Understanding financial reports and notes to the financial statements

ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice ROYAL MELBOURNE INSTITUTE OF TECHNOLOGY SCHOOL OF BUSINESS AND MANAGEMENT Understanding Financial Reports and Notes to the Financial Statements Subject Code: ACCT2105 Subject Name: Accounting in Organization & Society Lecturer Name: Vinh Tran Phuc Group Number: 12 _ Team Number: 05 Group Members: Tran Quoc Dung _ S3877059 Nguyen Tran Nhut Nhi _ S3877069 Ngo Pham Minh Nhat _ S3868762 Thai Duc Hoang Son _ S3880603 Word Count: 1430 Page Number: 10 ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice Name Rating Explaination Nguyen Tran Nhut Nhi Excellent (5) She tried very hard to guide and support each member She is a good leader and managed not only time but also workload very well Excellent (5) He participated in all discussions and supported others’ works He always met the deadlines from the leader Very good (4) He partially supported others’ works and did a decent job on his part He is acceptably prepared and cooperative Good (3) Teammate reminded him to be present in class to thoroughly understand his work (its opportunities to help him ask the lecturer directly to clarify) but he didn't go As a result, he had a lot of questions that his teammates tried to explain but still couldn't figure out However, he did quite well and post his part clearly and Show effort in the process of doing assignment (s3877069) Tran Quoc Dung (s3877059) Ngo Pham Minh Nhat (3868762) Thai Duc Hoang Son (s3880603) ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice Contents Introduction Understanding financial statements in detail What are the principal activities of the company? What is the purpose of the auditor's report? What opinion did the auditor give the financial statements What does the above opinion mean? Explain one additional type of opinion the auditor could have given the financial statements Understanding financial statements’ items Balance Sheet Income statement Statement of Cash flows Statement of Changes in Equity Conclusion ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice I Introduction Chevron is an American multinational energy corporation headquartered in San Ramon, California (McGinley 2018) Chevron was the successor company of Standard Oil founded by John D Rockefeller in 1879 Currently, it is operating under the direction of Michael K Wirth (Chairman and the CEO) (Chevron 2020) To help Chevron's investors, market analysts, or even owners make judicious investments, evaluate company's financial performance comprehensively, as well as track their financial health and income potential, Chevron have published Financial reports publicly to satisfy previous expectations (Calzon 2021) They have issued their latest completed Annual report in 2020 This report will give a detailed analysis of Chevron's financial statements (FS), and its items (Balance Sheet, Income statement, Statement of Cash flows and Statement of Changes in Equity), mainly in 2020 II Understanding financial statements in detail What are the principal activities of the company? Figure 1: Main activities of Chevron Corporation (Chevron 2020) Chevron is a manufacturing Oil and Natural Gas corporation that has covered more than 180 countries worldwide Its main activities are exploitation, production, transportation, and export of high-quality refined products, marine and aviation fuels, premium base oil, finished lubricants, and fuel oil additives Chevron also engages in hydrocarbon investigation and production, petrochemicals manufacturing, and power generation Furthermore, they have recently begun to research clean pomegranate fuels as well as biodegradable solvents (Chevron 2020) ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice What is the purpose of the auditor's report? The primary objective of an audit of a company's financial statements is to empower the auditor to determine whether the entity's financial statements have been correctly prepared based on the relevant accounting system, and to demonstrate management's confidence in the entity's owners (Mohamed Elborno 2019) What opinion did the auditor give the financial statements After auditing the balance sheets of Chevron and its auxiliaries, it can be concluded that the consolidated financial statements of Chevron presented legally necessary information such as cash flows and results of operations, which are basically accepted in American accounting regulations, as of the end of 2020 and 2019 Therefore, the opinion of Chevron is Unqualified Opinion (Page 56 report 2020) What does the above opinion mean? An unqualified opinion expressed when the auditor concludes that the financial statements have been prepared, in every material regard, as per the appropriate financial reporting framework The Chevron Annual Report 2020 clearly states almost everything needed in a financial statement which is from page 53 to 100 of the report This means that Chevron's annual report is an unqualified opinion Explain one additional type of opinion the auditor could have given the financial statements To assume that Chevron hasn’t represented inventory accurately, has kept inadequate records in its cash accounts, and didn't give sufficient records to audit for devaluation, the auditor could give the Qualified opinion in the Chevron financial statements That is because qualified opinions have been issued if a company has deficient disclosures in the commentaries to the financial statements, when limitation of scope appears in which the auditor couldn't accumulate adequate proof to support different parts of the FS (Davoren 2019) III Understanding financial statements’ items Balance Sheet A balance sheet helps market stakeholders and investors in surveying an organization's in general financial condition and ability to meet its working costs It ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice can also be used to figure out how to satisfy the financial commitments and the best ways to fund activities with credit (Source: Chevron annual report supplement 2020) Regarding the above figure, we see that the total current asset of 2018 is higher than the rest of the years As for total liabilities, they prevailed in 2016 and 2017 but then decreased significantly In particular, the total current inventory has remained at a stable level for years, showing that they handle inventory at an acceptable level ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice (Source: Chevron annual report supplement 2020) The fact that the Chevron company has increasing debt (including the final debt as well as the Ratio of total debt to total debt-plus-Chevron Corporation stockholders' equity proves that Chevron's The financial