COCA-COLA AND PEPSI COLA ANALYSIS 1

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Coca Cola and Pepsi Cola Analysis

Advance Auditing Theory and Application

January 24th, 2020

Coca-Cola and Pepsi Cola Analysis

In the business world, competition between products, brands, companies has always existed and can be considered a boost for each company to want to be better every day. In the industry of carbonated drinks there is a classic example of competition that involves Coca Cola and Pepsi Cola, both American companies that have achieved worldwide success because of their high demand among consumers. The article “Transaction Costs And Firm Boundaries In The Soft Drink Industry” by Kench, B. T., Knox, T. M., & Wallace, H. S. (2012), indicates how both companies are constantly evolving with marketing strategies to be able to excel from each other or simply improve operations, lower costs, and thus be able to have a better profit margin; for example, the decision of both companies to have their own bottling plants to eliminate dependence on external companies. (Kench, B. T., Knox, T. M., & Wallace, H. S., 2012).

The purpose of this paper is to analyze the history of Coca Cola Co. and Pepsi Cola co., And the financial development that both companies had in 2015, with the help of specific reports including: 2015 annual report, 2015 10-k, 2015 Def 14A; answering specific questions with the help of the aforementioned reports. The analysis is divided into three parts which contain specific questions.

Part I

a. What is the history of these companies, its current business, operating sectors, and reportable segments? What factors affect their profitability and this industry in general?

A: History:

The Pepsi Cola was created in 1893 by Caleb Bradham, in his pharmacy, calling it Brad Drink, in the state of North Carolina, and in 1898 the name was changed to Pepsi after the enzyme Pepsin, since Bradham believed that the drink helped the Digestion, one of the fundamental ingredients in the drink was the cola nuts. As a curious fact in 1934 the years of the great depression the company used as a strategy the sale of a 12-ounce bottle of the drink for a cost of $ .05 cents, which increased sales compared to its competitors. The company changed control or owner several times until it made a merge with Loft and said merge acquired the name of Pepsi-Cola Company, another important merge emerged in 1965 with Frito-lay, since then Pepsi-cola Co. has bought other companies, adding products to its portfolio nationally and internationally. (Encyclopedia Britannica, n.d). The Coca Cola, was created in Atlanta in 1886 by a pharmacist named John S. Pemberton; the Pemberton bookkeeper chose the name of the drink and wrote it in script, eventually becoming the trademark of the beverage. Pemberton promoted the drink to relieve common pains, two of the ingredients of the drink was cocaine from the coca plant and the nuts cola (cocaine was eliminated as an ingredient in 1903) in 1891 another pharmacist Mr. Griggs bought the property total of the product for $ 2300 and some property rights, incorporating the company in 1892 and in 1929 the company was again sold for $ 25 million to the investor Mr. Woodruff, who served as president for more than three decades. The contoured form of the Coca-Cola bottle was introduced in 1916 but registered until 1960. Coca-Cola bought other soft drink companies and introduced new ones to the market. In 1985 he changed the original flavor of the drink by calling it the New Coke, but did not have a good feeling and returned to the original flavor by calling it Coca-Cola Classic. Coca-Cola has expanded worldwide and was one of the first companies to use recyclable plastic for the creation of its container bottles. . (Encyclopedia Britannica, n.d). Both companies have similar risk factors which include changes in consumer preference due to awareness of better nutrition due to obesity risk, inability that companies can innovate in services or products, national and international political problems, these factors would produce Low demand for products affected companies financially.( SEC,2015)

b. Compare the nature of Pepsi’s history, business sectors, and reportable segments to those of CocaCola’s history?

A: 

c.  What is the purpose of the Form Def 14A? What does “Def” stand for?  What types of information does a proxy contain?

