The Apple Companys Financial Data - Essay Example

Apple Financial Report Analysis

This document provides an analysis of the Apple Company’s financial data for the 2014 and 2015 financial years. The aim of the report is to analyze the accounting principles and methods applied by the Apple Inc. The specific focus is on the methods used to account for assets, liabilities and shareholders’ equity as well as the impact of Apple’s inventory method on reported results. Additionally, the report will examine the Apple’s approach to internal controls and other legal requirements. Finally, it will analyze the financial statements, ratios, overall financial performance of the company and how various Apple’s stakeholders use the information on the financial statement to make a decision. Apple prepares its financial report in accordance with the “U.S. generally accepted accounting principles (GAAP)” (Apple Inc.2015). The Apple’s accounting principles and approximation include those involved in the valuation of inventory and manufacturing assets, revenue recognition, appraisal and impairment of marketable securities, income taxes, legal contingencies, etc. The application of accounting principles plays a crucial role because they reveal the company’s financial situation and necessitate the management to make judgment and approximations regarding organization’s uncertainties.

Apple Inc is an American technology-based company which deals with designing, production, and marketing of electronic products such as mobile phones, personal computers (PCs), media gadgets, software, portable digital mp3 plays, etc. The company uses various platforms to market its products globally (Apple Inc.2015). These techniques include direct marketing, online stores, retail marketing, resellers, third party wholesalers and value-added resellers.

Revenue Recognition

The accounting principles require the entity to revenue after sales have taken place and all other activities completed the receipt of the payment is probable. Apple sales revenue is obtained from sale of various products including hardware, software, digital content, services, accessories and support contracts. The recognition of revenue should occur after delivery has taken place and the risk in goods and title has been transferred to the buyer. For instance, some products such as TV and iPhone are sold with company’s promise to provide additional features and software for free thus revenue recognition is in accordance with the subscription accounting under SOP No. 97-2 (Apple Inc.2015). The products sold with warranty revenue are recognized after the end of warranty term. Therefore, Apple recognizes revenue when it is due based on the accounting guidelines for specific software or other products and services.

Valuation of inventory and manufacturing assets

Apple maintains inventory before the shipment and also they purchase various machinery for use in the manufacturing process. Some of the facilities are held by the suppliers and they also prepay their suppliers to ensure continuous production activities through timely delivery of manufacturing assets. The pursuance of accounting principles result in write-down of obsolete assets and inventory or according to market value to recognize net realizable value. They practice various reviews such as demand forecasting, developing product plan, reviewing the product life cycle, assessing the trend of cost component (Apple Inc.2015). Whenever the company predicts that the carrying value of its prepaid inventory and capital assets are unlikely to be recovered they conduct a review for impairment and record a loss for the irrecoverable asset with similar value to that asset or inventory. They also do the same for the inventory whose future technological changes and future demand renders them obsolescence or loses market value. The write-downs of the assets and inventory impacts the company’s financial position and the performance of the organization.

Valuation and impairment of marketable securities

The accounting principles require the entity to report its value of investments in securities available for sale using fair price. Apple recognizes the unrealized losses or gains in fair value of the marketable securities from the balance sheet in comprehensive income or tax (Apple Inc.2015). This recognition impacts the company’s income negatively at the time of sale of the marketable securities are sold. Apple reviews its marketable securities periodically to determine any security with non-temporary impairment and assess the degree in which they are lower than the fair value, establish whether the circumstances of that security and any other relevant factor for determining or recovering its value.

Income Taxes

Apple uses assets and liability method to record its provisions for estimated tax implications of the reported results. This method recognizes and records deferred tax assets and liabilities which are likely to have implications on the company’s results (Macroaxis, Inc. 2016). The current tax rate is applied on differed tax about the years when those taxes were supposed to be settled. Also, the company reduces the deferred tax obligation through valuation allowance based on the estimated amount that this may not be realizable (Apple Inc.2015). Making adjustments for deferred tax and the valuation allowances have the effects on the company’s financial positions and operating outcome.

