Coca-Cola Accused of Channel Stuffing
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Coca-Cola is the most valuable brand in the world. Founded in and successful since the late 1800s, it is now considered the largest beverage company in the world—with customers in more than 200 countries.Â

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Accountants summarize the information from a firm’s business transactions in various financial statements for a variety of stakeholders, including managers, investors, creditors, and government agencies. Many business failures may be directly linked to ignorance of the information “hidden” inside these financial statements. Likewise, most business successes can be traced to informed managers who understand the consequences of their decisions. While maintaining and even increasing short-run profits is desirable, the failure to plan sufficiently for the future can easily lead an otherwise successful company to insolvency and bankruptcy court.

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Read the case below and answer the questions that follow.

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In the mid-2000s, Coca-Cola was accused of channel stuffing. Channel stuffing occurs when the demand for a product is inflated because a company sends extra inventory to wholesalers or retailers at an unsustainable rate. Essentially, a company sends products to distributors and counts these shipments as sales—although the product often remains in warehouses or is later returned. This behavior can inflate earnings and mislead investors. Companies resort to channel stuffing to show a false increase in sales. Many companies have been accused of channel stuffing, including, Coca-Cola, Krispy Kreme Donuts Inc., Harley-Davidson Motorcycles, Clear One Communications, Symbol Technologies, Network Associates, and Intel.

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Coca-Cola was accused of sending extra concentrate to Japanese bottlers from 1997 through 1999 in an effort to inflate its profit. In January 2004, former finance officials for Coca-Cola discovered statements of inflated earnings based on the company’s shipping extra concentrate to Japan. Although the company settled the allegations, the SEC (Securities and Exchange Commission) found evidence that channel stuffing did occur. However, Coca-Cola had pressured bottlers into buying additional concentrate in exchange for extended credit. Therefore, the sales were technically considered legitimate.

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To settle with the SEC, Coca-Cola agreed to avoid channel stuffing in the future. The company created an ethics and compliance office and is required to verify each financial quarter that it has not altered the terms of credit or extended special credit. Coca-Cola also agreed to reduce the amount of concentrate held by international bottlers. Although the company settled with the SEC and the Justice Department, it still faced a shareholder lawsuit regarding channel stuffing in Japan, North America, Europe, and South Africa. Despite its reputation as a responsible corporate citizen, Coca-Cola has found it difficult to balance ethics and responsibility to shareholders, complying with legal requirements on reporting earnings, and maintaining the bottom line.

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 1.
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Coca-Cola was accused of creating and processing _________ during specific time periods to positively impact financial statements.

Analysis

Customers

Transactions

Documents
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 2.
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The act of channel stuffing causes _____________ on Coca-Cola’s financial statements.

Increased customers

Decreased profit

Increased revenue

Increased inventory
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_________ use accounting information to make decisions, plan and control.

Governments

Managers

Creditors

Stockholders
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 4.
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Which financial statement shows a detailed increase/decrease of transaction payment types?

Balance sheet

Income statement

Statement of cash flows

All of the above
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 5.
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Which federal government agency provides rules, policies and requirements for accounting firms and companies?

Treasury Department

Public Accounting Oversight Board

Securities and Exchange Commission

Government Accounting Assurance Policy