The Depreciation Policy of British Petroleum - Essay Example

When companies show balance sheets for the group and the company they are reporting the income of a subsidiary that is part of a parent company. The group balance sheet is the result of the entire company. The company is a subsidiary that reflects the result of a business segment of the firm. The financial statements of British Petroleum illustrated in its latest annual report only reflect the results of the group or the parent company.

4)
a)
Total Assets 2011 = $293,068 million
Total Liabilities 2011 = $180,586 million
Assets – Liabilities (2011) = $112,482 million
b)
The assets minus liability equation can be interpreted as a liquidity ratio. A more specific evaluation of short-term liquidity would occur by subtracting the current assets from the current liabilities. The accounting equation states that assets equal liabilities plus stockholders' equity (Cliffnotes, 2012).
5)

a)
The net profit of British Petroleum in 2011 was $26,097 million. In 2010 BP endured losses of $3,324 million. The net margin of the company in 2011 was 6.95%. In 2010 the net margin of BP was -1.11%.
b)
One of the reasons for the discrepancy in profitability between the two years included higher operating costs in 2010.
6)
a)
The depreciation policy of British Petroleum is straight-line depreciation.

b)
The straight-line method is calculated by dividing cost minus salvage value by depreciation time. “The declining balance depreciation method uses the depreciable basis of an asset multiplied by a factor based on the life of the asset” (Assetaide, 2009).
c)
15% straight line = $17,882 million
30% reducing balance = $35,764 million
d)
The use of an alternative method of depreciation such as double declining would increase the expenses of the company in the early years, thus the profitability of the company would be lower in the short term.

7)
a)
The company had trade receivables of $4,337 million.
b)
The company generates $1,029 million per day. The company has 4.22 days' worth of trade receivables.
c)
I believe the group should be concerned because the level of trade receivables is too low.
8)
Stewardship accounting refers to, “A traditional approach of accounting that places an obligation on stewards or agents, such as directors, to provide relevant and reliable financial information relating to resources over which they have control but which are owned by others, such as shareholders” (Williamson, 2002).
9)

a)
Current ratio = current assets / current liabilities = 89164 / 83780 = 1.06
Quick ratio = (current assets – inventory) / current liabilities = (89164 - 25661) / 83780 =
0.76
b)
The current ratio of the company is good because it is above the 1.0 threshold. The company is in a good position to pay off its short-term debt.
10)
a)
Several factors affect the price of common stocks. The prices of stocks are influenced by the general state of the economy, the financial performance of a company as illustrated in its financial statements, and by political factors among other reasons.
b)

The chart shows its highest price in January 2011 and it shows a dip in price in September 2011.
11)
If I was a potential investor of British Petroleum I would be very satisfied with the latest financial results of the company. The firm achieved a net margin of 6.95% in 2011 which is a tremendous improvement over the -1.11% net margin obtained in 2010. The current ratio (1.06) shows that the company is in a good position to pay off its short-term debt. The company had a net profit of $26,817 million in 2011. The return on assets and return on equity of the company were 8.90% and 23.2% respectively in 2011. Read More