A Discussion on Cost Behavior in Relation to Financial Statements
Interpreting figures presented on the financial statement has always been a hectic task to the public. A trend analysis assists in the evaluation of the financial presentation of a business over a specific period of time. Periods to be analyzed ranges from months, quarterly, half yearly or between specific years depending on the situation. In accounting, two methods are widely adopted to analyze the income statement and balance sheet trends. The techniques adopted are the horizontal analysis or the vertical analysis. The two analyses help the users of financial information to compare the ...view middle of the document...
On the balance sheet, all components are calculated as a percentage of total assets.
In my analysis, I will consider the use of the horizontal analysis technique to analyze the following components of the income statement and balance sheet; revenues, cost of goods sold, accounts receivables; accounts payable and inventory. From our excel sheet that is attached, I have computed some percentage changes in the components above which are extracted from the balance sheet and income statement. My analysis is based Exxon Mobil and Chevron Corporation (Chevron 2009 Annual Report) which specialize in oil producing and manufacturing of petroleum products. The financial statements under scrutiny are for the periods between 2008 and 2009, extracted from the company’s annual reports.
This is among the best performing companies when it comes to oil exploration. From my analysis both companies’ revenues have decreased from the previous period. Exxon Mobil has experienced a decrease in revenue by 57.36% while Chevron Corporation experienced a decrease of 56.19% for the year ending 31 December 2009. The decrease in revenue could have been the result of the changing in economic conditions in the oil markets and also changes in demand and supply of their commodities.
The cost of goods sold by the two companies has also been on a downward slope. Exxon Mobil has its cost of goods sold decreased by 38.74% while Chevron is at 41.85%. Exxon Mobil is, therefore, making more sales compared to Chevron Corporation. Exxon Mobil has also been receiving much of their accounts receivables at an 11.91%. This is a good sign to the company as it lowers the risk of bad debts. On the other hand, Chevron Corporation has also experienced an increase in accounts receivables at 11.64%. This influences the cash flows to the organization as it increases the company’s revenues and lowers the debt owed to the companies.
Accounts payables for Exxon Mobil has increased by 12.64% meaning we owe more people money. This can have a positive impact to Exxon in the future as it expects to make high income from the goods it has acquired on credit. Chevron has reduced its accounts payables by 0.86%. This means that the company has paid off most of its debts as per the current period. A reduction in accounts payables would be an advantage to the company as it has reduced its debts, but it can also reduce its liquidity. Inventory for both companies has also reduced. Exxon Mobil has lowered its inventory by 0.80% while Chevron is at 19.33%. The companies are not having trouble selling its inventory thou Chevron are doing better.
To my point of view, after analyzing the two companies, I would go for Exxon Mobil, which seems to have a brighter future. It has the ability to increase its sales and thus revenue. The increase in accounts payables gives us a hint that in the future, it expects higher returns from its...