Significance of Oil Company Financial Statements
- Frank E. McGonagill Jr. (Bank Of The Southwest) | H.J. Gruy (H.J. Gruy And Associates, Inc.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- October 1965
- Document Type
- Journal Paper
- 1,179 - 1,182
- 1965. Society of Petroleum Engineers
- 9 in the last 30 days
- 221 since 2007
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This paper reviews responsibility of company management and auditors in the preparation and content of a complete financial statement. The various accounting procedures currently being used in the oil industry are discussed and examples presented, illustrating the different results obtained from the use of these various procedures. Tabulations are included comparing the book value of selected oil company stocks with the actual value as determined by sales or appraisals. Recommendations are presented which would eliminate the lack of uniformity in reporting financial information as well as inaccuracies in valuing assets of oil companies, thus permitting direct comparison of oil company balance sheets and income statements.
Businessmen, in general, are often shocked to learn that two different accountants with the same fact may construct two completely different financial statements. They are also usually surprised to learn that a corporate financial statement is the responsibility of company management. The chief executive of a corporation usually states in a letter to the auditors that all of the information in the report is true and fairly presented, to the best of his knowledge and belief. Thus, theoretically, the auditor is responsible only for his certificate, in which he ordinarily says that the financial statement presents fairly the financial company in conformity with generally accepted accounting principles applied on a consistent basis.
Many certified public accountants are concerned about the ambiguities falling under the term "generally accepted accounting principles". These ambiguities are numerous and involve the fundamental concepts and accounting. There is a feeling that, unless the situation is corrected, the interpretation of financial statements will be reduced to a guessing game. The nature of these ambiguities in oil company financial statements and possible means of resolving them will be discussed in this paper.
Corporate Financial Statements
A full financial statement contains two major parts-an income account and a balance sheet. The income account, frequently called a profit and loss statement, is as report of operations over a specified period, summarizing the income and expenses and indicating the net profit or loss for the period. The balance sheet is a report of the financial status of a company on a specific date. The depreciated costs of assets owned are set out in one column, and all the claims of creditors plus the equity of the owners are listed in the other column. The totals of the two columns are always equal.
The certification of a financial statements by an independent certified public account is perhaps the best available assurance of the accuracy of the data presented. The public accountant reviews the accounting records and systems of a business and makes such tests and checks as he deems appropriate. He then expresses an opinion in writing, subject to such qualifications as he may find necessary as to whether the statements fairly present the financial condition of the company as of the specified date and the results of its operations over a specified period in accordance with "generally accepted accounting principles".
Financial statements are intended to give an accurate condensation of a company's condition and operating results. An insight into a company's past performance can be obtained only by a study of the income accounts of past periods and a comparison of successive balance sheets. Everyone who comes in contact with corporations and their securities has occasion to read balance sheets and in come statements. All who deal with corporate statements should have a thorough understanding of what they contain.
People examining financial statements are primarily interested in two items: (1) the stockholder's equity or the net worth of the company; and (2) the net income from operations. These two items are easily identified in most financial statements; however, the figures shown may well represent something completely different from what the terminology implies.
Flexibility in accounting practices is more widespread in some businesses than others. It is possible for financial statements of banks, insurance companies and investment funds to be fairly accurate because of the nature of their assets and type of activity. However, even in this case, two otherwise identical savings banks might report net income differing by hundreds of thousands of dollars, and over several years the total assets might differ by millions of dollars.
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