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Working Capital and Financial Environment

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Using Coca-Cola, and Pepsi-Cola:
a. Describe and quantify the elements of working capital for the most recent fiscal year for Coca-Cola and Pepsi-Cola.
b. Explain the functions of intermediaries and financial regulatory bodies with both companies.
c. Determine the importance of control programs and effective internal control techniques to the selected organizations. Discuss the impact of the 2002 Sarbanes-Oxley Act.

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Working capital is the capital which is used to run daily operations in a smooth manner. It has got two parts:
1) Gross Working capital is the firm's total current assets used in operations.
Gross Working capital = total current assets
These current assets include cash, marketable securities, prepaid expenses, accounts receivable, inventory, and other current assets. Working capital represents the liquid portion of the firm.

2) Net Working Capital means the difference between current assets and current liabilities, and therefore, represents that position of current assets, which the firm has to finance either from long-term funds or bank borrowings.

Use of working capital
Working capital provides the resources for the day to day operations of the firm.
Without cash, the firm cannot pay its bills. Without receivables, the company would have difficulty selling merchandise. Without inventory, the firm would be unable to make immediate delivery of goods.

Case of Coke:
All numbers in thousands$
Coke's Working Capital Analysis

Current Assets

Cash And Cash Equivalents 2,440,000
Short Term Investments 150,000
Net Receivables 2,704,000
Inventory 1,641,000
Other Current Assets 1,506,000
Gross Working Capital =Total Current Assets 8,441,000

Current Liabilities
Accounts Payable 5,622,000
Short/Current Long Term Debt 3,268,000
Other Current Liabilities -
Total Current Liabilities 8,890,000

Net Working Capital= Gross Working Capital-Current Liabilities -449,000

Comments: It has got moderate gross working capital and negative net working capital which shows inadequate liquidity.

Case of Pepsi:

Pepsi's Working Capital Analysis

Current Assets

Current Assets
Cash And Cash Equivalents 1,651,000
Short Term Investments 1,171,000
Net Receivables 3,725,000
Inventory 1,926,000
Other Current Assets 657,000
Gross Working Capital =Total Current Assets 9,130,000

Current Liabilities
Accounts Payable 5,271,000
Short/Current Long Term Debt 274,000
Other Current Liabilities 1,315,000
Total Current Liabilities 6,860,000
Net Working Capital= Gross Working Capital-Current Liabilities 2,270,000

Comments: It has high gross working capital and positive net working capital which shows adequate liquidity or an aggressive working capital management strategy.

Describe the importance of internal control programs
Control mechanisms assist in increasing communication, empowering the workforce, and attaining the goals set forth by helping management in the company evaluate and compare the performance of the company and/or employee over a specified time period to standards that have been preset, benchmarks and desired targets.
Management control system is the process of influencing human behavior in order to implement the strategy of the organization. A company should have several internal control programs implemented such as, accounting control systems and administrative controls. An Accounting control system consists of financial records and procedures dealing with cash disbursements, cash receipts, purchase of goods and services, employee payroll, and sales or ...

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