Financial Accounting Exxon Shell Case

1400 Words6 Pages
The University of Chicago
Booth School of Business
Financial Accounting 30000

Financial Statement Analysis Case
Exxon vs. Shell: Understanding the effect of inventory valuation on Financial Statements
Designed by: Valeri Nikolaev

Objective: Understanding the effect of inventory valuation assumptions on financial statements.

Assignment summary: You are taking the role of a security analyst who recently started following the Oil and Gas industry. The analyst has a task to draw a comparison of several financial indicators for two industry leaders: Exxon Mobil and Royal Dutch Shell, based on their income statements and balance sheets (attached at the end of this document) as well as the information from the notes to the financial
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Accounting-wise, what is one problem with these ratios?

See above. Measuring ratios through total value rather than quantity leaves them susceptible to fluctuations unrelated to underlying economics and instead to accounting assumptions.

Hint: Refer to the financial statements in the end of the document to calculate 2011 Cost of Revenue (also referred to as Cost of Sales and Cost of Goods Sold) for both Exxon and Shell. Note that Cost of Sales for an oil & gas company (mainly) consists of oil and gas purchases that match to current sales (i.e., it’s part of the income statement) and production and manufacturing expenses.

3. What information does an analyst need to draw better comparisons? If you do not have this information, how can you approximate it?

Undrilled oil/gas reserves, exploration productivity, etc. – approximated by inventory value

4. Translate Exxon’s 2011 Cost of Revenue into an amount that approximates the FIFO basis and calculate its percentage change. Use t-accounts.

5. Assume the statutory tax rate is 35%. Calculate the increase in income tax expense (both actual and %) if Exxon followed FIFO instead of LIFO (for both reporting and tax purposes).

6. Calculate Net Income (and its percentage difference) if Exxon used FIFO instead of LIFO in 2011.

7. [discussion question] Consider a company with an operating cycle that takes many years. Which inventory valuation method is more likely to be chosen by this

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