A: According to the article “SEC Form Def 14A” by Kenton, W. (2018), the purpose of the SEC Form Def 14A, is a form that must be filed by or on behalf of a registrant when the vote of a shareholder is required, including information on where the meeting of the meeting will be held. the shareholders and all related information such as the information of the people making the request, providing enough information for the security holders and that way they can vote based on good information. (Kenton, W., (2018)

d. Who is the auditor for Pepsico?  Who is the auditor for CocaCola?  What were the audit fees as a percentage of (1) total revenue, and (2) total assets?  Audit fees were not always publicly disclosed.  In fact, such disclosure became mandatory only since the year 2000 in the United States.  Why is public disclosure of audit and other fees paid to the audit firm important?

A: According to the information obtained by the SEC in 2015 Def 14A from Coca-Cola Co, the External Auditor was Ernest & Young LLP, for a fee service of $ 29,337,000. (SEC, 2015). The 10-K report for 2015 reported a Total Assets of $ 90,093,000,000 million, with a Total Revenue of $ 44,294,000,000 million.(SEC,2015). In the case of Pepsi Cola, the information obtained by the SEC in 2015 Def 14A, the external auditor was the firm KPMG for a service fee of $ 22,641,000. (SEC, 2015). The 10-K Report of 2015 reported a Total Assets reported were 69,667,000,000, with a total Total Revenue of 63,056,000,000.(SEC, 2015)

After the financial disaster in the beginning of the 2000-2003, the Sarbanes Oxley Act of 2002 was created, in order to make the financial statements presented by public companies more transparent and to have more control of the firms audit fees charged by audits, while exercising greater independence between audited companies and audit firms. (PCAOB Investor Advisory Group, 2012)

e. Both managements comment on the fact that internal control over financial reporting has “inherent limitations.”  What are those inherent limitations?  How does management obtain comfort that internal control does not contain any material weaknesses?

A: It can be considered as inherent limitations in the audit of internal controls when there is no independence, objectivity and professionalism. According to the PCAOB in “Audit Standard N.5”. (2007), effective internal controls provide reasonable assurance in the preparation of Financial statements; The objective of the auditor in the improvement of internal controls must be based on the evidence that there is no weak material, applying the standards of efficiency, independence and due professional care (PCAOB, 2007)

References

Encyclopedia Brittanica (n.d) PepsiCo, Inc. Retrieved from:

https://www.britannica.com/topic/Taco-Bell

Encyclopedia Brittanica (n.d) The Coca-Cola Company. Retrieved from:

https://www.britannica.com/topic/The-Coca-Cola-Company

Kench, B. T., Knox, T. M., & Wallace, H. S. (2012). Dynamic Transaction Costs And Firm

Boundaries In The Soft Drink Industry. Journal of Economics and Economic Education

Research, 13(1), 33-51. Retrieved from

https://search.proquest.com/docview/1037693077?accountid=35796

PCAOB. Investor Advisory Group. (2012).The Sarbanes Oxley Act Ten Years Later. Retrieved

from: https://pcaobus.org/News/Events/Documents/03282012_IAGMeeting/Independence_Objectivity_Working_Group_Report.pdf

PCAOB. (2007). Audit Standard N.5. Retrieved from:

https://pcaobus.org/Standards/Archived/PreReorgStandards/Pages/Auditing_Standard_5.aspx

SEC.(2015). Coca-Cola Co. Form Def 14A. Retrieved from :

https://www.sec.gov/Archives/edgar/data/21344/000130817916000226/lcocacola2016_def14a.htm

SEC.(2015). Coca-Cola Co. Form 10-K. Retrieved from :

https://www.sec.gov/Archives/edgar/data/21344/000002134416000050/a2015123110-k.htm

SEC.(2015). Pepsi Co. Form 10-K. Retrieved from :

https://www.sec.gov/Archives/edgar/data/77476/000007747616000066/pepsico201510-k.htm

SEC.(2015). Pepsi Co. Form Def 14A. Retrieved from:

https://www.sec.gov/Archives/edgar/data/77476/000120677416005007/pepsico_def14a.htm#d297606a022

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