Valuation and Assessment for the PepsiCo
Part1. Macro economic factors and Industry Analysis
In recent year, PepsiCo was in the extraordinary complicated economic environment. Economic environment can have a significant impact on PepsiCo. The economic factors such as Gross Domestic Product (GDP), interest rates, high inflation rate and commodity price may affect the PepsiCo current and future performance in large extend.

First, the increase of GDP affects the sales of PepsiCo. Pepsi is the world second largest food and beverage business, which sold products in more than 200 countries. In America, the GDP presents a slowly but stable increasing trend, the GDP growth rates were affected, and also influenced the sales of Pepsi America. According to the table 1, it can be seen that the core net revenue has increased 14 percent between 2010 and 2011. In addition, it was estimated that approximately 47 percent net revenue comes from outside the United States. Although most developing countries were suffered from global financial crisis, the GDP growth rates still keep a robust trend. For example, in China, the GDP growth was around 9.5 percent during 2010 to 2012. Therefore, PepsiCo in 2010, the revenue outside the America increased approximately 30 percent, which considerable above the global real GDP growth rate.

Secondly, the increase of inflation will affect the profits of PepsiCo. The whole world’s inflation rates have increased in recent year and will continually rise in the future. The increasing inflation rates leads to the raise of food prices and incomes and wages that push up the general price level. As a result, the manufacture cost of PepsiCo will be increased, including the cost of raw materials, processing, packing and transporting. In addition, the employee’s salary will also be increased. The increase of inflation results in decrease value of the currency. The situation above shows that PepsiCo has to spend more money in cost and wages. Thus, the profits of PepsiCo may be affected.

Thirdly, the increase of commodity price and foreign exchange rates may have influence on PepsiCo’s development. PepsiCo mainly divided into four main operating divisions, namely PepsiCo Americas Food (PAF), PepsiCo Americas Beverage (PAB), PepsiCo Europe and PepsiCo Asia, Middle East, Africa (AMEA). Therefore, the increase of foreign exchange rates may hinder the investment of PepsiCo. On the other hand, because of the increase price level, Pepsi is forced to increase the price of various products. In the future, it may weaken the global demand of convenient snacks, food and beverage and also decrease the purchasing power of consumers.

Moreover, it is known to all that the drink industry is a profitable industry. Therefore, the actual and potential market of drink industry is also very large. In this industry, PepsiCo and Coca Cola are the two main leaders. The Coca Cola is one of the most powerful competitors in the soft drink industry.

Rivalry between existing firms
Industry growth rate
Soft drink has become the essential food in modern people’s life and people’s requirement of the soft drink is increasing. Furthermore, the consumers enhance their awareness of brand. To be more specific, PepsiCo’s purpose is fashion, healthy, this can attract a large quantity of young people (Zhou, 2010).
Degree of concentration
PepsiCo and Coca Cola are the main two famous companies in the drink industry. The two companies occupy about 70% market share in the whole industry (Wang, 2009). Compared with those small companies, the degree of concentration of the two companies are better.

Threat of new entrants
Due to the large market of the drink industry, the result is that the industry will attract many new firms enter into the drink industry. It will increase the level of the competition in the industry, but the new entrants may can hardly affect the Pepsico’s position with some reasons. Firstly, the PepsiCo has a long history in the soft drink industry. The company invests a large quantity of money in advertisement with a long time which makes a great effect on the consumers (Liu, 2012). Secondly, the PepsiCo has occupied the limited goods shelves and vending machine and with a long development, the PepsiCo makes the consumers can get or buy Pepsi-Cola in anywhere (Liu 2012). This makes a great obstacle for the new entrants. As a result, the new entrants will think more about whether their firms can compete with the PepsiCo before enter into the industry.

Bargaining power of buyers & suppliers
Moreover, the buyer is fixed. The first one is filling factory because the factory signed franchise contract with PepsiCo and the factory has no choice. The second one is the terminal consumers. According to the statistics, it shows that 10% Pepsi-Cola consumers consume 50% Cola of the PepsiCo (Liu, 2012). Similarly, the PepsiCo’s economies of scale is large and the secret formula, it has a strong bargaining power with suppliers.

