Pepsico balance sheet 2018 pdf

PepsiCo_and_Coca_Cola_

Research Project Part III

Laura Pena Varona

Keiser University

Dr. Bunney L Schmidt

Adv Auditing Theory and Application (ACG6635G1-101112021)

Research Project Part I

PepsiCo Incorporation was founded in 1965 as a result of a merger between Pepsi-Cola led by Don Kendall and Frito-Lay led by Herman Lay. The two chief executive officers agreed to amalgamate their companies to form one of the world’s leading foods and beverages firm. The firm currently operates in the food and beverage industry with a wide range of business portfolios, such as Pepsi-Cola, Quaker, and Tropicana, among others (“About the Company,” n.d.). The company reports six segments, including Frito-Lay North America, Quaker Foods North America, North America Beverages, Latin America, Europe Sub-Saharan Africa, and Asia, Middle East and North Africa (“PepsiCo Inc.,” n.d.). Each of these segments is uniquely operated.

Coca Cola company was founded by Dr. John Pemberton in Atlanta in 1886. Since the world’s first Coca-Cola was served, the firm has evolved into the beverage business, especially with the acquisition of Minute Maid in 1960 (“Our Company,” n.d.). The company is passionate about beverages, and it has over 200 brands across the globe, including Coca-Cola and Costa Coffee. The firm’s reporting segments are organized into different operating groups, such as Europe, Middle East and Africa, Latin America, North America, and the Asia Pacific (“Segments,” n.d.). Coca-Cola also reports non-geographic categories, such as Global Ventures and Bottling Investments Group (“Segments,” n.d.). The company is focused on developing a global portfolio of quality brands of beverages that meets consumers’ expectations.

Factors that Affect PepsiCo’s and Coca-Cola’s Profitability

Although the two companies boast of significant earnings in the food and beverage industry in recent years, different factors are likely to affect their profitability. For instance, the increased tariff on steel and aluminum is detrimental for the Coca Cola Company since it raises the cost of producing cans for soda (“Factors Likely to Influence,” 2018). Furthermore, the increasing costs of freight and fluctuating currencies might also hurt the profitability in this industry. While PepsiCo also focuses on improving its revenue growth, stiff competition from Coca Cola and fluctuations of currency in regions it operates might affect the firm’s profitability. Generally, in the food and beverage industry, competition significantly affects profitability as companies intensify their marketing to attract consumers. Despite the odds, these companies can improve their innovation and strengthen brand power to drive revenues.

Compare the Nature of PepsiCo’s and Coca Cola’s History

Both Pepsi and Coca Cola have a rich history that starts from the time they were created to the unique way of marketing their products in the food and beverage industry. The companies are huge rivals in the sector because they produce substitute products and remain some of the most recognized brands across the globe. They also operate in similar geographical regions, which makes them dominate the soft drinks market across the globe. However, their business strategies are dissimilar, especially in such areas as diversification, globalization, and performance. Such aspects influence their relative successes and failures in the food and beverage sector.

Form DEF 14A

Form DEF 14A, whereby DEF means a definitive proxy statement, is a document used to provide shareholders with information that will allow them to vote confidently in scheduled security holders’ meeting. The Security and Exchange Commission must fill the form on behalf of a firm before the annual meeting. The proxy contains such information as the date and venue of the meeting, voting procedures, the process of submitting stockholder proposals, and information regarding nominated directors. Other details in the form include the compensation for the executive, cost of auditing, and potential conflict of interest among directors.

Auditors for PepsiCo and Coca-Cola

KPMG renders its professional audit services to PepsiCo for the firm’s annual consolidated financial statements. In 2017, PepsiCo paid the auditor $24,090,000 (SEC, 2018). The audit fees for the fiscal year 2017 comprised compensation for the audits of the company’s annual consolidated statements and the effectiveness of the firm’s internal control over financial reporting (SEC, 2018a). This fee was based on PepsiCo’s total assets of $79,804 billion and total revenue of $63 billion (“PepsiCo Reports,” 2018). In the same year, Coca-Cola engaged the services of Ernst & Young LLP as independent auditors at a fee of $30,286 (SEC, 2018b). The fees covered the annual audit and the audit of internal control over financial reporting. The firm’s total assets in 2017 were $83,216 billion, whereas total revenue was $35.41 billion (News Desk, 2018). All the audit information, including audit fees and total assets and revenues, are reported in SEC’s schedule 14A forms.

