This paper discusses the concept of profit and its elusiveness with regard to the market factors and the variability of its internal funds. It also highlights the factors affecting profit, limitations of financial statements, price earning ratio, and accounting policies with reference to BP Oil Company.
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Running Head: PROFIT AND ITS RELEVANCE 0 BP Oil Company Profit and its Relevance
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PROFIT AND ITS RELEVANCE 1 Contents Introduction:...............................................................................................................................2 Factors affecting Profit:..........................................................................................................2 Why there is variance in cash and profit:...........................................................................2 Limitations of financial statements:.......................................................................................3 Price Earning Ratio:............................................................................................................3 Accounting Policies:...........................................................................................................3 Conclusion:................................................................................................................................4 Bibliography...............................................................................................................................5
PROFIT AND ITS RELEVANCE 2 Introduction: In this paper the concept of profit and its elusiveness with regard to the market factors and the variability of its internal funds have been discussed. A company cannot be said profitable on the basis of a single abstract rather it will depend upon a list of factors and variables like market forces, supply and demand, business cycle, volume of sales and a lot more(Acosta, 2015). Factors affecting Profit: Generally oil companies like BP oil, are influenced more by the exterior factors rather than interior ones, like refining margins, demand for oil, oil price, geological prospects, capital cost and environmental policy. In alignment of these factors the two major concerns are being assessed below. Why there is variance in cash and profit: A lot of cash waves out of the company for buying equipment, machinery, leasing premises and hiring employees to operate such technology and funds would have been ceased by the time the revenue has been generated. This bridge of ‘expansion’ and ‘spending’ is the crucial period in business(Nicholls & Orsmond, 2015). After analysing the annual report of the BP Oil Company it states that the company’s overall revenue is fluctuating. In the year 2015 it has been decreased from (7918) to (430) in 2016 yet the finance costs have increased gradually from 1,347 to 1,675 so even after setting off the losses the cost to the company is robustly elevated(Oil, 2017). As long as enough cash is available, company can expand comfortably to a more profitable business rather than succumbing to panic.
PROFIT AND ITS RELEVANCE 3 Limitations of financial statements: The potential investors scrutinize the financial statements of the company to weigh its financial stability and strength of the business. Yet the financial statements are prone to certain limitations(Velte & Stawinoga, 2017). Price Earning Ratio: The report of the BP Oil company in 2013 reflected highest profit attributable to shareholders of $123.87 however it reduced to $17.20 in 2017. The investor might not invest on account of poor price earning ratio as compared to previous years. On the contrary they might miss the new projects and expansion or investments as they rely only on numbers and ratios. Accounting Policies: The problem occurs when BP Oil Company is using different accounting policies in calculation of inventory methods on FIFO basis while the other company might be using the average cost method. This may lead to wrong assumptions to the investors in decision making.
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PROFIT AND ITS RELEVANCE 4 Conclusion: After the critical analysis of the financial statements of BP Oil Company in line with the cash, profits and its overall stability it was observed the exploration activities increased and the reserve replacement ratio in 14-15 could not cross 100% which is a standard benchmark. Despite profits the company was running out of oil. Henceforth it can be concluded that the profits are not a single source of determination of the strength and market share of the company. Bibliography
PROFIT AND ITS RELEVANCE 5 Acosta, G. (2015).Financial Concepts I: Methods, Formulas and Examples (Volume I).Createspace Independent Publishing Platform. Nicholls , S., & Orsmond, D. (2015). The Economic Trends, Challenges and Behaviour of small Business in Australia .Reserve Bank OF Australia.Australia. Oil, B. (2017).Annual Report and Form 20-F 2017. https://www.bp.com/content/dam/bp/en/corporate/pdf/investors/bp-annual- report-and-form-20f-2017.pdf Velte, P., & Stawinoga, M. (2017). Integrated Reporting : The current state of empirical research, limitations and future research implications.Journal of Management Control, 28(3), 275-320.