Threat of Substitute Products
There is few substitute products in the sodas industry. In this industry, Coca Cola is the boss and PepsiCo is behind it. However, PepsiCo keeps changing its strategy in order to catch the step of Coca Cola. PepsiCo pay more attention to the young people which are the main consumers (Wang, 2009). PepsiCo and Coca Cola has been competing for many years, both brands have accumulated a large number of loyal consumers (Liu, 2012). The customers like the taste of Cola and they are not willing to try about any other substitute products. In other words, the taste of other sodas may be strange for the consumers because of the unique formula and the secret formula is the core competition of PepsiCo and Coca Cola.

1. Business Strategy Analysis
Success factors of strategies
The key success factors are related to of PepsiCo’s strategies which basically include three aspects: diversification strategy, advertising strategy and talent strategy.

In order to be a competitive corporation resembles the world's largest beverage company (Coca-Cola), PepsiCo avoid confrontation with Coca-Cola in beverage industries. Instead, PepsiCo is determined to diversify the product. According to PepsiCo’s annual report (2011), the corporation’s main global business is beverage, snacks and nutrition. In 2011, PepsiCo's global products volume of beverage, snack respectively rose 5 percent and 8 percent. In addition, the business of nutrition portfolio is more than 13 billion.

The next success factor of PepsiCo is advertising strategy. In the early stage, PepsiCo started to transfer the information, ’Pepsi, the choice of a new generation’, to customers. PepsiCo contra poses the younger generation as the primary customers. Therefore, PepsiCo invites the superstar who is famous among the new generation as brand spokesperson. For example, PepsiCo spent $5 million to hire the pop star Michael Jackson for advertisement in 1994.

In the talent strategy aspect, PepsiCo’s core is to attach great importance to the result of work. Those employee who can achieve goals, will be constantly promoted. Otherwise, the person will be eliminated out from the enterprise. Additionally, PepsiCo offers employees environment to release their talent. In this working environment, the internal competition of PepsiCo will promote the employees to concentrate on work.

Risks of strategies
However, even such strategies can lead to the success of the PepsiCo, the risks of the strategies still exist. According to PepsiCo’s annual report (2009), first, diversification of products certainly increases corporation’s profits, yet it augments the difficulty of management. In addition, the competition pressure changes with the diversity of PepsiCo’s products. The more realms PepsiCo enters, the more pressure which is from divergent corporations. Secondly, advertising strategy has become a common strategy in all the industries. Thus, this situation leads to the competition of selecting superstars. Moreover, the expenses in selecting spokesperson keep increasing every year. Thirdly, the risk is also in PepsiCo’s talent strategy that focusing on the working outcomes causes an excess of psychological pressure.

Sustainability of profits in competition
Since competition has become more serious in modern society, gaining sustainability of profits is the most efficient way for a corporation to develop. Therefore, PepsiCo focus on three aspects of sustainability development, the sustainable development of human beings, the sustainable development of the environment and the sustainable development of talents.

The sustainable development of human beings
With the increase of consumers’ healthy consciousness, PepsiCo begins to offer consumers variety, delicious and nutritious food and beverage to attract consumers (Yach, Lucio & Barroso, 2007) For instance, in 2008 Gatorade reduce the sugar degree; however, it can still meet the supply needed for athletes.

The sustainable development of the environment
PepsiCo attempts to create an efficient way for the process of production in order to protect environment and also is beneficial for the corporation’s reputation. According to Baldwin and Khurana (2012), PepsiCo not only innovate in food products, but also emphasize on production innovation, such as Ecofina (the new form of beverage bottle that can save 75 million pounds of plastic each year).

The sustainable development of talents
PepsiCo invest for construction of staff team. In addition, the corporation helps employees to achieve personal career progress to promote the development of corporation. Simultaneously, PepsiCo can also create employment opportunities in the community where they serve.

Part 2
1. Accounting analysis of PepsiCo Inc
This part is to analyze the accounting activities of PepsiCo with qualitative method, which to assess the authenticity of PepsiCo financial statements. This portion via five steps to continue the accounting analysis orderly that are key accounting policies, potential accounting flexibility, strategy analysis, quality of disclosures, and potential “red flags.” In addition, according to group discussion and analysis, we did not undo any accounting distortions. Finally, after group assessment of the financial statements, we consider that PepsiCo’s accounting activities are not distorted.

