PepsiCo Investments - Coursework Example

December 7, INCOME MENT PepsiCo has prepared its income ment based on multi-step format such that different the all the expenses are separated according to their nature and subtracted one by one from the net revenues in order to provide operating profit first, followed by income before income tax, net income and lastly income attributable to PepsiCo shareholders. Income statement of PepsiCo has been prepared on consolidated basis such that the individual income statements of the parent company and its subsidiaries are consolidated to present the complete and summarized financial performance of the whole PepsiCo group. As per the requirements of US GAAP and Securities and Exchange Commission, the income statement of PepsiCo shows the comparative financial performance of the company over last three years, i.e. 2009, 2010 and 2012. There is one extra ordinary item is also included with the head of “bottling equity income”. However, this item was of non-recurring nature such that it was present in the income statements of 2009 and 2010 but in 2011, this figure was not shown by the company. The requirement to show both basic and diluted earnings per share is also provided in the income statement of PepsiCo. There are few optional items also presented by the company in order to provide more meaningful picture of the company especially to its shareholders such as weighted average number of ordinary shares outstanding and dividend per share declared by PepsiCo over last three years. Contingencies Contingencies, is a specific type of liability under which account head is presented on the face of the balance sheet but its amount is not showed. Generally, contingencies include those items the results of which can go either in favor or against the company such as lawsuits, long-term contractual obligations, commitments etc. However, contingencies are presented only when their respective amounts are probable and can be reliably estimated as well. PepsiCo has also provided contingencies on its balance sheet under the name of commitments and contingencies. There are different kinds of contingencies under which PepsiCo is obligated, such as non-cancelable commitments. These non-cancelable commitments include commitments for operating leases of building, purchasing agreements with the suppliers of sugar and sweeteners, oranges and its juices and related packaging material. Non-cancelable marketing agreements are also signed by PepsiCo mainly for its sports based marketing. There are some items, which have not been included under contingencies by PepsiCo such as bottler funding and medical plan related liabilities for retirees. Bottler funding is that agreement which is negotiated by PepsiCo with its suppliers on yearly basis. Medical plan is not included because expected future cash outflows in this regard are not represented as long-term contractual obligations. Off-balance sheet transactions and items are also not included in the commitment and contingencies because PepsiCo has not made it its practice to include in its financial statements unless they constitute under the normal course of business of PepsiCo. INTANGIBLES Being a multi-national entity, PepsiCo has acquired different sorts of intangible assets such as brands, computer software, franchises, goodwill etc. The company has developed various criteria in order to value its intangibles, which are discussed below. Brands PepsiCo develops certain brands the cost of which is normally expensed out by the company in the year in which the brand is developed. Certain brands are acquired by PepsiCo such that their goodwill is recognized separately in the balance sheet. With respect to the life of brands, there are two types of brands i.e. brands with definite life and brands with indefinite life. PepsiCo has the specific brand valuation criteria, which it follows in order to assess the life of the brand. Generally, the brands with definite lives are amortized over a period ranging from 5 to 40 years are amortized on annual basis. On the other hand, those brands, which have indefinite lives are not amortized but tested for impairment every year. Franchise rights PepsiCo has acquired some entities due to which the company had to undergo with the new franchise agreements with the parties of their acquired entities. Those franchise rights are amortized by the company over the remaining life of those franchise agreements and contracts. Goodwill For goodwill, the company does not recognize its internally generated goodwill. However, in the event of purchased goodwill, the company has established the criteria of impairment testing every year. Research and Development Cost Research and development cost incurred by the company is not regarded as intangibles such that their costs are expensed out under the head of selling, general and administrative costs. INVESTMENTS Investments can have different types such that the company can invest in the financial securities of any other entity, or government. The company can also make investment in terms of internal growth to make expansions in the business. Another way to expand the business is the entire acquisition of an entity. If the annual report of PepsiCo is taken into consideration, the company does not invest in the government or corporate securities. However, in order to expand its business, it undergoes both internal growth acquisition based investments. The cash flow statement of PepsiCo provides a brief overview of the investments