Pepsi Co. and Coca-Cola’s Vertical, Horizontal, and Ratio Analysis XACC/280 Submitted by: Lataikeii Evans Date: April 8, 2011 Daneene Barton Arbitrating a company’s monetary physical stability inculpate their financial statements (income statements, balance sheets, and statement of cash flow). These statements must follow the GAAP standards. Sidewise from the statements that are involved in balancing a company or in my case comparing the financial stability of the two successful companies’ three components are involved.
The profitability, liquidity, and solvency are the three factors or components used in the analytical process of determining the success or nonsuccesses of a company. Understanding of the valuable components of accounting One having an intuitive understanding of the terms makes for a smoother transaction as far as performing an analysis of the economic status of a company.
The component profitability that term is used to ventilate the performance of a company over a specified time period; solvency is a term used to accredit a company’s ability to whether or not long-term financial obligations will be met as well as invest in future developments; and the last component liquidity is a term that is used that by description means a company’s capability in paying on short-term debts at the time in which they are due: by requisite deadlines. Tools used to support the components
Though solvency, profitability, and liquidity provide a useful way of measuring the status of a company’s finances the ratios provide a more thorough, yet a quick view of the where the company stands financial. With the ratios you are able to get a visual of how well off a company is or how far off from success it is going. In order to maneuver through the many functions of accounting and the components the tools used include vertical analysis, horizontal analysis, and ratio analysis.
Vertical analysis according to (Investopedia ULC, 2011) is a “method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account”. In order to get the results with the vertical analysis one would have to divide the expenses from the income statement by the net sales (by given year). The Vertical analysis methods give a decimal calculated outcome which can ultimately be used to determine the company’s expansion, growth, or constricted area if any exist.
The horizontal analysis according to (Investopedia ULC, 2011) is a “procedure in fundamental analysis in which an analyst compares ratios or line items in a company’s financial statements over a certain period of time (side by side). The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration”. Lastly; the ratio analysis is a tool basically used by individuals to manipulate a calculable analysis on a company’s fiscal/economical statements. Calculating the Liquidity Ratios of Coca-Cola
We are to utilize the information from the condensed balance sheet in our text books and abstract the data used to find the results. These tools can be utilized to measure both the PepsiCo Incorporated and Coca Cola’s financial consummation. In previous discussions I suggested that Coca Cola would be the best choice to invest in below shows the financial status of Coca-Cola. Current Ratio (2005) 10,250 (current total assets) = 1. 04 9,836 (current total liabilities) The same method will be applied to calculate the status of 2004 Current Ratio (2004) 12,281 (current total assets) = 1. 10 1,133 (current total liabilities) It is prominent that whatever strategies that Coca Cola is using is generating more assets for them. The data has been calculated so now we can proceed to getting the vertical analysis ratio results. To calculate the cash value we would divide the cash and cash equivalents by the total assets as shown below. Cash and Cash Equivalents Percentages (2005) 4,701 (cash and cash equivalent) = 0. 1598 (15. 98%) 29,427 (total assets) The same method will be applied to calculate the status of 2004 Cash and Cash Equivalents Percentages (2004) 6,707 (cash and cash equivalent) = 0. 213 (12. 13%) 31,441 (total assets) In determining the value or percentage of the current assets I will be dividing the current total assets by the total assets as shown below. Current Asset Percentage (2005) 10,250 (current total assets) = 0. 348 (34. 8%) 29,427 (total assets) The same method will be applied to calculate the status of 2004 Current Asset Percentage (2004) 12,281 (current total assets) = 0. 391 (39. 1%) 31,441(total assets) Gains from 2004 to 2005 When applying the horizontal analysis in order to find out the increase or the decrease for 2004 and 2005 for Coca-Cola. e take the data that is provided in the text and determine the change in the assets by the percentage. In order to get the results the formula used would be to divide total current assets (2005)/ total current assets (2004). 10,250 total current assets (2005) =0. 348 (34. 8%) 29,427 total current assets (2004) Coca-Cola’s assets have increased by 34. 8% from. Calculating the Profitability Ratios of Coca-Cola Profit (2005) 23,104 (net operating revenues – 8,195 (cost of goods sold) = 0. 645 (64. 5%) 23,104 (net operating revenues) Profit (2004) 21,742 (net operating revenues – 7,674 (cost of goods sold) = 0. 45 (64. 7%) 21,742 (net operating revenues) From liquidity ratios to profitability ratios Coca Cola has provided a stable business to make fortunate people want to invest. Not only did Coca Cola reduce their liabilities but they increased the earnings as well. Pepsi Co. is financially stable however there is a difference. Pepsi Co. lacks and as a result their financial stability differs from Coca Cola. Below reflect the ratios of Pepsi Co. As we did in getting the results with Coca Cola we are to utilize the information from the condensed balance sheet in our text books and abstract the data used to find the results.
