Planning, Control, and Risk in Apple Inc - Research Paper Example

? Planning, Control, and Risk Boris Lyles Acc-570 Jacquelyn Mosely 07/09 Company Summary Apple Inc. is a multinational company popular in the segment of selling and designing of computer software, computer electronics and personal computers. The company is best known for its products like Macintosh computers, iPhone, iPad and iPod. According to the “Fortune” magazine, Apple Inc. was considered the most admired company in 2008 in the United States (Goldman, 2012). At present, Apple is the largest publicly traded company by market capitalization in the world. Apple Inc. is the largest technological company in the world in terms of profit and revenue, bigger than Microsoft and Google combined (Hughes, 2012). In 2011, Steve Jobs unveiled the iCloud, which is an online storage for music, files, photos and software in place of MobileMe. The company is also looking forward to the environmental issues that emerge during the production process. Thus, the company has come up with the initiative of reducing the carbon emission during the production process. In spite of the rise in the revenue of the company over the years, the greenhouse gas emissions have reduced by 15.4% since 2008 in terms of per dollar revenue (Apple Inc., 2012). Rate of Return Apple Inc. is a US based company and, therefore, deals in the US dollar value. Internationally, dollar is considered to be the standard scale in understanding the present status of the market. Therefore, both local as well as parent currency returns for Apple Inc. would be in terms of the US dollar. If the company invests in developing countries where the market is huge, then the foreign direct investments made by the Apple Inc. will turn out to be fruitful, as the exchange rates of foreign currencies with respect to US dollar are variable over the market. On taking a closer look we can observe that, as per the present US market, the rest of currencies of the countries in which Apple has invested are of a comparatively lesser valuation. Thus, a deviation occurs with the gross margin and the net sales of the company when computation is done in terms of other foreign currencies. As inflationary pressures are faced by the economy at large, it is quite normal that exchange rate fluctuations occur. So the risk of exchange fluctuations still remains even if the company makes majority of its investment in the US dollar. Since the company has generated a maximum return from Asia Pacific, there remains a probability that the foreign direct investment made in this region of the world will tend to bring about more returns for the company. The market of Asia Pacific still remains untapped in a lot of sectors which, if invested in, can generate profitable returns for the company. However, before investing in FDI’s, Apple Inc. needs to measure all the elements of the financial statement operating in functional currency. The company should also translate the current exchange rate from the functional currency to the reporting currency. Most importantly, the company should be able to assess the economic changes that are responsible for affecting the exchange rates over the net investment. The changes that are generally observed are on each item of assets and liability of the company over the years (FASB, 2012). Role of Accountants in Managerial planning process The accountant of an organization has a very important role in the operations of the company, based on which the managerial decisions are taken. In the process of accounting, the details of the most useful data related to the transaction of the business are recorded. If the accounting seems to have flaws, the decisions taken by the management may go against the success of the company. However, if all the rules of financial recording of a company are taken into consideration in the accounting of the organization, the managerial decisions taken on its basis may turn out to be fruitful for the company. The most vital role of an accountant is maintaining the books of accounts for the future planning of the organization. The budgeting of the company is done by the accountants. Based on the budgeting process, the same is implemented by the managerial organization. On finding any deviation, the accountant of the company cites the reason behind such a debacle in the report of the company. The management planning process is formulated on the basis of the report thus created by the accountant of the company. The planning process thus implemented always keeps a provision as to the steps that need to be taken in case of a deviation from the structured plan. Therefore, it is very important for any organization to have a close coordination between the accountant and the management of the company. Thus, in a way it can be said that the evaluation of the company is done by the managerial personnel on the basis of the report thus generated by the accountant of the company. The daily factual report received by the managers of the company makes their work related to the planning process much simpler. In other words, it can be said that the role of accountant is indispensible in the managerial planning process of a company (Frezzati et al., 2009, pp.1-3). Recommendation Foreign currency exposure is a specific risk associated with any global firm. The probability of the settlement value of the foreign currency denominated contracts, in home currency equivalents have chances of being adversely affected. Loans taken in foreign currency have chances of influencing the required rate of return because the company, Apple Inc., also does business in countries where the US dollar value decreased with the passage of time. This results in the global competitive position of the firm being affected due to the negative changes occurring in the exchange rates. As a result of this negative impact, the market capitalization of the company is adversely affected over the years. The foreign exposures of the MNC are generally related to transaction, economic and translation exposure. The translation exposure is dependent on the economic exposure of the company. Based on the translation exposure, the occurrence of transaction exposure takes place. However, the economic scenario of the company cannot be predicted in advance. Thus, to avoid the foreign exposures, hedging can be adopted by the company. Through the process of hedging a situation is created by the firm by which it reverses the initial foreign exposure. Since Apple is a global company, the hedging has to be applied for the firm both in short and long positions. When Apple is under long position, it needs to reverse it to short position in the similar currency. However, when the company is in short position, long positioning the payment of the company will tend to off-set the affect of the exposure. Through the application of this procedure, the company covers the initial foreign exchange position, thus nullifying the effect of the foreign exchange exposures. The process of hedging is carried under two heads, namely the financial contracts and operational techniques. Under the financial hedging come the forward and futures contracts, option contracts and investing or borrowing from the local markets. Operational technique of hedging can be applied through geographic diversification, thereby spreading the risk. This helps the company reduce the risk thus created through foreign exchange exposures. Futures and Forward Contracts The market price of Apple Inc. has been fluctuating over the years. This may result in the company facing foreign exposures. In order to hedge the risk, the company should adopt a forward contract instead of a futures contract because the former is the private agreement between two parties where today’s price is booked for the specific future date; but unlike the futures contract, the forward contract is not so rigid with respect to terms and conditions. Forward contract needs to be applied to the company as the legal bindings in a futures contract are comparatively fewer. Moreover, a direct negotiation related to the amount of the underlying assets is possible, which is not the case with the futures contract. Much flexibility is obtained as far as the forward contract is concerned. Forward contracts generally have customized maturity dates and sizes. Moreover, the absence of the margin system in a forward contract makes it less expensive in comparison to the futures contract. Since a forward contract is customized in format, no initial payment is required for the same, which may be otherwise for the future contract. The price of the forward contract is easy to determine, which can turn out to become really beneficial for the company. As the forward contract has no initial payment, the delivery price of the contract being chosen becomes zero. However, with the approaching maturity, the price of the underlying assets may change, but without bringing any change in the delivery price of the forward contract. Therefore, a forward contract would be suitable for Apple Inc. on the basis of its foreign exchange exposures (Chance & Brooks, 2009, p.295). References Apple Inc., (2012). About us. Retrieved from < http://www.apple.com/about/> Chance D. M., & Brooks R. (2009). Introduction to derivatives and risk management. United States: Cengage Learning. FASB, (2012). Foreign currency translation. Retrieved from Frezzati F., Arguiar, A., Guerreiro, R., & Gouvea, M. (2009). Does management accounting play role in planning process? Journal of Business Research. Retrieved from Goldman D. (2012). Apple's $46 billion sales set new tech record. Retrieved from Hughes N. (2012). Apple now worth more than Google and Microsoft combined. Retrieved from Read More