Survey Of Accounting
Survey Of Accounting
5th Edition
ISBN: 9781259631122
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Chapter 15, Problem 4ATC

ATC 9-1 Business Applications Case Analyzing segments at Coca-Cola

The following excerpt is from Coca-Cola Company’s 2014 annual report filed with the SEC:

Management evaluates the performance of our operating segments separately to individually monitor the different factors affecting financial performance. Our Company manages income taxes and certain treasury-related items, such as interest income and expense, on a global basis within the Corporate operating segment. We evaluate segment performance based on income or loss before income taxes.

Below are selected segment data for Coca-Cola Company for the 2014 and 2013 fiscal years. Dollar amounts are in millions.

Chapter 15, Problem 4ATC, ATC 9-1 Business Applications Case Analyzing segments at Coca-Cola The following excerpt is from

Required

  1. a. Compute the ROI for each of Coke’s geographical segments for each fiscal year. Which segment appears to have the best performance during 2014 based their ROIs? Which segment showed the most improvement from 2013 to 2014?
  2. b. Assuming Coke’s management expects a minimum return of 30 percent, calculate the residual income for each segment for each fiscal year. Which segment appears to have the best performance based on residual income? Which segment showed the most improvement from 2013 to 2014?
  3. c. Explain why the segment with the highest ROI in 2013 was not the segment with the highest residual income.
  4. d. Assume the management of Coke is considering a major expansion effort for the next five years. On which geographic segment would you recommend Coke focus its expansion efforts? Explain the rationale for your answer.

a.

Expert Solution
Check Mark
To determine

Ascertain the return on investment (ROI) for each of the geographical segments of Company CC for the years 2014 and 2013, indicate the segment that has performed well in 2014, based on the ROI, and indicate the segment that has improved from 2013 to 2014.

Explanation of Solution

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions of companies.

Formula of ROI:

Return on investment = Operating incomeOperating assets

Ascertain the ROI of Segment EA for the years 2013 and 2014.

Particulars20132014
Income before taxes$1,087,000,000$1,084,000,000
Identifiable operating assets÷ 1,273,000,000÷ 1,298,000,000
ROI85.4%83.5%

Table (1)

Ascertain the ROI of Segment E for the years 2013 and 2014.

Particulars20132014
Income before taxes$2,859,000,000$2,852,000,000
Identifiable operating assets÷ 3,713,000,000÷ 3,358,000,000
ROI77.0%84.9%

Table (2)

Ascertain the ROI of Segment LA for the years 2013 and 2014.

Particulars20132014
Income before taxes$2,908,000,000$2,316,000,000
Identifiable operating assets÷ 2,918,000,000÷ 2,426,000,000
ROI99.7%95.5%

Table (3)

Ascertain the ROI of Segment NA for the years 2013 and 2014.

Particulars20132014
Income before taxes$2,432,000,000$2,447,000,000
Identifiable operating assets÷ 33,964,000,000÷ 33,066,000,000
ROI7.2%7.4%

Table (4)

Ascertain the ROI of Segment P for the years 2013 and 2014.

Particulars20132014
Income before taxes$2,478,000,000$2,448,000,000
Identifiable operating assets÷ 1,922,000,000÷ 1,793,000,000
ROI128.9%136.5%

Table (5)

Analysis: Of all segments, Segment P has performed well in 2014, with the highest ROI of 136.5%. Segments E, NA, and P have improved from 2013 to 2014.

b.

Expert Solution
Check Mark
To determine

Ascertain the residual income for each of the geographical segments of Company CC for the years 2014 and 2013, indicate the segment that has performed well in 2014, based on the ROI, and indicate the segment that has improved from 2013 to 2014.

Explanation of Solution

Residual income: The excess of income from operations over the desired acceptable income is referred to as residual income.

Formula of residual income:

Residual income = Operating income – (Operating assets×Desired rate of return on investment)

Ascertain the residual income for each of the geographical segments of Company CC for the years 2013 (amount in millions).

SegmentIncome Before Taxes˗Operating assets × Desired ROI=Residual Income
EA$1,087˗$1,273×30%=$381.9=$705
E2,859˗3,713×30%=$1,113.9=1,745
LA2,908˗2,918×30%=$875.4=2,033
NA2,432˗33,964×30%=$10,189.2=(7,757)
P2,478˗1,922×30%=$576.6=1,901

Table (6)

Ascertain the residual income for each of the geographical segments of Company CC for the years 2014 (amount in millions).

SegmentIncome Before Taxes˗Operating assets × Desired ROI=Residual Income
EA$1,084˗$1,298×30%=$389.4=$695
E2,852˗3,358×30%=$1,007.4=1,845
LA2,316˗2,426×30%=$727.8=1,588
NA2,447˗33,066×30%=$9,919.8=(7,743)
P2,448˗1,793×30%=$537.9=1,910

Table (7)

Analysis: Of all segments, Segment P has performed well in 2014, with the highest residual income of $1,910 million, and Segment LA performed well in 2013, with highest residual income of $2,033 million. Segments E, NA, and P have improved from 2013 to 2014, but Segment E has improved the most.

c.

Expert Solution
Check Mark
To determine

Explain the reason for the segment with highest ROI in 2013, was not the segment with highest residual income.

Explanation of Solution

Reason: Residual income depends on the operating assets value. Since Segment P had more operating assets, the residual income was lower in 2013, despite highest ROI.

d.

Expert Solution
Check Mark
To determine

Indicate the segment that stands as the best investment opportunity for Company CC, and give reasons.

Explanation of Solution

Best investment opportunity: Segment P would be the best segment for the investment opportunity for Company CC, based on the ROI. Company CC should consider the non-quantitative factors too before investing in Segment P.

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