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This paper revolves around “PEPSI Company Financial analysis”.
Background to PEPSI Company
Pepsi Multinationalcompany was established in 1898and deals with distribution, marketing and manufacturing beverages, grain snacks foods, and other related products. It has its head quarter in Purchase in New York USA. The company sells its products in the global market with products distributed in over 200 countries. Pepsi Company is the second largest beverage and food company in the world in terms net revenue and largest in North America. The company generated a net income of US$ 6.74 billion in 2013 up from US$ 6.178 billion in 2012. Pepsi uses both LIFO and FIFO in determine its inventory (the lower of cost or the market) (Barth, Landsman, Lang, & Williams, 2012).
IFRS and US GAAP
IFRS are accounting standards issued by IASB. They are used in more than 110countries around the world. On the other hand, are accounting procedures that are used by some USA based companies in their accounting and financial reporting. On the conceptual level, US GAAP are considered as more “rule based” as compared to IFRS which is considered to be more “principles based”. It is arguable that IFRS captures and represent economic transactions well than US GAAP by inclining more to principles basis (Meulen, Gaeremynck & Willekens, 2007). In addition to this, the two accounting methods defers in the manner in which different financial transactions are treated.
Comparison of use of US GAAP and IFRS
USA GAAP allows both LIFO and FIFO inventory accounting while IFRS allows only FIFO. US GAAP prohibits reversing inventory write down which is allowed by IFRS. An asset is considered as a future economic benefit under GAAP while IFRS recognize it as a resource that will generate future economic benefit. UNDER GAAP, extraordinary items are shown below net income, and EPS calculation average individual interim period incremental shares. IFRS does not segregate extraordinary items and computation of average individual interim period in determines EPS (Madura, 2014). The two methods have similarities that include requiring presentation of changes in shareholder equity and having a complete set of financial statements that include statement of income, balance sheet, and cash flow statement.
Accounting Method of Pepsi Company
Pepsi Company valued its inventory using an average of LIFO and FIFO method. According to the company, its inventories in 2013 were valued at the lower of market or cost.
Pepsi Company uses the straight line depreciation method. The company considers the salvage value of the assets less the acquisition, which is amortization over the life of the assets.
Revenue is recognized using the GAAP where the cost of sales (which is a product of inventory) is computed using an average of LIFO and FIFO method.
The fixed assets are recognized at their book value less the accumulated depreciation. This is similar application procedure that is adopted by both IFRS and the US GAAP.
Intangible asset (Company’s goodwill) is recognized using the GAAP.
The long-term liability are amortized on a straight line basis over the number of years
Analysis of using US GAAP accounting
US GAAP does not facilitatefinancial reports comparability. Statements prepared under GAAP are not well understandable by investors. GAAP does not recognize loss immediately and reduce transparency and consistency, which limits access to capital market. On the other hand, the use of GAAP inflates the value of the inventory, which gives tax advantage to the company. GAAP does not set a period within which the financial statements should be prepared giving the company more flexibility. Use of GAAP enables the companies to maintain consistency in financial report presentation and limit the misrepresentation risk, which forms the main objective of carrying out financial reporting.
Balance sheet, income statement, and cash flow statement under IFRS (Bloomberg Business 2014):