Use of the financial statements to make business decisions - Essay Example

Use of the financial ments to make business decisions Grade (October 15, Use of the financial statements to make business decisions Introduction The Coca-Cola financial statements can be applied in various ways, in order to improve the business performance. This analysis establishes three major ways in which the Coca-Cola financial statements can be used for making business decisions. Analysis Decision-Making on Common Stock Repurchase The Coca-Cola Company financial statements are useful in determining how some of the revenues generated by the company should be applied, for the benefit of the company. One of these ways in which the revenues generated by the Coca-Cola Company should be used is to increase the percentage of the common stock repurchased by the company. The share repurchase program was launched in 1984, to have the company repurchase some of its common stock, to the tune of 600 million from the outsider shareholders (Coca-Cola Company, 2014). The program to repurchase the shares was extended further in 2006 and again in 2012, when the company launched a program to repurchase an additional 500 million of common stock. The price at which the company repurchased back its shares in 1984 was $14.66 (Coca-Cola Company, 2014). This common stock repurchase price has continued to increase over the years, such that the repurchase price for the common stock of the company was $ 37.11 in 2012, which increased to $ 39.84 in 2013 and further increased to $ 40.97 in 2014 (Coca-Cola Company, 2014). This clearly indicates that the company has continued to repurchase its common stock at expensive prices every year, when compared to the previous year. In addition, the number of common stock that the Coca-Cola Company repurchased in 2014 was 98 million, compared to 121 million in 2012 and 2013 respectively (Coca-Cola Company, 2014). When the calculations are done, they indicate that at a price of $40.97, the Coca-Cola Company spent a total of $4,015.06 million to repurchase 98 million of common stock in 2014. On the other hand, at a price of $37.11, the company used a total of $4,490.43 million to purchase 121 million shares in 2012. This indicates that the company spent just $475.37 million to repurchase 23 million more shares in 2012, which means that the extra shares only cost an average of $20.66 per common stock repurchased in 2012. This simply goes to show that the extra shares of common stock that were purchased in 2012 above the 98 million mark were very , compared to the price of the common stock in 2014, since they cost 50% less. Additionally, if the Coca-Cola Company had to repurchase 121 million common stocks in 2014, it would have used a total of $4957.37 compared to $4490.43 that the company used to repurchase 121 million common stick on 2012, which shows that the Coca-Cola Company would have saved a total of $466.94 million, if it would have purchased more common stocks in 2012. Therefore, based on these calculations, it would be much cheaper for Coca-Cola Company to repurchase more common stock when the prices are lower, since it would save a lot of money. In this respect, the Coca-Cola Company financial statements can help the management to make a decision on whether to use some more of the company’s profits to repurchase more common stocks, other than waiting until the price of the common stock increases. According to the Coca-Cola Company, “we target to repurchase between $2.0 billion and $3.0 billion worth of common stock during the financial year 2015” (Coca-Cola Company, 2014). This simply means that the company will actually repurchase fewer common stocks using the $2.0 billion to $3.0 billion, compared to the amount of common stock that the company would have purchased using the same amount of money in the previous years. Thus, there is a need for the management to make a decision to repurchase more common stock and reach the target quickly, rather than continue to repurchase the shares on piece-meal basis, while they continue to become more expensive for the company. Decision-Making on Foreign Currency Adjustment Treatment Secondly, the financial statements can be used to make a decision related to the change of currency in which international subsidiaries, partners and customers transact from their local currency into USA dollars. The financial statements present various items of losses that were associated with adjustments to the foreign exchange rates. For example, in the financial year 2014, the Coca-Cola Company incurred a loss of $2,382 million from the Net foreign currency translation adjustment (Coca-Cola Company, 2014). This trend does not seem to be new, considering the fact that the company also incurred a net loss of $1,187 million in 2013 and $182 million in 2012. These figures serves to indicate that the losses associated with the adjustment of translating the foreign currency into the USA dollar, which the Coca-Cola company uses as the currency for recording its financial statements is both recurrence and huge. In addition, the trend also indicates that the loss that the company is incurring from the adjustment of foreign currency translation increases with every passing year. For example, the