# 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.

$^7$In 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
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