Depreciation at Pepsi Bottling Group and Coca$-$Cola Enterprises

The nonalcoholic beverage business is highly competitive. Two of the largest competitors in this business are the Pepsi Bottling Group $($PBG$),$ the world$$s largest seller, manufacturer, and

distributor of Pepsi$-$Cola beverages, and Coca$-$Cola Enterprises $($CCE$),$ the world$$s largest marketer, distributor, and producer of Coca$-$Cola beverages.

On March $6,2000,$ PBG issued a press release regarding changes in their depreciation policy:

In recognition of its long$-$standing success in preventive maintenance programs, The Pepsi Bottling Group, Inc. $($NYSE: PBG$)$ today announced a change in the depreciation lives of certain categories of assets. During the past two months, PBG has conducted a review of the operating lives of its assets. This review has shown that it is appropriate to extend the book lives of several asset categories, particularly manufacturing and selected distribution assets. The primary reason for this is that our extensive preventative maintenance programs have enabled us to extend the operating lives of our assets well beyond their previous book lives.

$$We maintain that cash profits remain the best method of tracking our performance. However, since some investors look at us and other bottlers in terms of reported earnings, we thought it was important to reflect our depreciation expenses and reported profit more accurately,$$ said John Cahill, Executive Vice President and Chief Financial Officer for PBG$.$Even with these changes, the

new policies still present our financial results conservatively.$$

In the first quarter alone, the change in depreciation policy lowered depreciation expense by $$14$ million, reducing cost of sales by $$8$ million and selling, delivery, and administrative expenses by $$6$ million. Excerpts from PBG$$s $2000$ Annual Report are shown in Exhibit $1.$

In $2000,$ CCE also made changes to its depreciation policy, discussed in the excerpts from CCE$$s

$200010-$K shown in Exhibit $2.$

What effect, if any, does the change in depreciation policy have on PBG$$s fixed asset turnover ratio and cash from operations? No calculations are necessary, but explain the direction of the effect.