The Method Adopted by Coca Cola Company for Setting up the New Business Entity - Case Study Example

Accounting and Finance Introduction This is an accounting feasibility report submitted to Coco Cola USA. The report is intended to analyse the type of accounting and finance system to be followed for the new company that will be set up in UK. There is wide difference between the type of reporting system in US and UK. Specifically, the report will give information about profit, tax and other calculation methods to be used. Costing portion will also be considered in this report. The usage of full costing and activity based costing are also dealt in this report. This report will give an idea about the type of ownership and identity the business should be given. The report will also give a deep insight about the corporate governance principles of UK. First part of the main body of the report will deal specifically about different aspects in profit and loss account. The second part will deal about the costing aspects. Main body The new company can be established in three forms, that is, as a Public Company (Plc), Private Company (Pvt) or as a Limited Liability Company. “The initials PLC after a UK or Irish company name indicate that it is a public limited company, a type of limited company whose shares may be offered for sale to the public.” (Ukincorp, 2010) The minimum share capital requirement is £50000 of which 25% should be paid for. It must be registered with Companies House, which is an agency of Department of Trade and Industry. The forms of companies are governed by the Companies Act 1985. A Private Limited company is a company that cannot raise capital by issue of shares to the public. The registration procedure and governing body of a private company are similar to that of a public company. A Limited Liability Company means that a company whose finances is separated from the personal finances of the owners. “Shareholders may be individuals or other companies. They are not responsible for the companys debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails.” (Businesslink, 2010) Every company that is incorporated in UK and that is listed in the UK Stock Exchange has to adhere to the Combined Code on Corporate Governance. This code contains recommendations by the Cadbury and Greenbury reports on Corporate Governance, Turnbill reports and Smith Guidance. Turnbill report gives guidance of how directors should comply with internal controls. Smith Guidance gives mandates on compliance regarding audit committees. (Iod, 2010) An Income statement is essential to arrive at the net profit/loss made by the business at the end of an accounting period. There are various types of profits that can be calculated, namely, gross profit, operating profit and profit before and after tax. Gross profit is the profit that is arrived at by just subtracting from sales, all direct expenses related to sales. Operating profit is the one that show whether the company is operating efficiently or not. It refers to the profit of a company before deduction of expenses like interest and tax. It is also called EBIT. Profit before and after tax refers to the net profit of the company. Profit before tax is arrived at by deducting all the expenses except tax from the operating profit. Profit after tax is arrived at by deducting the tax amount from profit before tax. See appendix 1 for pro forma income statement for the company. Depreciation is the charge against an asset and is entered in the income statement as expenses in order to arrive at the correct profit and loss figure of a company. An asset faces depletion in its value over time due to factors like wear and tear, obsolescence etc. Therefore, assets should be shown in the books only in the depleted values. It is for this, depreciation is charged. The two main methods used to measure depreciation are straight line method and diminishing value method. Allocating overhead cost is another challenging job for the company. Full costing method can be used by the Company for arriving at the cost. “Full cost accounting describes how goods and services should be priced to reflect their true costs (including environmental and other social costs).” (Carnegie Mellon, 2010) Thus the price of a product that is fixed by using this method will reflect even the environmental and social cost involved in the production of a product. Indirect costs are the one that is indirectly related to manufacturing and sales of a product or service. Such expenses include advertising, maintenance, security, etc. Such costs affect the entire business operation. The main problem of such cost is the difficulty to assign it to a particular department or section in an organisation. They are otherwise known as overheads. (Wisegeek, 2010) Overheads and other expenses are charged to a product by using a cost sheet. A cost sheet will help to arrive at the cost of production of a product. The method of allocating cost to a product using a cost sheet is illustrated in Appendix 2. Activity Based Costing (ABC) is another method that can be used by the company in arriving at the cost of a product. “An ABC system is designed to match overhead costs as closely as possible with company activities.  By doing so, overhead costs can be reasonably associated with products, departments, customers, or other users of activities, which tells managers where overhead costs are being used within a company.” (Accounting tools, 2010) The primary benefit of an activity based costing is that it will help in better cost control in an organization. A small illustration of activity based costing is given in the appendix 3. The main drawback of activity based costing is that it is extensively time consuming. Another drawback is that certain cost can go unnoticed in the case of activity based costing. Conclusion The report has given a clear idea about the method to be adopted by the company for setting up the new business entity. As Coca Cola is planning to establish the new drink as a separate company, the company can initially establish itself as a public company by raising capital from the public. Later on when the brand establishes, it can be brought under the Coca Cola umbrella. The report has also given a brief insight about the corporate governance principles of UK. Overall the company can be a successful venture upon following the necessary guidance put forward in the report. Works cited Ukincorp, 2010. How to Incorporate a Public Company. [Online] Available at: http://www.ukincorp.co.uk/s-1G-public-company-formation-uk.html [Accessed 6 May 2010] Businesslink, 2010. Limited Liability Companies. [Online] Available at: http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073789612&type=RESOURCES [Accessed 6 May 2010] IOD, 2010. Corporate Governance in UK. [Online] Available at: http://www.iod.com/intershoproot/eCS/Store/en/pdfs/factsheet_corp_gov_uk_1003.pdf [Accessed 6 May 2010] Carnegie Mellon, 2010. Full Cost Accounting. [Online] Available at: http://www.ce.cmu.edu/GreenDesign/gd/education/FCA_Module_98.pdf [Accessed 6 May 2010] Wisegeek, 2010. What are indirect costs. [Online] Available at: http://www.wisegeek.com/what-are-indirect-costs.htm [Accessed 6 May 2010] Accounting tools, 2010. Activity based costing. [Online] Available at: http://accountingtools.com/Pages_Costing/Costing_Activity_Based_Costing.html [Accessed 6 May 2010] Nos, 2010. Cost sheet. [Online] Available at: http://www.nos.org/srsec320newE/320EL29a.pdf [Accessed 6 May 2010] Ruskin Brown Associates, 2010. Activity based costing. [Online] Available at: http://www.ruskin-brownassociates.com/pdfs/activity.pdf [Accessed 6 May 2010] Appendix 1. Income statement Income statement Sales 190000000 Cost of goods sold 140000000 Gross profit 150000000 Operating expenses Selling expenses Commissions 15000000 Transportation 9000000 Advertisements 20000000 44000000 Administrative expenses Salaries 10000000 Depreciation (Office Equipments) 5000000 15000000 59000000 Operating income 91000000 Interest expenses 10000000 Profit before tax 81000000 Less: Income tax (30%) 24300000 Profit after tax 56700000 2. Cost Sheet (Nos, 2010) 3. Activity based costing (Ruskin brown associates, 2010) Read More