Calculating the Liquidity Ratios of Pepsi Co. In determining the value or percentage of the current ratio I will be dividing the current total assets by the current total liabilities as shown below. In determining the many ratios with Pepsi Co. by the ending one will be able to see significant difference in the two and at that point will probably be able to develop their own panorama as to why Pepsi Co. is drastically behind Coca-Cola’s financial status. Current Ratio (2005) 10,454 (current total assets) = 1. 11 9,406 (current total liabilities) The same method will be applied to calculate the status of 2004 Current Ratio (2004) ,639 (current total assets) = 1. 28 6,752 (current total liabilities) If you just went by the current Ratio then Pepsi Co. would be the ideal company to invest in however as we get the following results/calculations of the other areas of Pepsi Co. then you will then see why ultimately Coca Cola was the best choice. The data has been calculated so now we can proceed to getting the vertical analysis ratio results. As done with Coca-Cola in finding the cash and cash equivalents percentage I will be dividing the cash and cash equivalents by the total assets as shown below.
Cash and Cash Equivalents Percentages (2005) 1,716 (cash and cash equivalent) = 0. 054 (5. 4%) 31,727 (total assets) The same method will be applied to calculate the status of 2004 Cash and Cash Equivalents Percentages (2004) 1,280 (cash and cash equivalent) = 0. 046 (4. 6%) 27,987 (total assets) The cash and cash equivalents of Pepsi Co. are down by a large percentage to Coca-Cola. (HSBC Finance Corporation, 2011) “Cash equivalents, or cash investments, are short-term investments on which you earn interest.
The interest is calculated as a percentage of your principal, as it is with bonds, and may be compound or simple, depending on the type of investment you make”. Pepsi Co. is receiving very little interest in comparison to one of their biggest competitors. Now the current asset will calculated in order to make the comparison. In determining the value or percentage of the current assets I will be dividing the current total assets by the total assets as shown below. Current Asset Percentage (2005) 10,454 (current total assets) = 0. 3295 (32. 95%) 31,727 (total assets)
The same method will be applied to calculate the status of 2004 Current Asset Percentage (2004) 8,639 (current total assets) = 0. 3086 (30. 87%) 27,987(total assets) When apply the horizontal analysis in order to find out the increase or the decrease for 2004 and 2005 for Pepsi Co. we apply the same method of taking the data that is provided in the text and determine the change in the assets by the percentage. In order to get the results the formula used would be to divide total current assets (2005)/ total current assets (2004) 10,454 total current assets (2005) =1. 21 (21%) ,639 total current assets (2004) Just at a quick glance you can see that current assets are up by 21% for Pepsi Co. versus their competitor Coca-Cola at 34. 8%. There are a few factors in why Pepsi Co. in comparison to Cola-Cola reflects significant percentages. The results of the liabilities of Pepsi Co. are: 8,639 (total current liabilities 2005) = 0. 309 (30. 9%) 27,987(total current liabilities 2004) Final Comparison and conclusion In comparing the two it is prominent that Coca-Cola is the better pick as far as who to invest in if given the opportunity to invest in one or the other.
Through analyzing the many ratios and utilizing the components to accurately rationalize the status of the financial stability of the two companies Coca-Cola has proved to have a higher financial accountability. There are many factors that brought me to this conclusion. Just look at the statements you can see that Pepsi Co. has more liabilities than Coca-Cola and that would generally be the case since Pepsi Co. has monies invested in other products and Cola does not have any other involvements in other products.
But ultimately I feel both companies would be great to invest in because they both are successful and will be around forever (never know). Pepsi Co. could incorporate a change of methods that will place them at the same level if not higher than Coca-Cola’s financial status. Because Pepsi has ties in other developments naturally their liabilities would be greater however with the right marketing enforcement Pepsi Co. could supersede the financial aspect of Coca-Cola and this is the ending evaluation and comparisons of the horizontal, vertical, and ratio analysis of Pepsi Co. and Coca-Cola. Reference HSBC Finance Corporation. 2011). HSBC. Retrieved May 14, 2011, from http://www. yourmoneycounts. com/ymc/goals/investing/cash_equivalents. html Investopedia ULC. (2011). Investopedia. Retrieved May 13, 2011, from http://www. investopedia. com/terms/v/vertical_analysis. asp Investopedia ULC. (2011). Investopedia. Retrieved May 13, 2011, from http://www. investopedia. com/terms/h/horizontalanalysis. asp Text Book. Specimen Financial Statements. Appendix A. PepsiCo. Inc. Retrieved May 12, 2011. University of Phoenix. Text Book. Specimen Financial Statements. Appendix B. The Coca-Cola Company Retrieved May 12, 2011. University of Phoenix.
