COMPARE AND CONTRAST EXXON AND CHEVRON
Compareand Contrast Exxon and Chevron
1.Compare and contrast the limitations and usefulness of thesingle-step income statement and the multi-step income statement
Anincome statement describes a financial statement which is used inshowing the profitability of an entity for a particular tradinginterval, and the interval is usually specified. The time intervalfor the income statement is chosen by the entity or organizationdoing business. An income statement for a given business usuallyshows expenses, revenues, losses, and gains. “There are two formatsthat can be used in preparing the income statement the single-stepformat and multi-step format” (Porter & Norton, 2011). Theformat selected for the preparation of the income statement usuallydepends with the complexity of activities that a business has.
Asingle-step income statement usually presents an entity’s netprofit or loss in one mathematical equation. A single-step incomestatement is useful when one is presenting financial information topeople who only need to have knowledge of the end results. “In asingle-step income statement, the expenses and incomes are notseparated” (Brigham & Ehrhardt, 2013). Because this incomestatement is usually short, it is easy to understand and those whoprepare it benefit from consuming less time when preparing the incomestatement. Although this income statement has the above highlightedbenefits, it also suffers a drawback in that it lacks informationespecially when the financial situation of a business is beingassessed. On the other hand, a multiple-step income statementincludes details of a business concerning varied sources of incomeand expenses. It is through this income statement that the overallhealth of a business can be assessed. Unlike the single-step incomestatement, multiple-step income statement is detailed and consumes alot of time to prepare as well as correct mistakes. “Themultiple-step income statement is different from a single-step incomestatement because it separates the operating expenses and operatingrevenues from non-operating expenses, losses, and gains andnon-operating revenues” (Agtarap-San, 2007). The operating sectionsof the multiple-income statement detail expenses and revenues whilethe non-operating sections show losses and gains of indirectactivities. The multiple-step income statement is useful to aninvestor since it clearly details all the items that show theperformance of a business.
2.Analyze the gross profit, operating profits, and net income of bothExxon and Chevron for 2012 and 2013. Of the two (2) companies,speculate on the main reasons why one (1) company may have been moreprofitable than the other company.
NetProfit margin = Net income / Sales and Other revenues * 100
=(32,580, 000 / 420,836,000) * 100
GrossProfit margin = gross profit / Revenue
=(136,155,000 / 420,836,000) * 100
Operatingprofit margin = Operating profit / Net Sales (revenue)
=(40,301,000 / 420,836,000) * 100
Pretaxprofit margin = Pretax profit / Revenue
=(57,711,000 / 420,836,000) * 100
NetProfit margin = (44,880,000 / 451,509,000) * 100
Grossprofit margin = (149,453,000 / 451,509,000) * 100
Operatingprofit margin = (49,881,000 / 451,509,000) * 100
Pretaxprofit margin = (78,726,000 / 451,509,000) * 100
Netprofit margin = (21,423,000 / 220,156,000) * 100
Grossprofit margin = (60,833,000 / 220,156,000) * 100
Operatingprofit margin = (27,213,000 / 220,156,000) * 100
Pretaxprofit margin = (35,905,000 / 220,156,000) * 100
Netprofit margin = (26,179,000 / 230,590,000) * 100
Grossprofit margin = (67,254,000 / 230,590,000) * 100
Operatingprofit margin = (35,013,000 / 230,590,000) * 100
Pretaxprofit margin = (46,332,000 / 230,590,000) * 100
Fromthe profit margin calculations, it is apparent that operating profitand net profit margins are higher in Chevron compared to those inExxon. However, in the case of gross profit margin, it is higher inExxon compared to that of Chevron. From the analysis, Chevron is moreprofitable compared to Exxon. One of the reasons why Chevron may bemore profitable than Exxon is due to excellent management. Themanagement of Chevron may be considered to put a lot of efforts inensuring that the expenses remain low while revenues are high acompany is likely to have high profitability in case it maintainsexpenses and keeps the revenues high. This is the case in Chevron.Another reason that could have attributed to higher profits inChevron compared to Exxon is due to the use of excellent marketingcampaigns that ensure high sales revenue. Also, Chevron may be moreprofitable compared to Exxon because investors may have a lot ofconfidence in investing in Chevron than in Exxon. Chevron may attracta vast number of investors due to its disclosures, making investorsto consider investing in the company where investors have highinvestment confidence, they are likely to invest in the companyresulting in high profitability. Furthermore, Chevron may have beenindicated as being more profitable compared to the Exxon Company dueto Chevron having higher efficiency than Exxon. Efficiency in thiscase implies that Chevron is capable of utilizing the inputs that ithas in producing better outcomes compared to Exxon.
3.Compute each company’s price-earnings (P/E) ratio andprice-to-sales ratio (PSR). Identify primary estimates or assumptionsthat could result in overstated earnings, and use the ratio data tocompare the quality of each company’s earnings.