The public disclosure of audit and other fees paid to audit firms is important because it gives investors confidence in the financial report of a company, creates independence between audited and audit firms, and strengthens the legal enforcement of accounting standards. First, investors of a listed company rely on financial statements to understand financial reports. Non-disclosure can compromise financial-statement reliability. Second, the auditing profession requires independence to prevent the financial dependence of auditors and avoid a potential conflict of interest between the audited and auditing companies. Third, disclosure of audit fees strengthens the legal enforcement of accounting standards to avoid borderline revenue-enhancing accounting (Khoo & Hwang, 2010). It also prevents auditors from offering non-audit services to their clients. Thus, disclosure of audit fees offers a leveled ground for both audited and auditing firms.

Internal Control Over Financial Reporting

Regardless of how well internal controls over financing reporting is structured, there must be inherent limitations in the systems. One of the constraints is the poor judgment that makes people conduct business with the information at hand. The second limitation is a breakdown in the internal controls, especially when employees misunderstand the instructions. Finally, lack of professionalism may also override reporting policies and procedures. However, despite these constraints, the management can obtain comfort that internal control does not contain any material weaknesses by ensuring efficiency, independence, and professionalism in standards used.

The Coca Cola Company Code of Business Conduct

The code of business conduct is a guide for the Coca Company and its employees to act with integrity when conducting business across the globe. The key components of this code include what guides the actions of the firm’s employees in France and Coca-Cola Midi and guidelines for non-employee directors (“Code of Business Conduct,” n.d.). The overarching message of the code is for employees to commit to the highest standards of conduct to enable the firm to safeguard compliance in areas in which it operates. Thus, this code of business conduct is an effective way through which Coca-Cola encourages its partners to promote a culture of ethics and compliance. Any deviation from this code of business conduct, including conflicts of interest, confidentiality, or violations is handled by the General Counsel of the company.

References

About the company. (n.d.). PepsiCo. Retrieved from https://www.pepsico.com/about/about-the-

Company

Code of business conduct. (n.d.). The Coca Cola Company. Retrieved from

https://investors.coca-colacompany.com/corporate-governance/code-of-business-conduct

Factors likely to influence Coca-Cola’s (KO) Q3 earnings. (2018, October 26). Nasdaq.

Retrieved from https://www.nasdaq.com/articles/factors-likely-to-influence-coca-colas-ko-q3-earnings-2018-10-26

Khoo, T. A., & Hwang, S. C. (2010). Audit fees: To disclose or not to disclose? Business Times.

Retrieved from https://core.ac.uk/download/pdf/13246151.pdf

News Desk. (2018, February 16). Coca cola hit by $3.6 billion tax charge as 2017 revenues

shrink. Foodbev Media. Retrieved from https://www.foodbev.com/news/coca-cola-hit-3-6bn-tax-charge-2017-revenues-shrink/?__cf_chl_jschl_tk__=0bcc22d4c87875b140564114da160077b049be00-1610980885-0-ATXZ9Bt9GSOOqtnQcfjHsIVht6Aw7DW6FG9vT49Bqt0udYkQoepJb9l-oXEMsUQ6apkVtupPcMvwq5wD31k27cVCZrDmQxzhLkcD9p3BcHnZI29TIYX55KORRB4CM2Wt3-3IKyBcvZAhi16m2Z2IMzJc2WSrsfaJLRzDXyxvouLU5TLDAWuODYc3bhpdfn49mw9HQEskr3NSULqeFKOLEfHO7o-wdfmyGFNwMhcXPBFjbop-hfV6S6E3xzVHM_WxwdOelU3EsZmJz-LFE2mC0mlowqKl4Xq2qr6i68SDqKn4_AYOytiFZBjrYBG9SofbeS_iu6XnYgmhLi2dqxlHg-NXJgDgdZAIItFAM67gIuvptBMPXHeA9ExcAWjoaeZMdg

Our company. (n.d.). The Coca-Cola Company. Retrieved from https://www.coca-

colacompany.com/company

PepsiCo Inc. (n.d.). Reuters. Retrieved from

https://www.reuters.com/companies/PEP.O#:~:text=About%20PepsiCo%2C%20Inc.&text=The%20Company%20operates%20through%20six,and%20North%20Africa%20(AMENA).