financial statements of the Coca-Cola Company indicate that the losses incurred through the adjustment of foreign currency translation increased by a massive 652% between 2012 and 2013 financial years (Coca-Cola Company, 2014). Further, the financial statements indicate that the losses incurred by the company in the financial year 2014 arising from the foreign currency adjustment were $2,382 million compared to $1,187 million in 2013, which is an increase by 200% (Coca-Cola Company, 2014). This therefore indicates the need to change the currency in which the coca-Cola company transacts within the international markets from the local currencies to the USA dollar. For example, the total loss arising from foreign currency adjustment incurred by the Coca-Cola Company in 2014 was accounted for by a whopping $140 million, after “Venezuelan government devalued its currency to an official rate of exchange of 6.3 bolivars per U.S. dollar” (Coca-Cola Company, 2014). This serves to indicate that there is a need for the Coca-Cola Company to change the currency in which its foreign subsidiaries, partners and customers transact with from the respective regional and local currencies to USA dollars. This would in turn help to safeguard the company against the huge losses that are occasioned by the adjustment of the foreign currency translation into the USA dollars (Makridakis, 2007) Decision-Making on Asset Disposal The other important use of the financial statements is the determination of the appropriate time during which the assets that the Coca-Cola Company seeks to dispose should be sold. The items held for sale by the Coca-Cola Company has become yet another source of huge losses that the company continues to incur every financial year. For example, the Coca-Cola Company incurred a total loss of $494 million from the revaluing of its assets that were held for sale, into the fair market value (Coca-Cola Company, 2014). In this respect, the total significant losses on sale of assets by the Coca-Cola Company totaled $670 million for the financial year 2013. This trend can also be traced back to the year 2012, when the Coca-Cola Company incurred a significant loss of $98 million for the sale of its assets (Coca-Cola Company, 2014). This therefore indicates that the financial information can be applied towards making a decision on exact what time the assets of the company should be disposed off. It would be much more prudent if a company was to determine the assets that needed to be disposed-off way before these assets have depreciated completely, such that their value differs greatly from the fair market value (Bernhard, 2010). If the assets could be disposed in good time, they could fetch a comparatively fair market price, which would then help to reduce the losses incurred by the Coca-Cola Company, as a result of the revaluation of its assets held for disposal to the fair market value (Storero, 2009). Additionally, assets that have not been fully depreciated, and are thus still usable can sell easily in the market. This would in turn reduce both the time and the maintenance costs incurred by the Coca-Cola Company during the period the assets are held for sale (Storero, 2009). In this respect, the Coca-Cola Company financial statements can be used to inform the decision-making on the right time that the disposal of determined assets should be done, as a way of helping the company avoid incurrence of recurrent losses from the disposal of old assets. The decision here should involve how to determine which assets require to be disposed before their value depreciates way below the fair market value, as well as determining when the assets should be put on sale. Conclusion In conclusion, the financial statements of the Coca-Cola Company can be very useful in helping make some major decisions related to the operations of the company. The financial statements can help the company make decisions that will help it safe-guard against major losses, such as the losses incurred through the foreign exchange adjustment translation, which has seen the company continuously incur huge losses. The financial statements can also be applied towards making the right decision related to the appropriate time that the old assets of the company should be disposed, to avoid such assets losing value and bringing loses to the company. Finally, the financial statements of the company can be applied towards helping the company make a decision on when and at how much to repurchase the company stocks, to avoid the company repurchasing its stocks when they are already very expensive. References Bernhard, R. H. (2010). Avoiding Irrationality in the Use of Two--Parameter Risk--Benefit Models for Investment under Uncertainty. Financial Management (1972), 10(1), 77-81 Makridakis, S. (2007). Metastrategy: Learning and Avoiding Past Mistakes. Long Range Planning, 30(1), 129-135. Storero, J. K. (2009). Avoiding The Next Financial Crisis: Why Effective Enterprise Risk Management Is Essential. Banking Law Journal, 126(3), 241-247. The Coca-Cola Company. (2015, February). The Coca-Cola Company Reports Fourth Quarter and Full-Year 2014 Results. Retrieved from http://assets.coca-colacompany.com/71/d8/cdb028f142de98572dd5a1a65e31/2014-q4-and-full-year-results.pdf Read More