Which of the following is true of the full cost and successful efforts accountin

Question

Which of the following is true of the full cost and successful efforts accounting methods?

A. In any given year, income under the full cost method is always higher than under the successful efforts method.

B. Larger oil and gas companies are quite sensitive to the full cost /successful efforts choice since the amounts of their exploration and development costs are large in comparison to their total assets.

C. Cumulative income is the same under both the full cost and the successful efforts methods.

D. Firms using the full cost method report higher assets, which makes them look bigger

Explanation / Answer

The following is true of the full cost and successful efforts accounting methods:

C. Cumulative income is the same under both the full cost and the successful efforts methods.

In general, SE and FC methods differ in their approach to treating costs associated with the unsuccessful discovery of new oil or natural gas reserves.

According to the view behind the SE method, the ultimate objective of an oil and gas company is to produce the oil or natural gas from reserves it locates and develops so that only those costs relating to successful efforts should be capitalized. Conversely, because there is no change in productive assets with unsuccessful results, costs incurred with that effort should be expensed.

On the other hand, the view represented by the FC method holds that, in general, the dominant activity of an oil and gas company is simply the exploration and development of oil and gas reserves. Therefore, all costs incurred in pursuit of that activity should first be capitalized and then written off over the course of a full operating cycle.

The cumulative income is same as Capitalized costs are also expense over a period of time thus giving same cumulative income.

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