PepsiCo reports Fourth Quarter and Full-Year 2017 results. (2018, February 13). PepsiCo.

Retrieved from https://www.pepsico.com/news/press-release/pepsico-reports-fourth-quarter-and-full-year-2017-results02132018#:~:text=PepsiCo%20generated%20more%20than%20%2463,%2DCola%2C%20Quaker%20and%20Tropicana.

SEC. (2018a). Schedule 14A information. The Security and Exchange Commission. Retrieved

from https://www.sec.gov/Archives/edgar/data/77476/000120677418000850/pepsico3269191-def14a.htm

SEC. (2018b). Schedule 14A. The Security and Exchange Commission. Retrieved from

https://www.sec.gov/Archives/edgar/data/21344/000130817918000022/lko2018_def14a.htm#36711647926:7586235

Segments. (n.d.). The Coca-Cola Company. Retrieved from https://investors.coca-

colacompany.com/about/segments#:~:text=The%20Coca%2DCola%20Company's%20operational,Bottling%20Investments%20Group%20(BIG).

Research Project Part II

Both PepsiCo and Coca-Cola ltd. maintain significant inventories in inventories during the focus years. Coca Cola had a total of $3,264 million invested in inventories in 2020, down from $3,379 million in 2019. The current inventory asset covers raw materials and packaging worth $2069 million, finished goods of $802 million, and miscellaneous worth $393 million (Coca-Cola Company "Balance Sheet"). On the other hand, PepsiCo has a total inventory of $4,135 million, increasing from $3,338 million in 2019 ("PepsiCo Balance Sheet 2005-2019 | PEP"). The increase in inventory experienced by PepsiCo asserts that the sale of the products has increased, and the company has invested in more inventory to keep the consumer satisfied. Therefore, the data implies that PepsiCo utilizes its larger inventory levels to sustain efficient operations.

Comparatively, the drop in Coca Cola's inventory value, attributed to a decline in its retainment of raw materials and finished goods, asserts that the firm has increased enhanced its production capacity to meet the consumer needs as they emerge. However, both firms' management ought to consider their inventory turnover to ensure that it does not overwhelm their business operations. The calculations will also help the company to make better pricing, marketing, and purchasing decisions. The inventory turnover will help the management determine how well the current inventory generates sales for the business.

Question Two

The Property Plant and Equipment (PPE) account forms a significant part of the companies' long-term assets. Coca-Cola has a PPE account of $19,444 million, whereas PepsiCo has a PPE account of $19,305 million ("Balance Sheet"). These values imply that both firms strongly invest in their physical presence in the market. However, both firms could enhance their value proposition by downsizing their storefront operations. Downsizing allows the company to reduce expenses such as wages and storefront rent, allowing for an increase in the profit margins (Huebner et al. 228). Downsizing will reduce the PPE valuation if the company decides to sell the equipment from the closed storefronts. However, the firm's liabilities will decrease since the firm will have less rent and leases to pay; hence, the cash will gradually increase. The company's overall valuation may also increase in the end.

Question Three

The companies have several assets subjectable to fair value adjustment. The adjustments for the fair value of the balance sheet's investments reflect the changes in the estimated market worth of the involved assets some period after their purchase (Needles et al. 759). Based on this premise, some of the assets reflected in the balance sheets of PepsiCo and Coca-Cola ltd. are eligible for a fair value adjustment. For the Coca-Cola Company, the assets that can undergo a fair value adjustment include inventories, marketable securities, trade accounts, PPE account, and indefinite trademarks. PepsiCo's assets that can undergo fair value adjustment include its inventory, investments, acquired operations, and employee pensions. Other assets of both companies can undergo impairment tests. These assets include the long-term investments and the goodwill held by each company. Additionally, both companies' inventories and accounts receivables can undergo the net realizable value (NVR) adjustments.

The fair value adjustment allows the companies' auditors to account for the changes in the current market worth of the involved assets. This valuation may either increase or decrease the total established value of the assets on the balance sheet. The impairment tests allow the auditors to establish whether the focus assets have undergone a significant drop in their economic benefits to the company. The NVR assessment allows the auditors to determine the reasonable revenues that the company could gain in selling the involved assets after deducting such a process's costs.

