Accounting Critical Thinking Samples
Income Statement Vertical Analysis
The gross profit as a fraction of total revenue (gross profit margin) was 60 percent in 2012. There was a slight improvement to 61 percent in 2013 and 2014. Selling and administrative expenses was constant at 37 percent of revenues for all the three years. However, other expenses increased by one percent in each year between 2012 and 2014. The income before taxes as a fraction of revenues declined slightly between 2012 and 2013 by one percent before declining by 4 percent to 20 percent in 2014. Similarly, the consolidated net income as a fraction of the revenues declined over the three years.
Income Statement Horizontal Analysis
Coca-Cola Co.'s net operating revenues increased by 3 percent from 2011 to 2012. However, there was decline in the net operating revenues between 2012 and 2013 as well as between 2013 and 2014 of 2 percent in both periods. Coca-Cola Co.'s gross profit increased by 2 percent from 2011 to 2012. However, there was decline in the gross profit between 2012 and 2013 as well as between 2013 and 2014 of 2 percent and 1 percent respectively. The increase and decline are as a result of the changes in the net operating revenues. Similarly, the net operating income increased by 6 percent from 2011 to 2012 and declined between 2012 and 2013 as well as between 2013 and 2014 of 2 percent in both periods. However, the income before taxes declined drastically in 2014 by 19 percent compared 3 percent in 2013. The drastic decline was a result of an increase in other losses by more than 300 percent. The net income attributable to shareholders increased by 5 percent from 2011 to 2012 and declined between 2012 and 2013 as well as between 2013 and 2014 of 5 percent and 17 percent respectively.
Balance Sheet Horizontal Analysis
The cash and cash equivalents of Coca Cola declined by 34 percent between 2011 and 2012 and then increased between 2012 and 2013 by 23 percent before declining again by 14 percent between 2013 and 2014. Marketable securities increased in all the three years under consideration. It is noteworthy that 2011-2012 recorded a drastic increase of more than 2000 percent. Net trade accounts receivable declined between 2011 and 2012, increased between 2012 and 2013 and then declined between 2013 and 2014. Coca-Cola Co.'s current assets increased in all the three years under consideration. However, 2011-2012 recorded the highest increase because of the drastic increase in marketable securities.
Property, plant and equipment declined between 2011 and 2012, increased between 2012 and 2013 but then slightly declined again between 2013 and 2014. Noncurrent assets increased for all the years under consideration with the exception of 2014. The total assets increased in the three years under consideration.
Balance Sheet Vertical Analysis
The Cash and Cash-equivalent as a fraction of total assets ranged between 10 and 12 percent for all the firms under consideration while the short term securities ranged between 6 and 10 percent. The value of marketable securities, net trade accounts receivable, inventories and prepaid expenses as a fraction of net income remained fairly constant for the period consideration. Consequently, current assets as a fraction of total assets was the same in 2012 and 2013 and increased by one percent in 2014. The value of equity method investments, other assets, property plant and equipment, trademark, goodwill and other intangible assets as a fraction of the total assets remain fairly unchanged. Consequently, current assets as a fraction of total assets was the same in 2012 and 2013 and declined by one percent in 2014.
The Altman z-score estimates the probability of a company going bankrupt. It is estimated using the formula;
Altman Z-score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0 E
A is Working Capital/Total AssetsB is Retained Earnings/Total AssetsC is EBIT/Total AssetsD is Market Value of Equity/Total LiabilitiesE is Sales/Total Assets
The latest market value of Coca cola equity was obtained from yahoo finance as 210.5 Billion. The market value for Coca Cola equity the previous years could not be obtained. Therefore, the latest equity value were applied for all the years for simplicity. The cut-off score is 2.675. Below the cut off score, there are high risks that the business may be bankrupt. The results show that Altman z-score was above 3 for all the years of consideration.
Liquidity ratios evaluate the ability or inability of a company to settle obligations that are maturing in less than one year using cash and other assets that are expected to be converted into cash in one year. The most common ratios are current ratio and quick ratio.
The average quick ratio for 2015 in the beverage industry was 0.56 which is lower that the quick ratio of Coca Cola company for the three years. Therefore, Coca cola has a better liquidity management than the industry on average.
The average debt-equity ratio for 2015 in the non-alcoholic beverage industry was 1.5 which was lower than that of Coca Cola Company. Similarly, the average interest coverage ratio for 2015 in the beverage industry was 15 which was lower than that of Coca Cola Company. Therefore, Coca Cola has a better debt management than the industry on average.
The average return on equity for the non-alcoholic beverage industry ranged between 22.49 percent and 25.42 percent for the 8 quarters of 2014 and 2015. The return on equity for Coca Cola in 2014 was 23.41 percent. Therefore, the performance of Coca Cola Company is fairly comparable to that of the industry on average. Similarly, the return on assets for Coca Cola of 7.71 percent in 2014 was within the range of the changes experienced by the other industry on average with the period. Therefore, the financial performance of Coca Cola is average when compared to the industry performance.
Management Report Discussion
Trade account receivables declined in 2014. Management reported that the decline was as result of write-down in concentrate sales receivables of a bottling partner who operates in Venezuela.
The drastic increase in other investments by 229 percent was as a result of investment in Keurig that was accounted for as available-for-sale. The quick ratio and cash ratio declined as a result of an increase in current liabilities. Management explained that the increase in current liabilities was a result of reclassification of loans and notes payables to current liabilities as they were set to mature in a year. Cash and cash equivalent increased as a result of a deliberate cash management strategy by the company to increase cash and cash equivalents.
Coca Cola. (2014). Coca Cola Annual Report. New York: Coca Cola.
CSIMarket. (2016, January 3). Nonalcoholic Beverages Industry: Financial Strength Information & Trends. Retrieved from http://csimarket.com: http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=502
Gibson, C. (2012). Financial Reporting and Analysis. London: Cengage Learning.
YahooFinance. (2015, December 31). https://finance.yahoo.com. Retrieved January 3, 2016, from https://finance.yahoo.com/q/ks?s=KO