Approach to Internal Controls

Apple’s financial reports for the 2014 and 2015 financial years were audited by an external auditor Ernst & Young according to Public Company Accounting Oversight Board’s requirements and expressed unqualified opinion that that the financial statement of the company were fair. The Apple’s management is responsible for establishing and managing internal controls. According to the external auditor’s report, Apple has established internal controls which ensure they maintain fair and detailed transactions reflecting all transactions and assets of the company (Apple Inc.2015). Also, the recording of their transactions is reasonable enough to allow for the preparation of financial reports in according with the acceptable accounting principles. The receipts and payments by the company are authorized by the entity managers and directors only. Furthermore, Apple’s management issue timely information regarding prevention or detection of any illegal disposition or acquisition of company’s assets that have material impact on the company’s financial statement. Therefore, Apple’s management has established adequate internal controls to ensure reasonable and reliable financial reporting in accordance with GAAP.

2014

2015

Revenue

182,795,000,000

100%

233,715,000,000

27.86%

Gross profit

70,537,000,000

100%

93,626,000,000

32.73%

Cost of sales

112,258,000,000

100%

140,089,000,000

24.76%

Operating Expenses

18,034,000,000

100%

22,396,000,000

24.19%

Net Income

39,510,000,000

100%

53,394,000,000

35.14%

Table 1: Apple’s Horizontal Analysis of Financial Statement (Apple Inc, 2015). (See appendix)

Apple had health activities in 2014 and 2015 from its operations. The results depict improved efficiency considering the growth in gross profit and net income surpassed the growth of operating expenses and revenue (Macroaxis, Inc. 2016).

2014

2015

Cash

13,844,000,000

25.62%

21,120,000,000

33.85%

Account Receivable

17,460,000,000

32.31%

16,460,000,000

26.38%

Inventory

2,111,000,000

3.90%

2,349,000,000

3.76%

Property and equipment, net

20,624,000,000

38.17

22,471,000,000

36.01%

Total Assets

54,039,000,000

100%

62,400,000,000

100%

Account payable

30,196,000,000

13.63%

35,490,000,000

13.72%

Accrued Expenses

18,453,000,000

8.33%

25,181,000,000

9.74%

Long-term Debt

28,987,000,000

13.09%

53,463,000,000

20.67%

Other Payables

33,427,000,000

15.09%

24,826,000,000

9.60%

Common stock

23,313,000,000

10.52%

27,416,000,000

10.60%

Retained Earnings

87,152,000,000

39.34%

92,284,000,000

35.68%

Total liabilities and Stockholders’ Equity

221,528,000,000

100%

258,660,000,000

100%

Table 2: Vertical Analysis of Apple’s performance (Apple Inc, 2015) (see Appendix)

The Apple’s performance is improving because there is the growth of assets and shareholders equity the bulk of which is in the cash, property and equipment, and retained earnings respectively (Macroaxis, Inc. 2016).

Ratios Analysis

(See appendices for the figures)

• Profit ratios: Gross margin = gross profit/net sales =38.6% and 40.1% for 2014 and 2015 respectively.
• Debt Ratios: Debt/Equity ratio = total liabilities/shareholders equity = 0.26 and 0.45 for 2014 and 2015 respectively.
• Efficiency Ratios: Inventory turnover =sales /average stock = 62.82 and 57.94 for 2014 and 2015 respectively.
• Equity Ratios: Earnings Per Share = net income/Number of Common Stockholders Outstanding = 6.45 and 9.22 for the year 2014 and 2015 respectively.
• Liquidity ratio: Current Ratio = current assets/current assets = 1.08 and 1.11 for the 2014 and 2015 respectively.

The ratio analysis establishes that Apple company has good performance is profitable. The profit gross profit continues to grow as shown in gross margin (Tracy, 2012). Also, debt ratios indicate that Apple uses most of the shareholders resources to finance its operations while less than half is obtained from borrowings thus it faces less risk in case of market volatility. The inventory turnover also indicates that the Apple can sell its stocks fast (Apple Inc.2015). The equity ratios depict that the company is also generating good returns for the shareholders while the liquidity ratio shows that the company has sufficient cash to meet its immediate cash obligations.

The Apple’s financial statement can be used by various stakeholders for decision making (Tracy, 2012). The internal users of such information include the management to plan for growth and expansion of the company, employees, directors, and shareholders. The external users include suppliers, creditors, the federal government, financial and legal advisors, and the general public.

In conclusion, Apple Company’s financial report shows that the company has good corporate governance and operates by the accounting principles and other legal requirements. The management has internal controls in place to ensure the reliability and reasonableness of the financial report. As an innovative company, Apple operates efficiently, and its market continues to grow steadily. However, its future depends on how well it can contain its innovative strategies to deliver new products in the market.