Question: On January 1, 2020, OIL 20 LTD. started its business by purchasing a productive oil well. It proved oil reserves from the well are expected to generate $400,000 cash flow at the end of 2020, $450,000 at the end of 2021 and $600,000 at the end of 2022. Net sales are gross revenues less production costs. Net sales equal cash flows. On January 1, 2022, the oil well is expected to be dry, with no environmental liabilities. The management of OIL 20 Ltd. Wishes to prepare financial statements on a present value basis with an interest rate of 10%. The following information is known about the well at the end of 2020.

• Actual cash flow in 2020 amounted to $350,000.
• Changes in estimates: Due to improved recovery (of oil from well), end-of-year cash flows for 2021 and 2022 are estimated to be $500,000 and $700,000, respectively.

Required:

1. Prepare the Income Statement for OIL 20 Ltd. For 2020 from its proved oil reserves.

2. Management of some firms have expressed serious concerns about the reliability of present value information for oil and gas companies. Outline three of these concerns.