Business Information of Coca Cola Company - Case Study Example

Running Head: COCA COLA - BUSINESS INFORMATION Coca Cola - Business Information Submitted by: XXXXXXXX Number: XXXXXXXX of XXXXXXXXXX Tutor’s Name: XXXXXXXXX Date of Submission: XX – XX – 2010 Table of Contents Table of Contents 1 1.Introduction 2 2.Organization Details: 2 a)Legal Details 2 b)Corporate Governance in UK 3 c)Analysis of Income Statements 4 d)Depreciation 5 3.Financials 6 a)Costing and Overheads: 6 b)Activity Based Costing 7 References 8 1. Introduction Entering into a new market can be very overwhelming for a number of companies. Having a strong brand image yet, trying to enter into a market as a complete different brand can be very challenging. Here in the case of Coca Cola, there are a few simple questions that need to be answered. The main aim of this report is to highlight and answer questions that detail the legal aspects of the company, as well as the financials of the company. 2. Organization Details: a) Legal Details A Public Limited Company (PLC) is a company which has been incorporated mostly as a limited liability firm. The stock for these companies can be bought over the stock exchange and these are open to all. These companies have strict regulations and are obligated to publish and disclose their financial performance to the public, so that the investors and the stakeholder can find the true worth of the stocks (Shenkman, Weiner, & Taback, 2003). A Private Limited Company (Ltd.) on the other hand similar to the public limited company is a limited liability, however here the ownership is not open to all and there is a strong level of restriction on the ownership. This is clearly mentioned in the Memorandum of Association and the Articles of Association. In these types of companies, the maximum number of shareholders is restricted at 50. Also, the shareholders are not allowed to sell their shares to outsiders or the general public (Shenkman, Weiner, & Taback, 2003). Limited Liability is the term used when the investors in a company cannot lose more that what they have invested, which does not put any form of personal debt or obligation on the person (Shenkman, Weiner, & Taback, 2003). In the case of Coca Cola’s new initiative, it would be most effective for the company to be registered as a private limited company. This will be more beneficial as the company can get a strong grip on the markets and then move on to become a public limited company. This will help ensure the safety of the investors as well as will not in any manner impact the brand image of the parent company. b) Corporate Governance in UK Corporate Governance refers to a set of rules, customs and policies that affect the working of the companies and corporations. Corporate Governance also accounts for the relationship of the various shareholders within a company and the goals that the organization aims at achieving. The Companies Act has been in use for over a hundred and fifty years. The companies act has been designed focused on the limited liabilities companies and provides for a framework within which they are expected to operate. Most academic, business professionals and observers have expressed Corporate Governance to be defined as ‘the general set of customs, regulations, habits, and laws that determine to what end a firm should be run. Much more fraught, however, is the question: “what defines good corporate governance?”’ (Leimsider, 2006). These rules and regulations affect the operating of companies to a great extent and in simpler terms it identifies the issues that are based on the ownership and control of a company. Majdi Hassen says, “Relations between ownership and management is the basis of the modern corporation. It leads to efficient specialization of tasks, risk-bearing by shareholders, and strategy development and decision-making by managers” (CIPE, 2005). Corporate governance is an essential part of every business and it is important that Coca Cola concentrates on this aspect of the business to ensure an effective working environment and a successful business. c) Analysis of Income Statements The purpose of the income statement is to measure and present the company’s financial performance over a specific time period. The total revenues and the expenses incurred are presented in the income statement, irrespective of the actual cash received for sales or the actual cash paid out on expenses. Both the operating and non operating expenses are included and the statement also lists any dividend payments made or the earnings available to the shareholders. Profit of a company can be presented in a number of ways (Clayman, Fridson, & Troughton, 2008). Gross profit indicates the difference between the revenue or the net sales made and the cost of goods sold. The cost of goods represents the cost of raw materials involved in the production of the sold items in the given period. The operating profit before tax includes all the expenses incurred due to the operational activities and also includes the interest paid on any long term debts. The operating profit after tax includes the tax payable for the given period. After dividends are paid to the shareholders from the income, the remaining profit available to be reinvested in the business is termed as the retained earnings of the company (Clayman, Fridson, & Troughton, 2008). The balance sheet for a particular period is derived from the income statement and provides a snapshot of the company’s value. Income Statement Sales £ 150,000,000 Cost of Goods £ 90,000,000 Gross Profit £ 60,000,000 Operating Costs   Salary £ 5,500,000 Selling & Administration Expenses £ 4,000,000 Interest £ 1,500,000 Total Operating Expenses £ 11,000,000 Operating