Price-earningsratio = Market value / EPS
EPS= Net Income / Outstanding Common Shares
EPS= 44,880,000 / 9,653,000
Price-earnings= 79.12 / 4.65
Priceto Sales Ratio (PSR) = Stock Price /Net Sales per Share
Netsales per share = 44,880,000 /9,653,000 = 4.65
PSR= 79.21 /4.65
PE= 32,580,000 / 10,077,000
Price-earningsratio = 89.57 / 3.23
Netshare per stock = 32,580,000 /10,077,000
PSR= 94.31 /3.23
EPS= 26,179,000 / 1,832,000
Price-earningsratio = 92.69 / 14.29
Netsales per share = 26,179,000 /1,832,000 = 14.29
NPS= 96.70 /14.29
EPS= 21,423,000 /1,832,000
Price-earningsratio = 112.25 / 11.69
Netsales per share = 21,423,000 /1,832,000 = 11.69
PSR= 114.75 /11.69
Price-earningsratio may be overstated emanating from inappropriate market value ofthe share. The market value of the shares are not constant and tendto increase or decrease depending on the market conditions in a givenmonth or day. When the market value of the share is overstated, it isobvious that the price-earnings ratio would be overstated. Also, whenthe net income is understated, the price-earnings ratio is likely tobe overstated. “When calculating the earnings per share, the valuewill be small when the net income is understated” (Faerber, 2014).This small value will result in an overstated per-earnings ratio.Alternatively, in case the value of the outstanding common shares isoverstated, the earning per share value will be small, a move thatwould result in an overstated value of the per-earnings ratio.
Exxonhas higher price-earnings than Chevron. Since price-earnings ratioindicates the market value of a stock relative to its earnings,higher price-earnings ratio for Exxon is an indication that Exxon hasbetter quality earnings compared to Chevron. Because of the higherprice-earnings ratio, Exxon is likely to be associated with highershare prices in the future compared to the share prices of Chevron.Quality of the Exxon Company can be indicated through the shares ofthe company attracting higher prices than Chevron when the predictedshare prices are high, there is an indication that a company is in aposition to attract a lot of investors. It is through the investorsthat the Exxon Company will be capable of generating qualityearnings.
4.Review notes to both Exxon’s and Chevron’s financial statements.Next, identify at least two (2) notes pertaining to the incomestatement, and explain the main way in which the notes in questioncould influence your decision to invest in each of the companies.Provide a rationale to justify your decision.
The“disclosures made in the financial statements of a company arecritical in influencing investors’ decision” (Kieso et al.,2011). According to the income statement of Exxon for 2012, there isa provision that the products of the company can be sold underlong-term agreements, where there are periodic price adjustments. Asan investor, the use of long-term agreements in selling the productsof the company is attractive. This is because “long-term agreementswould ensure that the price of the products remains stable for a longperiod, which is an indication that the revenues of the company wouldalso remain stable for a long period” (Faerber, 2014). When therevenues of the company are steady, it implies that the company wouldbe capable of paying good dividends to the investors.
Anothernote in the Exxon income statement that may influence the decision asan investor entails the note on litigation. According to this note,the company has encountered a variety of claims made against it. Thisinformation may affect the decision of an investor because it showsthat the company may be engaged in dubious ways of earning itsrevenues. Because of the uncertainties that may not be disclosed bythe company for example, the reasons for a claim, an investor mayfear investing in the company.
Onthe other hand, in the income statement of Chevron Company, one ofthe notes indicates that the company has different subsidiaries,which are managed differently. This information is crucial to aninvestor since it can help an investor make the right decisionconcerning which subsidiary to choose for investment. When making aninvestment decision, it is important to understand the performance ofthe different subsidiaries. “An investor is likely to make adecision of investing in a subsidiary that has the best performance”(Faerber, 2014). Another note in the income statement of ChevronCompany entails the concentration of credit risk. According to thisnote, the company’s investment policies limit the exposure of thecompany to credit risks as well as concentration of credit risk. Thisis of immense importance to an investor because it offers him theconfidence of investing in the company.
Agtarap-San,J. D. (2007). Fundamentalsof Accounting: Basic accounting principles simplified for accountingstudents.Bloomington, IN: AuthorHouse.
Brigham,E. F., & Ehrhardt, M. C. (2013). Financialmanagement: Theory and practice.Mason, Ohio: South-Western.
ChevronCorporation. Retrieved from http://finance.yahoo.com/q?s=cvx&ql=1
ExxonMobil Corporation. Retrieved fromhttp://finance.yahoo.com/q/is?s=XOM+Income+Statement&annual
Faerber,E. (2014). Allabout value investing.New York: McGraw-Hill Education.
Kieso,D. E., Weygandt, J. J., & Warfield, T. D. (2011). Intermediateaccounting: Vol. 1.Hoboken, NJ: John Wiley & Sons.
Porter,G. A., & Norton, C. L. (2011). Financialaccounting: The impact on decision makers.Australia: South-Western Cengage Learning.