Week 5 Team

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Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.

The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.


Use the companies’ financial information to answer the following questions.

(a)What method of computing net cash provided by operating activities does Coca-Cola use? What method does PepsiCo use? What were the amounts of cash provided by operating activities reported by Coca-Cola and PepsiCo in 2014?

(b)What was the most significant item reported by Coca-Cola and PepsiCo in 2014 in their investing activities sections? What is the most significant item reported by Coca-Cola and PepsiCo in 2014 in their financing activities sections?

(c)What were these two companies’ trends in net cash provided by operating activities over the period 2012 to 2014?

(d)Where is “depreciation and amortization” reported by Coca-Cola and PepsiCo in their statements of cash flows? What is the amount and why does it appear in that section of the statement of cash flows?

(e)Based on the information contained in Coca-Cola’s and PepsiCo’s financial statements, compute the following 2014 ratios for each company. These ratios require the use of statement of cash flows data. (These ratios were covered in Chapter 5.)

(1)   Current cash debt coverage.

(2)   Cash debt coverage.

(f)What conclusions concerning the management of cash can be drawn from the ratios computed in (e)?

CA5-5 WRITING (Cash Flow Analysis) The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2017. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow, (2) the importance of operating cash flow, (3) the renewable source(s) of cash flow, and (4) possible suggestions to improve the cash position.

Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income

$ 100,000 

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense

$ 10,000 

Amortization expense


Loss on sale of fixed assets


Increase in accounts receivable (net)


Increase in inventory


Decrease in accounts payable



Net cash provided by operating activities -0-
Cash flows from investing activities
Sale of plant assets


Purchase of equipment


Purchase of land


Net cash used by investing activities


Cash flows from financing activities
Payment of dividends


Redemption of bonds


Net cash used by financing activities


Net decrease in cash


Cash balance, January 1, 2017


Cash balance, December 31, 2017

$  15,000 


President Kappeler, CEO
Kappeler Corporation
125 Wall Street
Middleton, Kansas 67458

Dear Mr. Kappeler:

I have good news and bad news about the financial statements for the year ended December 31, 2017. The good news is that net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low. Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred simultaneously . . .


Complete the letter to the CEO, including the four components requested by your boss.

P6-12 (LO5) ETHICS (Pension Funding) Craig Brokaw, newly appointed controller of STL, is considering ways to reduce his company’s expenditures on annual pension costs. One way to do this is to switch STL’s pension fund assets from First Security to NET Life. STL is a very well-respected computer manufacturer that recently has experienced a sharp decline in its financial performance for the first time in its 25-year history. Despite financial problems, STL still is committed to providing its employees with good pension and postretirement health benefits.

Under its present plan with First Security, STL is obligated to pay $43 million to meet the expected value of future pension benefits that are payable to employees as an annuity upon their retirement from the company. On the other hand, NET Life requires STL to pay only $35 million for identical future pension benefits. First Security is one of the oldest and most reputable insurance companies in North America. NET Life has a much weaker reputation in the insurance industry. In pondering the significant difference in annual pension costs, Brokaw asks himself, “Is this too good to be true?”


Answer the following questions.

(a)Why might NET Life’s pension cost requirement be $8 million less than First Security’s requirement for the same future value?

(b)What ethical issues should Craig Brokaw consider before switching STL’s pension fund assets?

(c)Who are the stakeholders that could be affected by Brokaw’s decision?

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