1) The key accounting policies of PepsiCo Inc
There are four crucial accounting policies of PepsiCo- revenue recognition, brand and goodwill valuations, income tax expense and accruals, and pension and retiree medical plans (PEPSICO 2011). PepsiCo has necessary to adopt these vital accounting policies to sustain a competitive advantage in this market. First of all, the aim to implement the policy of revenue recognition for PepsiCo is to assure consumers can receive high quality products with a method called direct-store delivery; and because of that PepsiCo can build a high reputation image for its products. Secondly, about the policy of brand and goodwill valuations, PepsiCo considers that the behavior of purchasing goodwill and brand does not belong to amortization; and they maintain recording and evaluating future cash flows compare with book value (PEPSICO 2011). The third accounting policy is income tax expenses and accruals. PepsiCo accords to these four factors- income, tax planning opportunities, significant judgment and statutory tax to identify annual tax rate. The final accounting policy is pension and retiree medical plan expenses. PepsiCo pushes this pension plans to whole employees (local and international) and it does relatively cover some principle and important contents.

2) Assess accounting flexibility
Under the US GAAP, PepsiCo via accounting methods reflects the real economic reality with financial statements. A large number of customers use cash or payment on account for PepsiCo products and the delivery deadline is one month. Generally speaking, it is unadvisable if an enterprise completely through the equity capital to raise money, because this behavior cannot achieve the benefits of debt management. Then, the risk will increase due to the proportion of excessive debt. Meanwhile, the enterprise crisis cost and agency cost will increases and lead an increasing trend for the risk of creditors. The result is, it is forced to add limited clause that allow companies in the investment, financing and dividend distribution of financial decisions of the loss of elasticity. According to this seriousness, PepsiCo purchases other brands via mergers and acquisitions and maintains performing pension and retiree medical plans as long-term liabilities to keep good financial elasticity that is agile adapt to capital market.

3) Evaluating Accounting Strategy
Assessing PepsiCo’s accounting policies can help analyze whether this company exists potential distortions; while after comparing with other companies’ strategies, it indeed exists.

PepsiCo's accounting policies have many similarities with Coca Cola. The first similarity is revenue recognition and payment within 30 days of industry practice. This is a good credit term policy. Another important common point is the brand and goodwill valuations. It is interesting that PepsiCo and Coca-Cola use the same three criteria to evaluate intangible assets such as goodwill. In addition, they also perform the same procedures to test defect, the purpose is that when the company in the economic downturn or book value may not be recovered. About pensions and retiree health care plan, PepsiCo estimates the prospective earnings of the plan and risk. They accords to the interest rate to adjust budgets then calculate the value of the expected liabilities and wage increase.

4) Evaluate the quality of Disclosure
In general, the purpose of the accounting information disclosure is to contact investors and enterprise management. PepsiCo offers its complete and true financial statements then investors accords to the accounting information disclosure to continue investment decision. However, PepsiCo's disclosure is not 100% complete. In the consolidated financial statement cannot find about the change of fixed assets and welfare liabilities in each net income and other comprehensive income. Compared with last five years pension plans, the company has some small changes. According to the 2010 annual report, in early 2008, the company changed the every hour pension plans of United States in order to improve the participants' retirement pension amount. In the company's financial statements note points out, the company again to test their pension plans and retiree medical costs and liabilities in the third quarter of 2010. This led the expected payment reached $9.851 billion at the end of 2010 and the fair value of assets is $8.87 billion. This shows that the company's pension plans lacks funds, and still hold 981 million dollars pension liabilities (PEPSICO 2010). The company's pension plan does indeed make influence to the company. In the future, pension plans may also have some problems. PepsiCo has to overcome a number of pension liabilities. So it should make some change on fixed assets. However, the company is still a profitable company.

5) Potential Red Flags
According to accounting analysis with PepsiCo annual report’s numbers, our group consider that PepsiCo does not have potential distortions in accounting activities. In addition, we find that the company’s financial statements can evaluate their accounting policies with any unexpected changes. Moreover, the accounts receivable and accounts payable show a growing trend and this phenomenon may lead the sales ratio to increase in future. Oppositely, the trend of cash or cash equivalents also indicates a sharp decline; while this phenomenon may rise the opportunities of short-term investment. Meanwhile, they does indeed conform the amortization of intangible assets.