Profit before Tax £ 49,000,000 Tax £ 17,150,000 Net Income £ 31,850,000 Dividends Paid £ 12,740,000 Retained Earnings £ 19,110,000 d) Depreciation Depreciation is a major and important aspect of any given business. It is the non cash expense which results in the reduction of value of an asset. The loss of value of an asset over a given period due to wear and tear, age and also obsolescence is referred to as depreciation of the asset. This can be measured clearly with the help of the accounting methods. These include the write offs of an asset’s depreciation during the life of the asset. This has a major impact on the reported earnings of a company however it helps in an increase in the free cash flow of the company. There are a number of factors to be considered when applying depreciation values to the assets. The most important factors include the usage, units of useful utilities obtained from the asset, the market value of the asset in the future, the rate at which the technology and when the asset becomes obsolete in the segment and in some cases the opportunity costs involved in purchasing the asset. The depreciation method followed has a great impact on the financial performance of the company. In other terms, the method applied and the values entered in the accounts have a significant effect on the three key financial statements, namely the balance sheet, income statement and the cash flows statement. 3. Financials a) Costing and Overheads: Full costing method is another costing technique that is used irrespective of whether it is variable or fixed costs and the costs that are charges based on the cost units produced. This method is very useful as it unlike the marginal costing. In marginal costing the fixed costs are taken as the period costs. The basic thought process behind the investment decisions revolves around the profit gained by owning a large or small share of a corporation or other businesses. The investment decision is really a two-pronged question: ‘What is the Potential Income?’ and ‘How risky is the venture?’ (Silbiger, 1999). High returns are not the only deciding factor for investments. It depends on the risk involved in that investment. Hence the investment decision is dependent on the returns, the risk involved (amount of uncertainty in generating the expected returns) and also the investor’s utility indifference (attitude towards risk and expected returns). However it is essential to learn the definition of full costing. Full costing has been defined as, “Total cost of all resources used or consumed in production, including direct, indirect, and investing costs” (Business Dictionary, 2010). Consider the direct costs incurred per unit as follows: The overheads incurred per week are identified. In a weak, the estimated production under normal circumstances is estimated to be 100,000 units. The overhead expenses are tabulated as shown below: Overhead Costs / week (100,000 units) Factory Overheads £ 500,000 Selling & Admin £1,200,000 Total £1,700,000 According to the full costing approach, the overhead costs are apportioned to all the products and per unit overhead costs amounts to £17 per unit. Hence the total expenses per unit is found to be £22. b) Activity Based Costing Activity Based Costing is one of the few modern accounting systems and is one which has proved to be very beneficial over the years. The method o ABC is a relatively newer accounting system and this segregates the expenses and the overheads based on the functions. This is then followed by allocation of the costs among each individual item based on the volume of activity. Here in this system the activities and the overheads are traced to a particular product and the costs are not spread across all the product lines of services (Kaplan & Anderson, 2007). The use of ABC costing allows the company to accurately assign the costs for all the activities of each of the product or service. A study by Philip Beaulieu has highlighted that the main reasons that ABC costing method has not caught up with all companies is firstly because it does not meet the needs of all firms and is not an appropriate accounting method for the firms. For example if a company has just one or two products to offer then the method is not appropriate. Other limitations of this method includes, that the method brings out the wastes that are involved in the processes which most managers would prefer are not found by the top level management (Beaulieu & Lakra, 2002). Also, this method is very time consuming and in a number of cases the adoption of this is unsuccessful as the implementation can be an issue. References Beaulieu, P., & Lakra, A. (2002). Coverage of Criticism of Activity-Based Costing in Canadian Textbooks. Retrieved May 5, 2010, from Working Paper 2002-18: http://haskayne.ucalgary.ca/haskaynefaculty/files/haskaynefaculty/coverage.pdf Business Dictionary. (2010). Full Cost. Retrieved May 3, 2010, from http://www.businessdictionary.com/definition/full-cost.html CIPE. (2005). Why Study Corporate Governance. Retrieved March 25, 2010, from http://developmentinstitute.org/Member/hassen_CG.aspx Clayman, M. R., Fridson, M. S., & Troughton, G. H. (2008). Corporate Finance: A Practical Approach (Cfa Institute Investment). Wiley . Kaplan, R. S., & Anderson, S. R. (2007). Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits . Harvard Business Press. Leimsider, R. (2006, July). A Closer Look at Business Education: Corporate Governance. Retrieved May 2, 2010, from http://www.beyondgreypinstripes.org/pdf/CGReport.pdf Shenkman, M. M., Weiner, S., & Taback, I. (2003). Starting a Limited Liability Company. Wiley Publications. Silbiger, S. (1999). The 10-Day MBA. Mumbai: Magna Publishers. Read More