Question 17.1: The Coca-Cola Company: An Illustration of Accrual Analysis B...
The Coca-Cola Company: An Illustration of Accrual Analysis
Below, recent financial statements for the Coca-Cola Company (NYSE: KO) have been put in the format of Exhibit 17-5.^7
Based on the information given, address the following problems:
1. Calculate net operating assets for Coke for 2006 and 2005.
2. Calculate balance-sheet-based aggregate accruals for Coke for 2006.
3. Calculate the balance-sheet-based accruals ratio for Coke for 2006.
4. Calculate cash-flow-statement-based aggregate accruals for Coke for 2006.
5. Calculate the cash-flow-statement-based accruals ratio for Coke for 2006.
6. State and explain which of the measures calculated in Problems 1 through 5 would be appropriate to use in evaluating relative financial reporting quality of a group of companies.
^7In Panel A, the balance sheet, deferred taxes refers to accumulated deferred taxes. In Panel B, the statement of cash flows, “deferred taxes” refers to deferred tax expense related to the single period being reported, 2006. Note also that the concise balance sheet pools cash and cash equivalents and short-term investments into one line so the change in cash and cash equivalents of –2,261 shown in the statement of cash flows cannot be confirmed directly. However, the more detailed balance sheet in the Form 10-K disclosure for Coca-Cola shows that cash and cash equivalents in 2005 to 2006 were $4,701 and $2,440 respectively; as $2,440 – 4,701 = -$2,261, this confirms the value shown in the statement of cash flows.
| Panel A: Balance Sheet | 2006 | 2005 |
| Cash and short-term investments | 2,590 | 4,767 |
| Receivables (net) | 2,587 | 2,281 |
| Inventories (net) | 1,641 | 1,424 |
| Other current assets | 1,623 | 1,778 |
| Total current assets | 8,441 | 10,250 |
| Property, plant, and equipment (net) | 6,903 | 5,786 |
| Investments and advances | 6,783 | 6,922 |
| Intangibles (net) | 5,135 | 3,821 |
| Other noncurrent assets | 2,701 | 2,648 |
| Total noncurrent assets | 21,522 | 19,177 |
| Total assets | 29,963 | 29,427 |
| Debt in current liabilities | 3,268 | 4,546 |
| Accounts payable | 929 | 2,315 |
| Income taxes payable | 567 | 797 |
| Other current liabilities | 4,126 | 2,178 |
| Total current liabilities | 8,890 | 9,836 |
| Long-term debt | 1,314 | 1,154 |
| Deferred taxes | 608 | 352 |
| Other noncurrent liabilities | 2,231 | 1,730 |
| Total noncurrent liabilities | 4,153 | 3,236 |
| Minority interest | 0 | 0 |
| Total liabilities | 13,043 | 13,072 |
| Preferred stock (book value) | 0 | 0 |
| Common equity—total | 16,920 | 16,355 |
| Total shareholders’ equity | 16,920 | 16,355 |
| Total Liabilities and Shareholders’ Equity | 29,963 | 29,427 |
| Panel B: Income Statement | 2006 |
| Net revenue | 24,088 |
| Less: Cost of goods sold | 7,358 |
| Less: Selling, general & admin. expenses | 9,195 |
| Operating income before depreciation | 7,535 |
| Less: Depreciation and amortization expense | 938 |
| Operating income after depreciation | 6,597 |
| Less: Interest expense (net) | 220 |
| Plus: Special items and other nonoperating items | 201 |
| Less: Tax expense | 1,498 |
| Income before extraordinary items | 5080 |
| Less: Extraordinary items | 0 |
| Net income | 5080 |
| Panel C: Statement of Cash Flows | |
| Income before extraordinary items | 5,080 |
| + Depreciation and amortization expense | 938 |
| + Deferred taxes | –35 |
| + Equity in net loss (earnings) | 124 |
| + (-) Gain (loss) on sale of noncurrent assets | –303 |
| + Other funds from operations | 768 |
| + (-) Decrease (increase) in net working capital | –615 |
| Operating cash flows | 5,957 |
| – Increase in investments | 1,045 |
| + Sale of investments | 640 |
| – Capital expenditures | 1,407 |
| + Sale of property, plant, and equipment | 112 |
| – Acquisitions | 0 |
| Investing cash flows | -1700 |
| + Sale of common stock | 148 |
| – Stock repurchases and dividends | 5,327 |
| + Issuance of debt | 617 |
| – Reduction of debt | 2,021 |
| Financing cash flows | –6,583 |
| Less: exchange rate effects | 65 |
| Change in cash and cash equivalents | –2261 |
Solutions to 1, 2, and 3. These are given in the worksheet below.
Problem 1. The amount of net operating assets is found as the difference between operating assets (total assets minus cash and short-term investments) and operating liabilities (total liabilities minus total debt). For 2005 and 2006, net operating assets amount to $17,288 million and $18,912 million, respectively.
Problem 2. The amount of balance-sheet-based aggregate accruals for 2006 is found as the change in net operating assets from 2005 to 2006. This amount is $1,624 million.
Problem 3. The balance-sheet-based accruals ratio for 2006 is found by dividing balance-sheet-based aggregate accruals for 2006, $1,624 million, by average net operating assets, (18,912 + 17,288) ÷ 2 = $18,100 million. This ratio is equal to 1,624 ÷ 18,100 = 8.97 percent.
Solutions to 4 and 5. These are given in the worksheet below:
Solution to 6. Among the measures presented in Problems 2 through 5, only the size scaled measures calculated in Problems 3 and 5 are appropriate for cross-company comparisons. The unscaled measures in Problems 2 and 4 would be affected by differences in company size.
| Balance Sheet Computation of Aggregate Accruals | |||
| 2006 | 2005 | ||
| Operating Assets | |||
| Total Assets | 29,963 | 29,427 | |
| Less: Cash and Short-term Investments | 2,590 | 4,767 | |
| Operating Assets (A) | 27,373 | 24,660 | |
| Operating Liabilities | |||
| Total Liabilities | 13,043 | 13,072 | |
| Less: Long-term Debt | 1,314 | 1,154 | |
| Less: Debt in Current Liabilities | 3,268 | 4,546 | |
| Operating liabilities (B) | 8,461 | 7,372 | |
| Net Operating Assets =(A) – (B) | 18,912 | 17,288 | Solution to 1 |
| Balance-Sheet-Based Aggregate Accruals B | 1,624 | Solution to 2 | |
| BSA=NOA_{2006} –NOA_{2005} | |||
| Average Net Operating Assets (AvgNOA) | 18,100 | ||
| Balance-Sheet-Based Accruals | 8.97% | Solution to 3 | |
| Ratio = BSA/AvgNOA | |||
| Cash Flow Statement Computation of Aggregate Accruals | ||
| 2006 | ||
| 5,080 | Income Before Extraordinary Items | |
| 5,957 | Less: Operating Cash Flows | |
| –1700 | Less: Investing Cash Flows | |
| Solution to 4 | 823 | Cash-Flow-Statement Based Aggregate Accruals (A) |
| Solution to 5 | 4.55% | Cash-Flow-Statement Based Accruals = (A)/AvgNOA |
Note: AvgNOA is 18,100 (see previous worksheet).