made by the company in the year 2011. For internal growth, the company has made capital spending which amount to around $3.39 billion across the world. The company has also acquired a Russian company named as WBD for $2.42 billion, which has boosted the company’s penetration into Russian beverage market. In 2009 and 2010, the company also strengthened its supply chain network by making investments to acquire its distribution companies namely PBG and PAS. The final cash consideration of this investment is completed in the year 2011 for around $2.83 billion. PepsiCo acquired the rights of manufacturing and distribution from a company named as DPSG, the agreement for which was finalized in 2010 but completed in 2011 for $900 million. Other investments made by PepsiCo in which it does not have a controlling interest, amount to around $600 million until 2011. LEASES As far as the accounting for leases is concerned, there are two types of leases, which are operating lease and finance lease. Operating leases are similar to rental contracts whereas finance lease provides the lessee to use the asset for majority of its life. At the end of the lease term, lessor also provides lessee an option to purchase the asset. Finance lease is capitalized by the entities in its balance sheet such that the depreciation expense is recorded by the lessee in the income statement. For operating lease, the lessee only pays the rentals to the lessor, which is charged as an expense in the income statement. No capitalization of asset is made by the lessee in its balance sheet under operating lease. PepsiCo has established a policy all over the world of acquiring the ownership title of the assets. The company does not have the practice of holding the assets on lease whether finance or operating lease. Because of this, in the 2011 annual report of PepsiCo, there is not even a hint of leasing out the asset is provided which affirms this fact that the company believes in acquiring ownership title of assets rather than undergoing leasing arrangements for using those assets. INCOME TAX ACCOUNTING Income tax accounting for companies mainly focuses upon the deferred taxation principles. Deferred taxation principles hold the point there are differences between the accounting income and taxable income. Since the tax rate is applied on taxable income, therefore, there is a discrepancy in income tax expense as per accounting principles. There are two major reasons for such differences between accounting income and taxable income. These are permanent and temporary differences. Permanent differences arise in those cases when taxation authorities of a particular jurisdiction allow an expense to be deducted instead of disallowing and vice versa. For temporary differences, the taxation authorities allow either a greater or smaller portion, of expense to be deducted in the current year followed by the adjustment for remaining portion in the subsequent years e.g. depreciation expense. PepsiCo also follows the same deferred taxation principles such that it also recognizes the respective deferred tax assets and liabilities. Since the company operates in multiple jurisdictions, therefore, respective rates of those jurisdictions are applied on the taxable earnings generated from those jurisdictions. The company also determines its effective tax rate such that it was around 23% in 2010, which increased to 26.8% in 2011. PepsiCo states that the reason behind such increase in effective tax rate in the acquisition made in PBG and PAS. In US, the company is obliged to pay 35% tax on its taxable income. However, in other jurisdictions, the company is allowed a benefit of lower tax rate, which leads to overall lowered tax rate. CASH FLOW STATEMENT Cash flow statements provide a summarized view of the cash inflows and out flows during the year. It also specifies those activities under which company’s cash is paid or received. Generally, there are two methods of preparing financial statements, which are regarded as direct and indirect methods. Under direct methods, both income statements and balance sheets are required to develop cash flow statement whereas under indirect method, only net income figure is required along with balance sheet. Indirect method is commonly followed by the public listed entities all over the world due to their easier understanding level as well as easy way of computation. PepsiCo also prepares its cash flow statement based on indirect method. As per the conventions, the cash flow statement is mainly divided into three sections which operating activities, investing activities and financing activities. Operating activities mainly provides cash inflows such that around $8.9 billion were received by the company from its business operations in 2011. On the other hand, the company also participated under various investment projects, which caused an outflow of cash of around $5.6 billion. During the year, the company underwent cash outflow in respect of financing activities, which amounted to around $5.1 billion. Since the company had better opening cash balance at the start of the year, therefore, it supported the company’s overall cash position despite of having paid too much cash for investing and financing activities. It has been the practice of PepsiCo to maintain $4 billion cash balance at the closing of the year. References Kieso, Donald, E., Weygandt, Jerry, J., and Warfield, Terry, D., Intermediate Accounting, 14th ed., John Wiley and Sons, Inc.: New York. 2011. Print. Read More