2. Financial analysis of PepsiCo Inc
This financial analysis will use ratio analysis and cash flow analysis to evaluate the performance of the corporation. In addition, a simple comparison between the PepsiCo and the Coca-Cola Corporation will also be included. The data are both from the annual reports in 2011 of the two companies.

1. The Ratio Analysis of PepsiCo Inc

Firstly, according to the Appendix 1 & 2, profit margin shows the ability that a company earns income. Pepsi’s operating margin increased 0.1 percent in 2011. According to the Pepsi’s Annual Report (2011), operating profit growth was mainly influenced by the net revenue growth. However, in 2010, total operating margin decreased 4.2 percentage points. We can conclude that the result is not very optimistic. Pepsi heavily depends on the great amount sale. To 2011, PepsiCo is still a very profitable corporation. The return of equity of the PepsiCo is 28.02 percent in the Dec.31st 2011, together with other ratios. For examples, current ratio in the Dec.31st 2011 of the PepsiCo is 96 percent. In the same time, Quick ratio is 62 percent and cash ratio is 24 percent. All those ratios have increased in different degrees among those years. Therefore, those ratios all shows that PepsiCo not only had a good liquidity in the past, but also will have a good fortune.

2. The Cash Flow Analysis of PepsiCo Inc

From the cash flow analysis, combined with the Appendix 3 & 4, we can see that the PepsiCo is an efficient company. From the chart in the Appendix 3, net cash provided by the operating activities is increasing every year from 2009 to 2011. The chart in the Appendix shows a strong internal cash flow generation. Then, the investing activities increased from 2401 to 7668 from 2009 to 2010. In 2011, it decreased to 5618. In addition, for the financing activities, the PepsiCo invested more money every year.

3. Simple Contrast between PepsiCo & Coca Cola
As the biggest competitor in the field of coke sales, Coca-Cola is always the biggest threat to the Pepsi. From the Appendix 5, it can be seen that after the comparison of statics like total assets turnover, Pepsi is bigger than Coca Cola. However, in some other statics, Coca-colas’ statics is much bigger than the Pepsi. For example, in the field of days’ sales in inventory. These results show that the Pepsi is more efficiency than the Coca-cola. With many branch brands of the Pepsi emerges, the sales of the PepsiCo may still keep a positive trends.
Part1. Table 1

Part 2.Appendix 1
Income Statement of the PepsiCo
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Appendix 2
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Appendix 3
The cash activities of the PepsiCo
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Appendix 4
Cash Flow Statement of the PepsiCo
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Appendix 5
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References:
Allison Heiland, Angela Heyroth, Robin Tieman 2001, ‘Analysis of the Accounting Policies of PepsiCo as compared to Coca Cola’, pp1-12.

Aziz Hassanali, Rami Musa & Jordan Rubin 2001, ‘Analysis of Pepsico’, pp1-12.

Baldwin, E. & Khurana, R. 2012, ‘PepsiCo, performance with purpose,Achieving the right global balance’, Harvard Business School.pp 1-22.

Liu, Y.F, 2012, ‘The Competition between Pepsico and Coca Cola’.pp1-25

Wang, S.A, 2009, ‘ Market Research Report of Pepsico’.pp1- 3

Jeff Williams 2012, ‘Profitability Analysis of PepsiCo’, Seeking Alpha.

PEPSICO 2010, ‘Performance with purposes- The promise of PepsiCo’, pp1-110.

PepsiCo, 2011, ‘The power of PepsiCo’, Annual Report 2011, pp 1-92.

PepsiCo, 2009, ‘Our business risks’, Annual report 2009,

The United Nations New York 2011, ‘World Economic Situation and Prospects 2012 Global Economic Outlook’, pp.1-42.

Yach,D. Lucio, A & Barroso,C. 2007, ’Can food and beverage companies help improve population health? Some insights from PepsiCo’,The World Today, pp, 656-657.

Zhou, Z.G, 2010, ‘ Market Analysis and Forecast About Pepsico’.pp1-4