Question Four

Many firms in the current market ecosystem rely on debt to facilitate their growth. PepsiCo has some short-term borrowings of $962.0 million and long-term obligations of $29,592 million ("PepsiCo Balance Sheet 2005-2019 | PEP"). Comparatively, Coca Cola has no short-term borrowings but has a long-term loan of $39,502 million. The balances of debt on both balance sheets assert that the firm has completed and classified the debt requirements. The managers ought to differentiate between the long-term and short-term arrears, their correctness, and their existence. The most relevant assertion in the audit of debt is completeness entailing comparison with other views. The contrast is essential because the material misstatement prevalent in arrears account arises from the debt's understatement, a problem of completeness in the debt balances. Other assertions the managers might hold on the debt account are the firms' rights and obligations towards the debt, assessing whether the firm owes the debt's liability as reported in the financial statement.

Question Five

PepsiCo and Coca Cola face numerous similar risks since they operate in the same beverage markets. One of PepsiCo's main operational challenges is the risk of cyberattacks on its information systems, which could cause huge losses for the company and the businesses (Zhang 44). The company also runs the risk of dealing with increased product taxes from any of its flagship states, causing an increase in financial burdens and expenses (Zhang 44). The firm also runs the risk of compliance resulting from sustainability strategies such as banning plastic bottles or changing one packaging to another. For instance, the recent ban on plastic bottles in most nations has decreased sales for the company.

On the other hand, Coca-Cola faces numerous strategic risks as they try to adopt new products such as the coke cherry and various brands of Fanta. Their innovation strategies continue to fail due to a decline in competitiveness. According to Zhang, Governments in flagship nations in America and Europe have sought to increase taxes for sugary products by consolidating retail channels, Coca Colas main distribution channel (45). Like PepsiCo, Coca Cola also faces compliance risks associated with sustainability as most realms burn their plastic bottles. The main challenge facing both firms is most economies' requirements, where they operate, for the beverage companies to use labels highlighting the harmful ingredients and substances in their product (Zhang 45). Listing the potentially toxic ingredients may lead to the firms losing some of their markets, with some of their clients avoiding plausibly harmful beverages. Another challenge facing the finances of both firms is financial risk and interest rate risk.

When assessing the two companies, the auditor needs to identify the impacts of these risks on the firms' future performance. Such perspectives allow for a more comprehensive assessment of the economic outcomes of the risk management practices of the firms.

Question Six

The critical revenue accounts for PepsiCo and Coca-Cola ltd. are the cash and its equivalents and the short-term investments. Additionally, these accounts, alongside the goodwill and the receivables for both companies, may involve critical accounting estimates because their value is subject to future changes, such as currency values. In their footnotes, PepsiCo notes that its changes in its estimates may result in the development of an impairment charge that may affect its future operational results (PepsiCo "Financial Highlights"). Therefore, during the auditing process, the auditor needs to consider appropriate assumptions to avoid under or over-estimating the anticipated value changes.

Question Seven

Coca Cola has cash and cash equivalents of $11,385 and short-term investments of $7,347 million ("Balance Sheet"). The firm also has marketable securities of $2,396 million. Additionally, the firm held accounts receivable valued at $546 million over the past financial year. These served as its crucial revenue accounts for that year. Comparatively, PepsiCo reported cash on hand equivalent of 5,738 million and cash receivables of $7,822 million, with short-term investments valued at $1366 million ("PepsiCo Balance Sheet 2005-2019 | PEP"). The development of financial statements such as balance sheets and related disclosures must conform with the general principles accepted globally. Managers need to comprehend the critical accounting policies and their application in financial statements.

Question Eight

PepsiCo's cash flow statement shows that the company generated an income of $10.613 billion from its 2020 sales. Additionally, the firm dispensed $11.619 billion in its investment activities for the same year while generating $3.819 billion from its financing activities. Comparatively, the cash flow statement of Coca-Cola shows that the firm generated $6.294 billion in sales revenues while spending $12.051 billion in investment activities in the year 2020. The company further generated $26.898 billion in financing activities. This data shows that PepsiCo is firmly hedging its operations on future market outcomes. The company features a limited ability to generate cash from short-term activities, such as issuing debt to other firms. Contrastively, Coca-Cola maintains a stronger current position, developing a significant proportion of its income from short-term financing activities. These aspects imply that the auditing process for PepsiCo's finances needs to maintain a greater emphasis on the influence of the future value of its investments on the current company performance, compared to that of Coca-Cola

References

"Balance Sheet." The Coca-Cola Company, 22 Oct. 2020, investors.coca-colacompany.com/financial-information/balance-sheet. Accessed 12 Feb. 2021.

