Intermediate Accounting Paper

Single -Step Income Statement versus the Multi-Step Income Statement Comment by PeggyParrish: Comment by PeggyParrish:

In a single-step income statement, all the revenues and profits are added together and presented relative to the expenses and the losses. The usefulness of the single-step income statement is mainly advantageous to firms that have a simple structure, including sole proprietorships. This income statement depicts all the business expenses in a line to come up with the net income instead of breaking down the results into operating and gross profits. Such an approach leads to easy record-keeping that is less involving to accountants who are preparing the statements (Zimmerman, 2014). From this point of view, the single-step income statement has the advantage of saving the effort and time taken to prepare. Moreover, users of the single-step income statement have the ability to focus on the single figure, which is the income statement so as to make an assessment of the health of the company before making decisions. However, the single-step income statement is faced by limitations with the main one being the lack of detailed information. In most instances, users of the income statement, including investors mainly evaluate the company’s worth as opposed to the net income figure provided by the single-step income statement (Vanderbeck, 2012). From this point of view, the single-step income statement is insufficient for use in making investment decisions. Comment by PeggyParrish: This is confusing… how is a single figure a statement?

On the contrary, the multi-step income statement entails an itemized list of the different sources of a business’ expenses and revenues. It reveals the firm’s gross profit, cost of goods sold, as well as the operating profit and expenses. Subsequently, it is useful to the users, including lenders and investors because it is able to reflect the overall health of the company (Carmichael & Graham, 2012). As a result, it is more viable than a single-step income statement in helping the users make effective decisions. However, the multi-step income statement has limitations including that it provides extensive and complex information that might cause confusion in informing the users about the company’s financial health. Moreover, its extensive nature makes it time-consuming to prepare.

Analysis of Exxon and Chevron

ExxonMobil Calculations

Gross profit margin = Gross profit/Sales and other operating revenue X 100 Comment by PeggyParrish: These are not the correct numbers. You are not asked for percentages; it is operating income, net income, and profit margin. This would be easier to report in a table for each company, comparing the 3 numbers for each year. Comment by PeggyParrish:

2013 gross profit margin = 118973/42053 X 100 = 28.27%

2012 gross profit margin = 133565/451509 X 100 = 59.58%

Operating profit margin = Operating Income/Sales and other operating revenue X 100

2013 operating profit margin = 40301/420536 X 100 = 9.58%

2012 operating profit margin = 49881/451509 X 100 = 11.05%

Net profit margin = Net income attributable to ExxonMobil/Sales and other operating revenue X 100

2013 net profit margin = 32580/420836 X 100 = 7.74%

2012 net profit margin = 44880/451509 X 100 = 9.94%

Chevron Calculations

2013 gross profit margin = 60833/220156 X 100 = 27.63%

2012 gross profit margin = 67254/230590 X 100 = 29.17%

2013 operating profit margin = 27213/220156 X 100 = 12.36%

2012 operating profit margin = 35013/230590 X 100 = 15.18%

2013 net profit margin = 21423/220156 X 100 = 9.73%

2012 net profit margin = 26179/230590 X 100 = 11.35%

After carrying out an analysis of the gross profit, operating profits, as well as the net incomes of both Exxon and Chevron, different observations can be made. The gross margin of ExxonMobil is higher than that of Chevron. However, the fall in the gross margin for ExxonMobil is higher than that of Chevron. However, the operating profits for Chevron are higher than those of ExxonMobil. It can also be observed that the net profits of Chevron are higher than those of ExxonMobil. Generally, the profit margins of both companies dropped between the years 2012 and 2013. Moreover, the profit margins of Chevron are higher than those of ExxonMobil. Moreover, from a general point of view, the growth in the profit margins is higher than those of ExxonMobil.

Chevron may have been more profitable than Exxon Mobil due to different reasons. One of these reasons might be due to more competitive advantage than ExxonMobil. As a result, Chevron is able to capture a bigger share of the market share than ExxonMobil, which in turn culminates to a higher sales turnover for the company. Additionally, the higher profitability for Chevron could be because of lower costs of operation as compared to those of ExxonMobil. As a result, the resultant expenses for the company take less of the firm’s profits, which in turn lead to higher profits. In addition, the higher profits for Chevron could be as a result higher demand for the company’s products in the market as compared to those of the competing firms. Because of such high demand higher quantities of the company’s products are ordered by the customers in the market, which in turn leads to higher sales turnover for the company. From a different point of view, price discrimination might have led to the higher profits for the company. Such could be in case the company needs to be more efficient and thus, charges different prices for similar products where such products still belong to the firm. If the company’s prices are proportionately higher than those of the competitors for a few of its products, it can attain higher profits from most of its products that it has priced proportionately lower. Comment by PeggyParrish: Where is your source for this?

Price-Earnings and Price-to-Sales Ratios

Exxon Mobil Calculations Comment by PeggyParrish: Put these numbers in a table for each company, rather than all of these calculations

P/E ratio = Share price/Earnings per share

Earnings per share = net income attributable to Exxon/No. of shares of common stock outstanding

For 2013 = 32580/432123 = 7.54

P/E ratio for 2013 = 101.20/7.54 = 13.42

P/S Ratio = Share price/Sales per share

Sales per share = Sales and other operating revenue/No. of shares of common stock outstanding

For 2013 = 420836000000/4321238544 = 97.39

P/S Ratio for 2013 = 95.79/97.39 = 0.98

Chevron Calculations

Earnings per share 2013 = 21423/189943 = 11.28

P/E Ratio 2013 = 9.99

Sales per share 2013 = 220156/1899435 = 115.91

PSR = 112.68/115.91 = 0.97

An analysis of each company’s price- earnings ratio and the price-to-sales ratios, it is clear that Exxon Mobil has a better performance in the market in terms of the earnings. One of the assumptions that might lead to overstated earnings between Exxon Mobil and Chevron is their share price and the sales per share price. An analysis of the ratios of the two firms depicts that the earnings per share of Chevron were higher than those of Exxon. However, both companies’ ratios grew in the year 2013. Moreover, it seems as if Chevron was charging investors more, spent more, and also carried out more expansion in the market as compared to Exxon Mobil. Comment by PeggyParrish: You did not discuss what factors could result in these two figures being overstated. Read the specific requirements. Comment by PeggyParrish:

Influence on the Decision to Invest Comment by PeggyParrish: No identification of 2 notes to the income statement for each company or discussion of them. Your discussion on whether to invest should be based upon the notes.

The investment decision can be related to the ability, as well as the position of the firms’ in the current industry, as well as the market. Exxon Mobil is bigger in size than Chevron, although in reality such is not the case when market expansion and company profitability is considered where Chevron has the intension of spending more on expansion relative to Exxon Mobil that is making attempts to stabilize in the market and industry. More so, notes in the income statement show that investors could be influenced to invest in Chevron when they notice that the company makes more profits as compared to those of Exxon Mobil. Investors might also be influenced to invest in Chevron because of its quest for more expansion in the market as it seeks to become a market leader. The notes depict that the profits reported in the income statement do not include the attempts by the company to expand, as well as the expected revenues in other upcoming years. Such could affect the decision to invest in the firm as investors look forward to better returns in the future.