Exxon

Exxon Mobil

1. Exxon Mobil's nature of business is a natural haven for criticism; reporting record profits for 2005 only added fuel to the fire so to speak. The topic of nearly every conversation around the country had something to do with how much people were shelling out at the pumps or how the cost of most consumer goods was increasing a rate never experienced before; Exxon Mobil's feat did nothing but bring negative attention to the firm. However, Exxon Mobil knew that their profits wouldn't be well accepted by the general public and did its best to do a little damage control by creating charts comparing their profits to other industries, holding press conferences and by trying to educate the public on the costs of running their business by creating small informational advertisements. Yet, no matter how hard they tried, scrutiny was in evitable. Consumers were paying three dollars for a gallon of gas, the media constantly did special reports on the increasing cost of filling our gas tanks, and the Democratic Party constantly ridiculed the Republican's lack of effort to lower the prices of gas.

Exxon Mobil's attempt to justify its profit margin by comparing the profit margins of the oil & natural gas industry to other industries can be compared to a magicians act on stage. It's a game of misdirection that the average citizen wouldn't think twice about. To get a true comparative measure of Exxon Mobil's profit margin you want to calculate Exxon Mobil's profit margin which I calculated to be 10 cents, and compare it to the profit margins of other firms in the same industry. Looking at the chart in Exhibit 2, the oil & natural gas industry has and average return on sales of 5.8 cents, which is 3.2 cents less than Exxon Mobil's true returns. If we put their true figures on this chart they would jump up to the likes of real estate industry, which earns on average 10.8 cents on the dollar. But even comparing Exxon Mobil to these different industries isn't very justifiable because different industries have different operating costs, so to get a better picture of how Exxon Mobil stacks to other firms or industries the ROE should be looked. The ROE shows how well the firms generate money with money that was brought in through equity. An ROE figure has different factors that would be accounted for such as how levered a firm is, how high operating costs are, and how efficient a firm is at generating money with its assets, combined giving you a more accurate picture of a firm's profitability.

2. Exxon Mobil's physical inventory levels of 'crude oil, products, and merchandise' decreased by $0.3 billion during 2005. Taking a quick glance at the total balances in Exhibit 8 note 3 you'll see that the ending balances are $7.8 billion and $8.1 billion for 2005 and 2004 respectively. Analyzing the numbers further we see that petroleum products and crude oil decreased by $0.2 billion and $0.1 billion respectively. However, Exxon Mobil tracks its inventory using a dollar value - LIFO method. In other words, inventory is tracked in dollars rather than units making it difficult to determine the physical levels of inventory. A fluctuation in inventory using the dollar value can be due to one of two scenarios. Either there has been a change in the units (or gallons in Exxon Mobil's case) on hand or the cost per unit has changed. But, from the information provided by the case we can conclude that the physical inventory level has dropped, because there was an increase in the price per barrel during 2005.

3. If Exxon Mobil was to have reported inventories of 'Crude oil, products, and merchandise' for 2005 using a FIFO instead of LIFO, they would have had an ending balance of $23.2 billion. This can be found by adding the ending LIFO balance to the 'aggregate replacement cost of inventories' - also known as a LIFO reserve account. Please refer to the attached excel sheet.

4. If Exxon Mobil was to have used the FIFO method for measuring the cost of 'Crude oil, products, and merchandise' inventories, COGS for 2005 would have been reported at $206.438 billion. This can be calculated by first finding the change in the LIFO reserve account ($15.4 billion - $9.8 billion = $5.6 billion), then subtracting this figure from COGS calculated under the LIFO method, which was $212.038 billion, so $212.038 billion - $5.6 billion = $206.438 billion. It makes sense that the COGS under FIFO are lower than COGS under LIFO because prices were on the rise, meaning you'd be selling the products that you paid most for now, and holding on to inventory that you paid less for. Please refer to attached