Foreign Currency Transactions

Credit is temporary capital and the objective of credit is lending with the purpose of increasing profits and sales. A sound credit policy in business is the key component to managing by measurement and benchmarks. Trade accounts receivables are recorded at net realizable value. According to DocLoan. com, "net realizable value" is "a method of determining the present value of a troubled asset to its present owner based on the assumption that the asset will be held for a period of time and sold at some future date" (JPL Networks, 2003).

This value includes the appropriate allowance for estimated uncollectible accounts to reflect any loss that might be anticipated on the trade receivables account balance. This amount would be charged to a provision for doubtful accounts. The company calculates this allowance by evaluating past write-offs from previous fiscal years and also taking into account the economic status of their customers. In an effort to retrieve accounts faster without having to charge them off, it is a possibility to offer discounts to customers who pay early.

An example of this would be to offer a 10 net 30 discount; meaning that customers would receive a 10% discount if they paid their account prior to the 30 day cut-off. This would decrease their receivables turnover, possibly resulting in more accounts being paid. A downfall to this method would be that the company would be collecting less on the account. We believe this amount would be insignificant in comparison to the profit received from more accounts being paid.

he Coca-Cola Company manages most of their foreign currency exposures on a consolidated basis, which allows them to "net certain exposures and take advantage of any natural offsets" (Coca-Cola Company, 10-K, 2003). The five geographic operating segments (North America, Africa, Asia, Europe/Eurasia/Middle East, and Latin America) accounted for nearly 81 percent of 2003 operating income outside the United States. The company believes that weakness in one particular currency is often offset by strengths in others over time.

The overall increase in total assets can be explained by the impact of a stronger Euro and Japanese Yen (impacting 2 of the operating segments) which in turn offset the impact of weakening currencies in the Latin America segment. The Coca-Cola Company also engages in forward exchange contracts and purchases currency options (principally Euro and Japanese Yen) to offset the earnings impact relating to exchange rate fluctuations.

By researching numerous International Bank Websites, we have determined that forward exchange contracts and currency options allow the company to take advantage of favorable exchange rate movements by buying or selling an amount of foreign currency at an agreed rate for a certain delivery date while protecting the company from the effects of adverse movements.

The advantages of using these measures are that they provide a simple method of covering exchange risk, without having to worry about unfavorable movements in exchange rates; and they allow the company to overcome the problems in budgeting and simplifying the process since now the company can budget at a guaranteed rate of exchange. It is important to stay abreast of economic and political conditions in the segments the company's subsidiaries are located. A slight lapse in attention could be quite costly.

It is important for Coca-Cola to maintain their relationships with foreign banks to continue contractual agreements to protect their investments abroad and increase profitability by utilizing the aforementioned foreign currency strategies. The Coca-Cola Company's inventories consist primarily of raw materials, supplies, concentrates and syrups. These inventories are valued at the lower of cost or market which means that if inventory values were to plummet, their valuations would represent the replacement costs.

In normal times of steady price increase or decrease the cost is determined on the FIFO method (first in, first out). If the price increases, this method allows for the company to have a better indication of the value of ending inventory, but it also increases net income, when the older inventory is used to account for costs of goods sold, which can lead to increased income taxes.

A potential liability to this method could be if a pause in the economy, in terms of the beverage industry, occurs. In this event, the company could incur great costs by having to destroy inventory due to spoilage. However, since the Coca-Cola Company has been on the edge of every trend, we believe they would be able to use the resources elsewhere to accommodate the beverage needs of the consumers.