picture is facing a lot of difficulties in terms of debt for shareholders, because the company's earnings have been in a loss since the pandemic, around $5,543, which significantly affects the profit-sharing ratio with shareholders During the difficult period of the epidemic, if not handled properly, the debt may pile up and they have a high risk of bankruptcy Income statement In general, the main purpose of Income Statement is presenting revenue of an organization and expenses, which helps the organization maintain in a specific duration (Birt et al 2019), to predict the changes of financial performance in the coming years based on information from the present years Figure 3: The mixed graph of income statement of Chevron Corporation from 2016 to 2020 Gross Profit is the profit of a company made after removing variable cost with making and selling its goods and services Chevron’s profit was at peak in FY2018 and it significantly decreased until FY2020 The drop in gross profit, which accounted for almost 36% compared to 2019, could be affected by the reduction in the sales and the product prices during the period 2019-2020 To prevent the spread of Covid-19, many restriction regulations ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice have been approved, thus, the demand on Chevron’s products have dropped down seriously Gross Profit Margin is the percentage of the total sales achieved divided by the total revenue of the company in the same period Chevron’s profit margin increased approximately 4% during the 2016 - 2020 period, and was at the top in FY2019 However, it declined slightly by around 0.7% from 2019 to 2020 due to the deduction of gross profit and the sales Net income is the profit of a company made after all expenses, revenue and other income are accounted for In the 2016-2020 period, Chevron’s Net Income was almost in the positive range The increase in operating expenses as well as the decrease in the income have significantly affected the result in FY2020 that Chevron spent more money in operating but received less due to the Covid-19 Statement of Cash flows The purposes of a Cash flow statement are to provide detailed information of the cash inflows and outflows of an organization, as well as assist in evaluating the ability of a company to generate cash flows, meet financial commitments, or get external accounts (Slides 24, Week 10, RMIT 2021) Figure 4: The mixed graph of the changes of Chevron’s Cash flows from 2016 to 2020 Operating cash flow (OCF) is the measure of cash produced by the working activities of a business in a particular period (CFI 2021) Chevron's OCF in FY2018 was $30.6 billion that was the highest level Chevron had ever achieved Chevron tightened management on working capital and received the highest profitability In 2020, the Net cash ($10.6B) was an ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice estimated 60.17% decline in comparison with FY2019 ($27,314B) because of the price slump, curtailed production, and profit’s sharp decline in the Covid-19 period (Chevron 2020) Investing cash flow (ICF) addresses the amount of money utilized or created from investment-related activities of a company (Radonovic 2020) ICF is negative over years because Chevron spent capital expenditure and purchased a large number of fuel production machines, as an outflow cash In FY2016, investment cash flow was deficit most due to higher exploration expenses (Chevron 2016) However, it was the best in 2020 because Chevron reduced capital spending and fixed asset procurement by 30% in the Covid-19 era (Foelber 2020) Financing cash flow (FCF) is a segment of an organization's cash flow statement, which shows the net cash flows that are utilized to endowment the company (CFI 2021) Chevron’s FCF shows the negative figures (2017-2020) because they repurchased depository shares In the Covid-19 epidemic, Chevron has to pay for obligation issuance, prepayment of debts In general, Chevron Corp's Net cash used for financing activities decreased from 2018 to 2019, and extended from 2019 to 2020 outperforming the 2018 level Statement of Changes in Equity $M 2020 2019 2018 2017 2016 Net income (loss) 5,543 2,924 14,824 9,195 497 Total assets 239,790 237,428 253,863 253,806 260,078 131,688 144,213 154,554 148,124 145,556 1,911,018 1,868,000 1,888,670 1,890,534 1,877,338 Total equity Common shares (Thousands) outstanding (Table 1: Information of statement of changes in equity Synthesized from Chevron annual report 2020 and 2018) Equity is the residual interest in the assets of the entity after deducting its liabilities (Slide 22, week 10, RMIT 2021) The table above shows that Chevron's equity declines year on year From the data, it’s obvious that their total equity decreased from 144,213 million of US dollars in 2019 to 131,688 million of US dollars In more detail, the company has reduced its investments in Petropiar and Petroboscan in Venezuela The effects of these impairments are included in Income (losses) from joint stock associates on the Consolidated Income Statement The company reported a decline for a number of joint stock companies in 2019 mainly because of capital allocation choices and longterm commodity price viewpoint (Chevron annual report 2020) In addition, ignoring the decline in equity of stockholders, their outstanding shares have increased slightly over the past year ACCT2105_ Group 12_ Team 5_ Understanding Financial Reporting Practice IV Conclusion Overall, Chevron has faced many constraints from the Covid 19 pandemic and as a result increased liabilities, reduced profits and total income However, Chevron's slight increase in share repurchases and stable dividend payment shows that top management and investors have confidence in the company's future growth along with a good liquidity ratio to ensure the interests of their shareholders V References Birt, J, Chalmers, K, Maloney, S, Brooks, A, Oliver, J & Bond D 2019, Accounting: Business Reporting for Decision Making, 7th edn, ProQuest Ebook Central Database Calzon, B 2021, The Importance of Financial Reporting And Analysis: Your Essential Guide, blog, Data Pine, viewed 15 May 2021, CFI 2021, What is Operating Cash Flow?, CFI for Business, viewed 17 May 2021, Chevron 2016, Annual Report, Chevron, viewed 17 May 2021, Chevron 2020, Chevron Announces Fourth Quarter 2020 Results, Chevron, viewed 16 May 2021, Davoren, J 2019, The Difference Between a Qualified & Unqualified Audit Report, Chron Small Business, viewed 15 May 2021, Foelber, D 2020, Is Chevron Stock a Buy?, The Motley Fool, viewed 17 May 2021, https://www.chevron.com/-/media/chevron/annual-report/2020/documents/2020-AnnualReport.pdf > McGinley 2018, Who are the biggest energy corporations?, McGinley, viewed 15 May 2021,