How Does Internal Control Regulation Affect Financial Reporting - Assignment Example

Exxon vs. Chevron Name Course Name and Code Date Compare and contrast the limitations and usefulness of the single-step income statement and the multi-step income statement. A multiple step income statement documents itemised list of an organisation’s various sources of expenses and revenues. A multiple step income statement provides information about an organisation’s gross profit which results from a difference between sales revenue and cost of goods sold. It also provides information on operating profit which is the difference between the operating expenses and gross profit. Therefore, the multiple step income statement provides information about profit margin and gross margin (Altamuro & Beatty, 2010). On the other hand, single step income statement is appropriate for a business with a simple structure such as partnerships and sole proprietorship (Weygandt et al. 2010). The single step approach documents the expenses in a single line for net income rather than itemising the information by operating profit and gross profit. It is thus easier for the accountants and financiers to prepare the financial statements (Healy & Palepu, 2012). The users of these financial statements can determine the organisation’s health through focusing on a single number: net income. Hence, the difference between these two financial approaches is the availability of the information, the complexity of the organisation, and the fundamentals associated with the organisation. Both income statement presents different challenges. Multiple-step income statement avails numerous information on the organisation’s operations and the methodology employed is usually time-consuming and complex. In multiple step income statement, the accountants are required to categories each type of expense and revenue and record the numerous transactions in each category (Altamuro & Beatty, 2010). Any wrong transaction entered affects the entire income statement and may result in investors and other stakeholders making wrong assumptions about the healthiness of an organisation (Weygandt et al. 2010). Regarding the single step income statement, the problem is a lack of information. Lenders and investors scrutinise financial statements and worthiness of an organisation on numerous factors other than its net income (Healy & Palepu, 2012). Some of the common variables analysed include operating margin and gross margin in appreciating source and expenses. The shortcomings of lack of extensive information availed to the investors and lenders mean that the organisation misuses investment opportunities and other similar opportunities. Analyze the gross profit, operating profits, and net income of both Exxon and Chevron for 2012 and 2013. Of the two (2) companies, speculate on the main reasons why one (1) company may have been more profitable than the other company. The following table summarises the gross profit, operating profits and net income for both companies: Exxon 2012 2013 Gross profit 149,453,000 136,155,000 Operating Profits 49,881,000 40,301,000 Net income 44,880,000 32,580,000 Chevron 2012 (millions of dollars) 2013 (millions of dollars) Gross profit 67,254,000 60,833,000 Operating Profits 35,013,000 27,213,000 Net income 26,179 21,423 In analysing the data from both companies, it is evident the incomes of the companies are decreasing. The difference in profitability may be attributed to asset outlay and strategic operation requirements. The energy industry is changing because the focus is shifting to renewable sources and the number of reserves are decreasing (Altamuro & Beatty, 2010). The amount of reserve, use of technologies, strategies in place and overall operational requirements contributes to more profitability in one company compared to the other. Factors of liability and investments influence the amount of return and profitability of the company. Compute each company’s price-earnings (P / E) ratio and the price-to-sales ratio (PSR). Identify primary estimates or assumptions that could result in overstated earnings, and use the ratio data to compare the quality of each company’s earnings. The following table summarises P/E and PSR for Chevron Chevron 2012 2013 Average Price earnings (P/E) ratio 8.1 10.2 9.15 Price to sales ratio (PSR) 0.98 0.98 0.98 The following table summarises P/E and PSR for Exxon Exxon 2012 2013 Average Price earnings (P/E) ratio 8.9 13.2 11.2 Price to sales ratio (PSR) 0.8 1.0 0.9 In collecting and documenting the earnings, an element of judgement plays an important role. If an accountant is excited about the business, the individual may overestimate the normalised earnings, which creates deception. In addition, the market fundamentals such as analyst downgrades and negative news flow may force the accountants to use overly conservative assumptions to normalise estimates. Factor such as amortisation and depreciation also affects the accrual earnings and may reflect appropriately on large capital expenditures. In such situations, it means the right profitability may not be documented appropriate (Healy & Palepu, 2012). Moreover, some