June 9, 2013

XACC-280

The accounting practices of today’s companies are highly regulated by several outside agencies. These regulations help to ensure that the accounting practices of all companies are equal and unbiased. As we all know, many corporations in the world today have revenues in the millions and billions of dollars. A mistake or error in the accounting department of these companies could result in millions of dollars lost in a short time. Also, without strict accounting practices, dishonest employees could easily take money from the company.

In this paper we will look at the accounting practices of two major companies that engage in business in the U.S. and throughout the world. Coca-Cola and Pepsi are two names that we hear every day and maybe purchasing their products without even knowing it. For example, Power-ade® is a registered Coca-Cola product. We will analyze these two corporations on a vertical and horizontal basis and see if there are any recommendations that could be made to improve their finances.

A vertical analysis is one that looks at each item in a financial statement as a percent of a base amount. One type of vertical analysis is saying that properties owned are a certain percentage of the total assets of the company. Horizontal analysis is that evaluates a series of financial data over a period of time. An example of this could be the profit totals for the year compared to previous years. When this type of analysis is done, we can see if an increase or decrease has taken place.

First we will look at the horizontal analysis for Pepsi. The first analysis will be the change in total assets from 2004 to 2005. In 2004 the total assets were (in millions) 27,987 and in 2005 total assets were 31,727. If we subtract 2004’s total from 2005’s total we get 3,740. Then we divide 3,740 by 27,987 and get 0.1336. This means that Pepsi’s total assets increased 13.36% in 2005 from 2004. `Now we will do the same for Coca-cola. In 2004, total assets were 29,427 and in 2005 they were 31,441. After subtracting the 2004 total from the 2005 total we get 2,014. Divide to get 0.0640 which shows that Coca-cola’s total assets decreased 6.4% from 2004 to 2005.

By comparing the two companies’ in the same categories we are able to see how they are doing as competitors. In the total asset category, even though Coca-cola showed a decrease in total assets, they are still relatively equal. The best way to get a good idea of assets is to compare the total assets of the company to the total liabilities, so we will look at those figures next.

The total liability for Pepsi in 2004 was 14,464 and 2005 was 17,476. Just like in the assets analysis we will subtract 2004 from 2005. 17,476-14,464=3,012. Divide 3,012 by the 2004 total to get 0.2082. We now know that Pepsi’s liabilities increased 20.82% in 2005.

For Coca-cola, they showed 15,506 in liabilities in 2004 and 13,072 in 2005. By doing the same operation as above we can find that Coca-cola’s liabilities decreased by 16% in 2005. So Pepsi increased their total assets and total liabilities in 2004 while Coca-cola showed a decrease in both categories for the same time period.

Next we will look at two different vertical analyses of each company in 2005 the first being the percent of total assets that are current assets. To get this number we will divide the current assets total by the total assets total. For Pepsi, the current assets show 10,454 and the total assets show 31,727. This gives us 32.9. Thus, the current assets for Pepsi make up 32.9% of the total assets. For Coca-cola, the current assets are 10,250 and the total assets are 29,427 which show us that the current assets are 34.8% of the total assets and again the two companies are quite comparable.

For the second vertical analysis we will look at the same analysis as above for 2004. In 2004 Pepsi’s current assets made up 30.9% of their total assets...