Evaluation of Financial Reports (GC01335)

Executive Summary

British Petroleum is a large organization as it is operating in more than one country. Its financials are very strong because its petroleum product is one of the most profitable products. The external users are very concerned with the financials because every user has its interest in the organization’s financial reports. Both the direct and indirect financial interest users are concerned either through credit terms, sales terms, lending terms, political factors (government) and even the investors are more concerned in investing in the most profitable business. Each external user is concerned with the specific financial report that they are concerned to secure their financial interest. Even the consumers become doubtful to know whether the amount charged to them is not unfair or includes any unfair taxation amount charged to them. The suppliers are also concerned with the payment to be received from the company because the supplies are received on credit terms, so the amount is received on a short or long term period, so the financial statements are also necessary to be useful for suppliers to make sure they get their payment within the payback period.

Introduction

British Petroleum (BP) is an energy company that is located in the UK, and it is known as the 3^rd largest Multi-National Company. Its operations are related to the natural resources that are found through natural gases, oil, petroleum and even other alternate fuel sources (BP, 2016). They are even operating to work for renewable and non-renewable resources that are used for powering the whole UK. They have expanded their resources and economies of scale to move onto a global energy group while expanding its factors of production over 100 countries that are also working for chemicals, refining and even marketing business (BP, 2015).

The financial information is very useful for the External users, as they are not physically involved in performing any operation in the company but they do have some financial interest in the organization. The external users are divided into two different categories; those who have: direct financial interest and indirect financial interest (Accounting Verse, 2016). The users who have a direct financial interest in an organization are the owners of the organization, investors and creditors who are a liability for the organization. The users who have an indirect financial interest in an organization are the employees working in the organization, the customers, suppliers and especially the government too (Accounting Verse, 2016).

Main Findings

Owners and Investors

Owners and investors are important stakeholders as they are the major contributors to the share capital of the company. Owners make use of the financial statements to consider the comparison of financial ratios that determine the return they are getting from investment in shares. Investors have to ensure whether they are earning anticipated returns or in other cases divest funds to other profitable ventures (Allee, 2009, pp. 1-25). Financial statements disclose important performance indicators that help in making the important decision to promote growth in the organization.

In the year 2014, British Petroleum (BP) reported a decrease of $20 billion in the profits attributed to the shareholders. This was a big loss for the shareholders but the financial statements helped ascertain the reasons behind this fall. Important ratios like current ratio, inventory turnover and Debt-equity ratios can be calculated to determine the financial direction of the organization (BP, 2015).

Financial statements help make comparison easier between the financial performances of different periods. This gives the investors awareness regarding the viability of investing in the business. Financial statements also make conducive to make important financial analysis including the derivatives to determine the risks associated with the investments (Thinggaard, 2006, pp. 35-63). The investor will be curious about the fluctuation in various performance indicators, gauged from these statements. The higher the fluctuation higher the risk and so more the rate of return charged on the investment. It can enable the investors to make adequate planning about their investments. It is the combination of the risk averseness of the investor and the fluctuation in the financial trends that eventually lead to the financial decision on the part of the investor…………………………………

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