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Lorenz Marsh
Acct 2301-S70
Annual Report Project
April 30, 2013

PEPSICO INC.

PepsiCo is a global packaged food and beverage company with numerous well known
brands including Frito-Lay, Quaker, Tropicana, and Gatorade. PepsiCo is divided into four
business units: PepsiCo. Americas Foods, PepsiCo Americas Beverages, Pepsico Europe, and
PepsiCo Asia, which distribute products to over 200 countries, with their largest geographic area
of distribution being North America. The companys headquarters is in Purchase, New York,
and the companys CEO is Indra Nooyi. PepsiCo uses internal control of their financial
reporting, with all financial statements being the responsibility of management, and they are
audited by the independent accounting firm of KPMG. In the statement regarding their audit of
the annual report, they say that PepsiCo has sound internal control of their financial reporting
and that they use sound practices and procedures to do so. PepsiCo ended its latest fiscal year on
December 29, 2012. Their dividend per share for the year was $2.13. Their stock is traded on
the NYSE under the ticker symbol PEP, and the closing market price for their stock on May 6,
2013, was $82.50.
INDUSTRY SITUATION AND COMPANY PLANS:
PepsiCo is the worlds second largest carbonated drink manufacturer and largest
packaged foods product manufacturer. The packaged food and beverage industry is currently

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strong and has a positive outlook, with emerging markets in developing countries growing very
rapidly. PepsiCos beverage division has recently lost market share to Coca-Cola and private
label soft drinks in developing markets. However, the company is making a push towards more
healthy food options, which could expand their Gatorade, Tropicana, and Quaker oat operations.
According to their website, two of PepsiCos current key initiatives are to significantly increase
advertising and marketing support behind its global brands, with particular focus on North
America, and to implement a 3 year productivity program to generate $1.5 billion in cost savings
over the next three years. In their letter to the shareholders, PepsiCo stresses their integrity, code
of conduct, strong controls of financial reporting, rigorous oversight of the business, and their
commitment to sustained growth while operating with responsibility and building trust.
FINANCIAL STATEMENTS:
*All dollar amounts are in millions*
INCOME STATEMENT:
The format of the Income Statement is most similar to a multi-step format.
Gross Profit = Total Revenue Cost of Goods Sold
(2012) $65,492 - $31,291 = $34,201

(2011) $66,504 - $31,593 = $34,911

Operating Income = Gross Profit Operating Expenses

(2012) $34,201 - $24,970 = $9,231

(2011) $34,911 - $25,145 = $9,766

Net Income = Operating Income Interest Expense

(2012) $6,214

(2011) $6,462

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PepsiCos Gross Profit, Operating Income, and Net Income have all decreased by a few percent.
BALANCE SHEET:
Assets = Liabilities + Stockholders Equity
(2011) $72,882 = $51,983 + $20,899

(2012) $74,638 = $52,239 + $22,399

STATEMENT OF CASH FLOWS:

Cash flows from operations are more than net income for both 2011 and 2012
(2011) $8,944 > $6,462

(2012) $8,479 > $6,214

Main investing activity: Capital Spending = $2,714

Most important source of financing: Issuance of long-term debt = $5,999

Total cash flow has increased over the past two years, from $4,067 in 2011 to $6,297 in
2012.
ACCOUNTING POLICIES:

Revenue Recognition - We recognize revenue upon shipment or delivery to our

customers based on written sales terms that do not allow for a right of return.

Cash Equivalents - Highly liquid investments with original maturities of 3 months or less.

Merchandise Inventories Inventories are valued at the lower of cost or market. Cost is
determined using the average, FIFO, or LIFO methods.

Depreciation Property, plant and equipment is recorded at historical cost. Depreciation

and amoritization are recognized on a straight-line basis over an assets estimated useful

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life. Land is not depreciated and construction in progress is not depreciated until ready
for service.

PepsiCos other significant accounting policies are Total Marketplace Spending,

Distribution Costs, Software Costs, Commitments and Contingencies, and Research and
Development.

The information contained in the footnotes solidifies my high opinion of the company.
RATIO ANALYSIS:
1. CURRENT RATIO = Current Assets / Current Liabilities = $18,720 / $17,089 = 1.10
2. QUICK RATIO = Quick Assets (Cash + Receivables + Short-term Investments)/Current
Liabilities = ($6,297 + $7,041 + $322) / $17,089 = .80
3. INVENTORY TURNOVER = Cost of Goods Sold / Average Inventory = $31,291 /
($3,581 + $3,827/2) = 8.4 times
4. ACCOUNTS RECEIVABLE TURNOVER = Net Credit Sales/ Average Net Accounts
Receivable = $65,492* / ($7,041 + $6,912/2) = 9.38
*Total sales used in place of credit sales because credit sales was not listed
5. Debt Ratio = Total Liabilities / Total Assets = $52,239 / $74,638 = .70
6. TIMES INTEREST EARNED = EBIT(Earnings Before Interest and Taxes) / Interest
Expense = $9,203 / $899 = 10.24 times
7. RETURN ON NET SALES( Net Income %) = Net Income / Net Sales = $6,214 /
$65,492 = .095 = 9.5%
8. RETURN ON TOTAL ASSETS = Net Income / Average Total Assets = $6,214 /
($74,638 + $72,882 / 2) = .083 = 8.3%

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9. RETURN ON EQUITY = Net Income/Average Stockholders Equity = $6,214 / ($22,417
+ $20,704 / 2) = .277 = 27.7%
10. EARNINGS PER SHARE OF COMMON STOCK = Net Income / Average number of
common shares outstanding = $6,214 /($1,565+$1,544/2) = $3.99
11. PRICE EARNINGS RATIO(PE) = Current Price Per Share / Current Earnings Per Share
= $82.50 / $3.92 = 21.04
12. DIVIDEND YIELD RATIO = Dividends Per Share / Current Market Price Per Share =
$2.13 / $82.50 = .0258 = 2.58%

CONCLUSION:
I would invest in PepsiCo by buying its common stock. PepsiCo is a global company and a
leader in its industry. Even with a weak economy, it has increased sales by 14.85% over the past
three years and has paid out an average of 8.35% in dividends over the past five years. With a
current ratio of 1.1 and a quick ratio of .8, they are under the industry average, but with their
current ratio being over 1, they still have an acceptable level of liquidity. The company is
efficient at managing its assets as shown by its high inventory turnover ratio of 8.4, compared to
the industry average of 6.59. Virtually all of the companys other ratios are strong. With a profit
margin of 9.49%, they are well above the industry average of 5.8% and the sector average of
7.19%. Their return on total assets is also above the industry average. These, along with a return
on stockholders equity of 29% for the year and 33% average over five years, which is well
above the industry average of 17.4%, shows that the company has had a high and steady level of
profitability. Their solvency and equity position is strong with a debt ratio of .7. With the debt
ratio being well below 1.0, it shows that the company has considerably more assets than debt.

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Their price earnings ratio is below the industry average, but their dividend yield of 2.75% is
above the industry average, and has been for the past five years. Virtually all of PepsiCos
financial ratios are above the industry and the sector average. PepsiCo is a very stable and wellmanaged company that has shown continued growth for many years. PepsiCo has a large variety
of brands that are household names, with a large number and variety of products. This variety of
products should give them the flexibility to adjust to changes in the market and continue to grow
and be highly profitable as a global leader in their industry. I would recommend investing in this
company.