"PepsiCo Balance Sheet 2005-2019 | PEP." Macrotrends.net, 2019, www.macrotrends.net/stocks/charts/PEP/pepsico/balance-sheet. Accessed 12 Feb. 2021.

Huebner, Gesche M., and David Shipworth. "All about size?–The potential of downsizing in reducing energy demand." Applied Energy 186 (2017): 226-233.

‌Needles, Belverd E., Marian Powers, and Susan V. Crosson. Principles of Accounting. Cengage Learning, 2013.

Zhang, Zhuo. "Risk Analysis of Two Leader Drink Company: PepsiCo and Coca-Cola." Asian Business Research 4.3 (2019): 42.

Research Project Part III

Key Acquisition and Inventory Cycle Accounts, and their Critical Accounting Policies

For the year ended December 31, 2019, PepsiCo had two key acquisition accounts, which were Pioneer Food Group Ltd and SodaStream International Ltd. An agreement to acquire Pioneer, a South African company, was made on July 19, 2019. The cost of the transactions was $1.7 billion and would be financed through debt. SodaStream was acquired on December 5, 2018 at a cost of about $3.3 billion. The transaction was completed in 2019 and treated as a business combination in the company’s financial statements. It means that the identifiable assets and liabilities were recognized and measured at their estimated value at the time of acquisition (PepsiCo, 2020). Similarly, the inventory accounts in the acquired entities were recorded at fair value at the acquisition date.

Coca-Cola also had few key acquisition accounts for the year ended December 31, 2019, such as Costa Ltd, C.H.I. Limited, Philippine Bottling, and Coca-Cola Beverages Africa Proprietary Ltd (CCBA). Costa Limited was acquired in January 2019 as a cost of $4.9 billion. The other acquisitions were valued at less than a billion dollars. The accounting policy used for the acquisition accounts at Coca-Cola is the recognition and measurement of fair value of assets and liabilities at the time of the transaction. The key inventory accounts for the company were raw materials and packaging and finished foods. All the accounts were valued at the lower of cost and net realizable value (The Coca-Cola Company, 2020). Coca-Cola determined the cost of it inventories using average cost or first-in, first-out (FIFO) methods.

Inventory Current Assets Ratio

PepsiCo reported inventories worth $3,338 million, which was about 19% of the $17,645 million total current assets as at December 31, 2019 (PepsiCo, 2020). On the other hand, Coca-Coca had inventories valued at $3,379, which was about 17% of the $20,411 million total current assets (The Coca-Cola Company, 2020). It means PepsiCo held a bigger portion of its current assets in inventory than Coca-Cola in the accounting period under consideration.

Key Long-Lived Assets and Related Expenses, and their Critical Accounting Policies

The key long-lived assets for PepsiCo for the relevant accounting year were land, buildings, machinery and equipment and construction in progress. Machinery and equipment accounted for about 68% of the total property, plant, and equipment. The assets were recorded at historical cost. The expenses related to these long-lived assets were depreciation and amortizations, which were recognized using straight-line method. However, land and construction in progress were not depreciated (PepsiCo, 2020). Similarly, Coca-Cola’s key long-lived assets were buildings, machinery and equipment, land, and construction in progress. The assets were recorded at cost. Expenses related to the assets were repair and maintenance and depreciation (The Coca-Cola Company, 2020). The accounting policy used to recognize the expenses was to expense repair and maintenance as incurred and calculate depreciation using straight-line method over the useful life of the assets.

Cycle-Specific Ratios and Implications of the Differences

PepsiCo’s ratio of PPE-to-total assets was 0.25 or 25% as at the end of 2019 as compared to Coca-Cola’s 0.13 or 13% at the same period (PepsiCo, 2020). PepsiCo held almost twice of its assets in PPE as compared to Coca-Cola. A critical look into other assets reveal that Coca-Cola held a significant portion of its total assets in intangible assets, such as equity investments, trademarks, franchise rights, and goodwill (The Coca-Cola Company, 2020). The implication of this is that PepsiCo is in a better solvent and liquid position than Coca-Coca. Lenders are likely to accept tangible assets as collateral for loan financing than intangible assets.

