On January 1, 2008, ABC Ltd. started its business by purchasing a productive oil well. The proved oil reserves from the well are expected to generate $7,000 cash flow at the end of 2008, $6,000 at the end of 2009, and $5,000 at the end of 2010. Net sales is gross revenues less production costs. Net sales equals cash flows. On January 1, 2011, the oil well is expected to be dry, with no environmental liabilities. The management of ABC Ltd. wishes to prepare financial statements based on RRA in accordance with SFAS 69 The following information is known about the well at the end of 2008 Actual cash flows in 2008 amounted to $6,500, that is, $500 less than expected.

Changes in estimates: Due to improved recovery (of oil from the well), cash flows in 2009 and 2010 are estimated to be $6,500 and $6,000 respectively.

Required

a. Prepare the income statement of ABC Ltd. for 2008 from its proved oil reserves.

b. Managements of some firms have expressed serious concerns about the reliability of the RRA information. Outline two of these concerns.