establishment may accrue earnings before receiving the cash, which may create a misrepresentation of the data. The timing of cash flow may also affect the outcome of the ratios and other financial statements requirements or expectations. For example, a business may ship products and services, but payments are received after the conclusion of the period, it becomes a challenge to categorise the financial data. The aspect of free cash flow against the net income influences the decisions arrived because of skewed nature of the analysis. Furthermore, other companies may exclude some important information affecting the integrity of the financial statements. Chevron and Exxon operate in the same industry and experiences similar operational forces. PE and PSR provides an opportunity to determine which company operates effectively. The average PE for Exxon Mobil is 9.15 while for Chevron is 11.2 in financial and accounting; it is advisable to invest in companies with smaller PE. Therefore, it is advisable to acquire the Exxon shares because of the quality of fillings. The important component associated with PS ratio is its ability to illustrate the actual information about the company with less manipulation or distortion. In addition, sales are more stable compared with alternative sources of data (Healy & Palepu, 2012). PSR for both Exxon and Chevron are similar since the data are 0.9 and 0.98 respectively. It indicates the capitalization and sales are similar to some extent because of the closeness of PS ratio. Chevron values are higher compared with the Exxon data, meaning Chevron is a viable investment. However, the small difference and compared with Exxon, it means that Exxon is a viable company for investment. Review notes to both Exxon’s and Chevron’s financial statements. Next, identify at least two (2) notes pertaining to the income statement, and explain the main way in which the notes in question could influence your decision to invest in each of the companies. Provide a rationale to justify your decision. Chevron (2013, p. 57) “Note 21 Employee Benefit Plans” presents information about the benefits the employees get, the company’s pension scheme, obligations and assumptions of other postretirement benefit (OPEB) plans. The rates of return are also documented to inform the employees and other stakeholders about the benefits the employees gain from working with the company (Healy & Palepu, 2012). This information provides a wider view of which the organisation treats its employees. Employees are an important asset to an organisation and treating the employees appropriating means that the efficiency of an organisation is improved. Chevron (2013, p. 51) “Note 15: Taxes” provides information about tax obligations and the mechanism and frameworks employed to complete the accounting requirements. Some data such as local and international current and deferred data are presented. Local taxes, statutory federal income tax rate, tax credits and effects of changes in tax rates (Altamuro & Beatty, 2010). Any business doing business has to observe taxation requirements and support the government roles. The clear documentation of accruals and associated information provides information on the taxes, and how Chevron aims to meet the tax obligations (Weygandt et al. 2010). It also informs the investor on problems and opportunities, which may arise due to litigations if the company does not adhere to the taxation requirements. Exxon Mobil (2013, p. 34) “Note 1. Summary of Accounting Policies” presents information on principles of consolidation, revenue recognition, sales based taxes, derivative instruments, fair value, inventories, and property, plant and equipment information/data (Altamuro & Beatty, 2010). Identification of these policies and its associated definitions means that it is possible to understand the processes employed into arriving at the conclusions. Exxon Mobil investors and stakeholders are able to monitor the financial statements and appreciate the information. Exxon Mobil (2013, p. 38) “6. Additional Working Capital Information” documents information about the working capital information. The details presented include notes and accounts receivable, notes and loans payable, and accounts payable and accrued liabilities (Healy & Palepu, 2012). Understanding the source of the working capital and other variables associated with the working capital informs investors on the healthiness of the organization and ability of the organization to achieve organizational goals and objectives. References Altamuro, J., & Beatty, A. (2010). How does internal control regulation affect financial reporting? Journal of accounting and Economics, 49(1), 58-74. Chevron. (2013). 2013 Annual Report. Retrieved from https://www.chevron.com/ Exxon Mobil. (2013). Financial Statements and Supplemental Information. Retrieved from http://corporate.exxonmobil.com/ Healy, P. M., & Palepu, K. G. (2012). Business Analysis Valuation: Using Financial Statements. Cengage Learning. Weygandt, J. J., Kimmel, P. D., KIESO, D., & Elias, R. Z. (2010). Accounting principles. Issues in Accounting Education, 25(1), 179-180. Read More