Types of Audit Report from Auditing Firms and Unique Aspect the Auditor’s Report

PepsiCo was issued with Unqualified Opinion report by KPMG LLP for the consolidated financial statements and internal control for the year ended December 31, 2019. The auditor’s report was unique in that it raised concerns about the methods that the company was using to estimate certain sales incentives, franchise rights, juicy and dairy brands, and unrecognized tax benefits (PepsiCo, 2020). Coca-Coca was also issued with Unqualified Opinion report by Ernst & Young LLP. The auditor raised matters relating to uncertain tax positions and valuation of trademarks and goodwill (The Coca-Cola Company, 2020). As a reader of financial statements, I would not prefer both companies sharing an audit firm due to conflict of interest. Since both companies are direct competitors, an auditor would have challenges balancing the interests of both clients in the auditing process.

Nature of Estimates Required in Valuing Pensions and Post-Retirement Benefits and their Risks to Audit Firm

The estimates required in the valuation of pensions and other post-retirement plans are mostly based on what the employee was earning while working and the present value of the benefits that are planned to be paid in the future. The estimates may also incorporate elements of interest cost and expected return from the funded plans. The biggest problem with these estimates is that they are informed by numerous assumptions, such as demographic factors of employees, rate of salary increases, health care cost of retirees, the spot rates, and the yield curve. The implication of these assumptions is that the estimates are largely reflections of management’s historical experience and judgment of future situations. For the audit firm, they pose great risk as the management’s judgment cannot be verified (PepsiCo, 2020). It means the assumptions involved might lead to misrepresentation of facts and materially affect the real value of pension and post-retirement benefits.

Calculation of Numerical Thresholds for Materiality

PepsiCo reported net income of $7,353 million for the year ended December 28, 2019. Its assets were valued at $78,547 million (PepsiCo, 2020). In the same year, Coca-Coca’s net income was $8,920 and its assets were valued at $86,381 million (The Coca-Cola Company, 2020). If overall materiality judgments of 5% of net income and 1% of assets are assumed, the table below shows calculations of numerical thresholds for the two companies.

Pepsi

Coca-Cola

Value ($)

Materiality ($)

Value ($)

Materiality $)

Net Income (5%)

7,353,000,000

367,650,000

8,920,000,000

446,000,000

Assets (1%)

78,547,000,000

785,470,000

86,381,000,000

863,810,000

Assets produce higher numerical thresholds than net income for both companies as can be seen from the table above. An auditor must consider other factors when considering which of the two items should be used to make materiality judgments.

The Position of SEC on the Use of Numerical Thresholds

SEC provides guidance on the materiality of specific items included in the financial statements. SEC Rule 504 addresses receivables from officers and stockholders in which any amount equal or more than $20,000 or 1% must be disclosed. SEC Accounting Series Release Number 147 requires disclosure of lease commitments under non-capitalized financing leases if their present value is at least 5% of aggregate long-term debt, value of equity, and present value of obligations (FindLaw, 2008). However, SEC permits auditors to recognize even smaller percentages as material if they deem it necessary.

Other Characteristics of Potential Misstatements Auditors Should Consider When Evaluating Their Materiality

The materiality decision should not only be based on a specific formula, but auditors should also consider other aspects of potential misstatements. In reality, the best materiality judgments are made when a person has all the facts regarding the item in question. One characteristic that should be considered is the audit risk presented by the misstatement. If the auditor feels that omitting or misstating a certain value will expose the firm to significant risk, it might be necessary to report it. In addition, the impact of the misstatement on the overall truthfulness and fairness of the financial statements should be considered (FindLaw, 2008). Thus, materiality should largely be an issue of professional judgment in which the auditor makes a decision with the potential users of the financial statements in mind.

References

FindLaw. (2008, March 26). SEC release on materiality in financial disclosure. Retrieved February 22, 2021, from https://corporate.findlaw.com/finance/sec-release-on-materiality-in-financial-disclosure.html