going up or

down depending on its increase in debt or its positive retained earnings. This type of analysis

particularly useful when management wants to see the percentage of assets does cash, accounts

receivable, inventory represent. This method is a great help for management to make decisions

regarding its credit policy, its inventory policy, etc.

Third: Ratio Analysis, according to Weygandt, Kimmel, & Kieso, (2008), “The ratio

analysis yields “the relationship among selected items of financial statement data.” The

relationship is expressed in terms of a percentage, rate or a proportion. This is a very important

analysis tool that is used by both internal and external users of financial statements, suppliers and

short-term creditors use it to examine the short-term liquidity of the firm, creditors and investors

use it to evaluate the profitability of the company hence decide on if its worth the risk of

investing in or extending credit facilities and most importantly creditors and managers also use

RATIO, VERTICAL, AND HORIZONTAL ANALYSES

ratio analysis to assess the long-term solvency of the company.

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PepsiCo, Incorporated

First thing that was completed was calculating the current ratio for 2005. To determine

this ratio we must start with the formula where “Current Ratio=Current Assets/Current

Liabilities.” Then take the data from the consolidated balance sheet in our text and input the data

to find the solution as follows:

Current Ratio =

The current ratio for Pepsi Co Inc. for the year 2005 equates to 1.11:1. Next we need to

calculate the same data for the year 2004 using the same formula.

Current Ratio =

The current ratio for PepsiCo Inc. for the year 2004 equates to 1.28:1. Now that we have

this data we proceed with performing a vertical analysis. For the vertical analysis we take the

items form the balance sheet and then divide by the total assets. This will determine what the

cash value is compared to their total assets. The formula used will look as follow: Percentage=

Cash + Cash equivalents/ Total Assets. For 2005 we take the data provided in our text and input

the data as follows:

%=

Converting the .054 into a percentage would equate to 5.4% in cash with cash equivalents.

Next view the same values for 2004.

%=

RATIO, VERTICAL, AND HORIZONTAL ANALYSES

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Converting the .046 into a percentage leaves us with 4.6% in cash with cash equivalents.

The data provided in this formula can be used to look at the overall picture compared to the

company’s current assets. By using this data one can start to put together the pieces in order

to see the whole picture. Next one should take a look at how these numbers fit together when

combined to create a complete picture. Using the same type of equation where the percent equals

the current assets divided by the totals assets as follow:

For 2005 PepsiCo Inc. formula: % =

For 2004 PepsiCo Inc. formula: % =

For the horizontal analysis for PepsiCo Inc. I needed to calculate the increase or decrease

for 2004 to 2005. So I took the data provided to calculate the change in assets by percent. The

formula to determine this calculation uses the 2005 total current assets which divided by the

2004 current assets as follow:

1.2101=

Total differences of 21.01% which is an increase from the year 2004. Next we will look

at the company’s liabilities using the following formula:

1.393=

Total differences of 39% which equates to an increase in liabilities from 2004 to 2005.

This could be result of the company acquiring additional assets during this period.

Coca-Cola Company

RATIO, VERTICAL, AND HORIZONTAL ANALYSES

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For the Coca-Cola Company I used the same equations to come up with the ratio

comparative data starting with vertical, then horizontal, and then reviewing the overall picture.

Current Ratio for 2005:

Current Ratio for 2004:

2005 percentage in cash and equivalents

2004 percentage in cash and equivalents:

2005 percent of current assets:

2004 percent of current assets:

The next step was taking the two compilations for each year with 10,250 divided by

12,281 results in a difference of .835 or 83.5%. This would be a significant decrease from 2004

compared to 2005. To calculate the difference we subtract the 83.5% from 100 and end up with

16.5%. This will leave a total of 16.5% decrease in total assets. Next took a look at the decrease

RATIO, VERTICAL, AND HORIZONTAL ANALYSES

in liabilities using the same type of formula. According to the numbers 2005 had 9,836 in total

liabilities and in 2004 it had 11,133. I divided the numbers .8835 which would make a difference

of 88.35%. Next I took this number and subtract from 100 to obtain our decrease in liabilities

which equals 11.65% form 2004 to 2005.

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