Total Assets19145 Total Liabilities Equity 19145

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1. Consider the assets on Coca Cola's balance sheet and answer the following questions:

a. Looking at the assets that Coca Cola has on its balance sheet, which assets are likely to be assessed closest to market value? Explain.

b. Coca Cola has net fixed assets of $3,669 million. Can you estimate how much Coca Cola paid for these assets? Is there any way to know the age of these assets?

c. Coca Cola seems to have far more invested in current assets, rather than fixed assets. Is this significant? Explain.

d. In the early 1980s, Coca Cola sold off its bottling operations, with the bottlers becoming independent companies. How would this action have impacted the assets on Coca Cola's balance sheet? (The manufacturing plants are most likely to be part of the bottling operations)

2. Examine the liabilities on Coca Cola's balance sheet.

a. Based upon the balance sheet, how much interest-bearing debt does Coca Cola have outstanding. (You can assume that other short term liabilities represent sundry payables, and other long term liabilities represent health care and pension obligations.)

b. Based upon the balance sheet, how much did Coca Cola obtain in equity capital when it issued stock originally to the financial markets?

c. Is there any significance to the fact that retained earnings is much larger than the original paid-in capital?

d. The market value of Coca Cola's equity is $140 billion. What is the book value of equity in Coca Cola? Why is there such a large difference between the market value of equity and the book value of equity?

3. Coca Cola's most valuable asset is its brand name. Where in the balance sheet do you see its value? Is there any way to adjust the balance sheet to reflect the value of this asset?

4. Assume that you have been asked to analyze Coca Cola's working capital management.

a. Estimate the net working capital and non-cash working capital for Coca Cola.

b. Estimate the firm's current ratio.

c. Estimate the firm's quick ratio.

d. Would you draw any conclusions about the riskiness of Coca Cola as a firm by looking at these numbers? Why or why not?

Coca Cola's income statements for 1997 and 1998 are summarized below (in millions of dollars):

1997

1998

Net Revenues

$18,868

$18,813

Cost of Goods Sold

6,105

5,562

Selling, G & A Expenses

7,852

8,284

Earnings before interest and taxes

5,001

4,967

Interest Expenses

258

277

Non-operating Gains

1,312

508

Income Tax Expenses

1,926

1,665

Net Income

4,129

3,533

Dividends

1,387

1,480

The following questions relate to Coca Cola's income statement.

5. How much operating income did Coca Cola earn, before taxes, in 1998? How does this compare to how much Coca Cola earned in 1997? What are the reasons for the differences?

6. The biggest expense for Coca Cola is advertising, which is part of the selling, general and administrative expenses. A large portion of these expenses are designed to build up Coca Cola's brand name. Should advertising expenses be treated as operating expenses or are they really capital expenses? If they are to be treated as capital expenses, how would you capitalize them? (Use the capitalization of R&D as a guide.)

7. What effective tax rate did Coca Cola have in 1998? How does it compare with what they paid in 1997 as an effective tax rate? What might account for the difference?

8. You have been asked to assess the profitability of Coca Cola, as a firm. To that end, estimate the pre-tax operating and net margins in 1997 and 1998 for the firm. Are there any conclusions you would draw from the comparisons across the two years.

9. The book value of equity at Coca Cola in 1997 was $7,274 million. The book value of interest-bearing debt was $3,875 million. Estimate:

a. the return on equity (beginning of the year) in 1998

b. the pre-tax return on capital (beginning of the year) in 1998

c. the after-tax return on capital (beginning of the year) in 1998, using the effective tax rate in 1998.

10. SeeSaw Toys reported that it had a book value of equity of $1.5 billion at the end of 1998 and 100 million shares outstanding. During 1999, it bought back 10 million shares at a market price of $40 per share. The firm also reported a net income of $150 million for 1999, and paid dividends of $50 million.

a. Estimate the book value of equity at the end of 1999

b. Estimate the return on equity, using beginning book value of equity.

c. Estimate the return on equity, using the average book value of equity.

Table 3.9: International Comparison of Accounting Principles

Accounting Principle

UK

USA

France

Germany

Netherlands

Sweden

Switzerland

Japan

1. Consistence - accounting principles and methods are applied on the same basis from period to period

Yes

Yes

Yes

Yes

Yes

PP

PP

Yes

2. Realization - revenue is recognized when realization is reasonably assured

Yes

Yes

Yes

Yes

Yes

Yes

PP

Yes

3. Fair presentation of the financial statement is required

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

4. Historical cost convention - departures from the historical cost convention are disclosed

Yes

Yes

Yes

Yes

Yes

Yes

RF

Yes

5. Accounting policies - a change in accounting principles and methods without a change in circumstances is accounted for by a prior year adjustment

Yes

No

Yes

MP

RF

MP

MP

No

6. Fixed assets - revaluation - in historical cost statements, fixed assets are stated at an amount in excess of cost which is determined at irregular intervals.

MP

No

Yes

No

RF

PP

No

No

7. Fixed assets - revaluation - when fixed assets are stated, in historical cost statements, at an amount in excess of cost, depreciation based on the revaluation amount is charged to income.

Yes

No

Yes

No

Yes

Yes

No

No

8. Goodwill amortized

MP

Yes

Yes

Yes

M

Yes

MP

Yes

9. Finance leases capitalized

Yes

Yes

No

No

No

Yes

RF

No

10. Short-term marketablse securities at the lower of cost or market value

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

11. Inventory values at the lower of cost or market value

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

12. Manufacturing overhead allocated to year-end inventory

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

13. Inventory costed using FIFO

PP

M

M

M

M

PP

PP

M

14. Long-term debt included maturities longer than one year

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

15. Deferred tax recognized where accounting income and taxable income arise at different times

Yes

Yes

Yes

No

Yes

No

No

Yes

16. Total pension fund assets and liabilities excluded from a company's financial statements

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

17. Research and development expensed

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

18. General purpose (purely discretionary) reserves allowed

No

No

Yes

Yes

Yes

Yes

Yes

Yes

19. Offsetting-assets and liabilities are offset against each other in the balance sheet only when a legal right of offset exists

Yes

Yes

Yes

Yes

Yes

Yes

PP

Yes

20. Unusual and extraordinary gains and losses are taken in the income statement

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

21. Closing rate method of foreign currency translation employed

Yes

Yes

Yes

Yes

Yes

No

Yes

No

22. Currency translation gains or losses arising from trading are reflected in current income

Yes

Yes

MP

MP

MP

MP

MP

No

23. Excess depreciation permitted

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

24. Basic statements reflect a historical cost valuation (no price level adjustment)

Yes

Yes

Yes

Yes

M

Yes

Yes

Yes

25. Supplementary inflation - adjusted financial statements adjusted

MP

MP

No

NO

MP

Yes

No

No

26. Accounting for long-term investments:

(a) less than 20% ownership - cost method

(b) 20 - 50% ownership -equity method

(c) More than 50% full consolidation

Yes Yes Yes

Yes Yes Yes

Yes Yes Yes

Yes

Yes

Yes MP Yes

Yes

Yes Yes Yes

27. Both domestic and foreign subsidiaries consolidated

Yes

Yes

Yes

M

Yes

Yes

MP

Yes

28. Acquisition accounted for under the purchase cost method

PP

PP

Yes

Yes

Yes

PP

Yes

Yes

29. Minority interest excluded from consolidation income

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

30. Minority interest excluded from consolidated owners' equity

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Key: PP - Predominant Practice MP - Minority Practice M - Mixed Practice RF - Rarely or not found

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