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FACULTY OF BUSINESS AND MANAGEMENT

JAN / 2012

BBAW2103

FINANCIAL ACCOUNTING

MATRICULATION NO : 831102115341001

IDENTITY CARD NO. : 831102115341

TELEPHONE NO. : 013-9120721

E-MAIL : shinigami_l@oum.edu.my

LEARNING CENTRE : KUALA TERENGGANU LC

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HISTORY

Apple Inc., formerly Apple Computer, Inc., is a multinational corporation that createsconsumer electronics, computer software, and commercial servers. Apple's core productlines are the iPad, iPhone, iPod music player, and Macintosh computer line-up. FoundersSteve Jobs and Steve Wozniak effectively created Apple Computer on April 1, 1976, with therelease of the Apple I, and incorporated the company on January 3, 1977, in Cupertino,California. For more than two decades, Apple Computer was predominantly a manufacturerof personal computers, including the Apple II, Macintosh, and Power Mac lines, but it facedrocky sales and low market share during the 1990s. Jobs, who had been ousted from thecompany in 1985, returned to become Apple's CEO in 1996 after his company NeXT wasbought by Apple Inc., and he brought with him a new corporate philosophy of recognizableproducts and simple design. With the introduction of the successful iPod music player in2001, Apple established itself as a leader in the consumer electronics industry, dropping"Computer" from its name. The latest era of phenomenal success for the company has beenin the iOS (Apple) range of products that began with the iPhone, iPod Touch and now iPad.Today, Apple is the largest technology firm in the world, with annual revenues of more than$60 billion.

Pre-foundation

Garage of Steve Jobs' parents on Crist Drive in Los Altos, California

Steve Jobs and Steve Wozniak were outcasts while they were in high school; by 1975, theyhad withdrawn from Reed College and UC Berkeley, respectively. Wozniak designed a videoteletype that he could use to log on to the minicomputers at Call Computer. Alex Kamradtcommissioned the design and sold a small number of them through his firm. Aside fromtheir interest in up-to-date technology, the impetus for "the two Steves" seems to have hadanother source. In his essay From Satori to Silicon Valley (published 1986), cultural historianTheodore Roszak made the point that the Apple Computer emerged from within the WestCoast counterculture and the need to produce print-outs, letter labels, and databases.Roszak offers a bit of background on the development of the two Steves’ prototype models.

In 1975, Wozniak started attending meetings of the Homebrew Computer Club. Newmicrocomputers such as the Altair 8800 and the IMSAI inspired him to build amicroprocessor into his video teletype and have a complete computer.

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At the time the only microcomputerCPUs generally available were the $179 Intel 8080, andthe $170 Motorola 6800. Wozniak preferred the 6800, but both were out of his price range.So he watched, and learned, and designed computers on paper, waiting for the day he couldafford a CPU.

When MOS Technology released its $20 6502 chip in 1976, Wozniak wrote a version ofBASIC for it, then began to design a computer for it to run on. The 6502 was designed by thesame people who designed the 6800, as many in Silicon Valley left employers to form theirown companies. Wozniak's earlier 6800 paper-computer needed only minor changes to runon the new chip.

Wozniak completed the machine and took it to Homebrew Computer Club meetings toshow it off. At the meeting, Wozniak met his old friend Jobs, who was interested in thecommercial potential of the small hobby machines.

NATURE OF BUSINESS

Apple Inc., formerly Apple Computer, Inc., designs, manufactures and markets personalcomputers and related software, services, peripherals and networking solutions. It alsodesigns, develops and markets a line of portable digital music players along with otherproduct and services

Other products and servicesRadios, tape recorders, compact disc (CD) players and high fidelity (hi-fi) equipment

MP3 players, portable

Servers and large scale computers

Servers, network

Desktop computers, portable computers and related devices

Computers, desktop/personal computers (PCs)

Computers, portable, laptop or notebook

Palmtop/hand-held computers and personal digital assistants (PDA)

Multimedia stations

Industrial computers. Special purpose computers NES

Data storage devices for computing

Terminals, monitors/display screens

Network equipment, switches and terminators

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Computer keyboards and other input devices NES

Computer keyboards, alphanumeric

Computer keyboards, ergonomic

Keyboards for laptop or notebook computers

Computer mice

Computer mice, cordless

Printers, plotters

Document scanners, bar code scanners/readers

Local area network (LAN) equipment NES

Computer cable assemblies and connectors

Computer consumables and accessories. Components for computers NES

Operating systems. System and development software

Software, anti-virus

Software, database management system (DBMS)

Application software packages, business, office, professional and financial

Software, electronic mail (E-mail)

Software, Internet navigation, web browsers

Software, web page design and development

Application software packages, industrial, technical and scientific

Software NES

Software, computer aided music composition

Software, multimedia

Software, video playing or editing

Software, music playing or editing

Computer and Internet related services NES

Computers, software, computer peripherals and auxiliary units (trade)

Documentation services

Information storage and retrieval services

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Apple Inc. Top Management Level

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Qualitative Characteristics of Accounting Information

To satisfy the stated objectives, information should possess certain characteristics. Thepurpose of SFAC 2 is to outline the desired qualitative characteristics of accountinginformation.

Graphic 1-7 indicates these qualitative characteristics, presented in the form of a hierarchyof their perceived importance. Notice that the main focus, as stated in the first conceptstatement is on decision usefulness—the ability to be useful in decision making.Understandability means that users must understand the information within the context ofthe decision being made. This is a user-specific quality because users will differ in theirability to comprehend any set of information. The first stated financial reporting objective ofSFAC 1 is to provide comprehensible information to those who have a reasonableunderstanding of business and economic activities and are willing to study the information.

GRAPHIC 1-7

Hierarchy of Desirable Characteristics of Accounting Information

To be useful, information must make a difference in the decision process.

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PRIMARY QUALITATIVE CHARACTERISTICS

The primary decision-specific qualities that make accounting information useful arerelevance and reliability. Both are critical. No matter how reliable, if information is notrelevant to the decision at hand, it is useless. Conversely, relevant information is of littlevalue if it cannot be relied on. Let’s look closer at each of these two characteristics, includingthe components that make those qualities desirable. We also consider two secondaryqualities—comparability and consistency.

To be useful for decision making, accounting information should be relevant and reliable.

RELEVANCE

To make a difference in the decision process, information must possess predictive valueand/or feedback value. Generally, useful information will possess both qualities. Forexample, if net income and its components confirm investor expectations about future cash-generating ability, then net income has feedback value for investors. This confirmation canalso be useful in predicting future cash-generating ability as expectations are revised.

This predictive ability is central to the concept of “earnings quality,” the ability of reportedearnings (income) to predict a company’s future earnings. This is a concept we revisitfrequently throughout this textbook in order to explore the impact on earnings quality ofvarious topics under discussion. For instance, in Chapter 4 we discuss the contents of theincome statement and certain classifications used in the statement from the perspective ofhelping analysts separate a company’s transitory earnings from its permanent earnings. Thisseparation is critical to a meaningful prediction of future earnings. In later chapters, we lookat how various financial reporting decisions affect earnings quality.

Timeliness also is an important component of relevance. Information is timely when it isavailable to users early enough to allow its use in the decision process. The need for timelyinformation requires that companies provide information to external users on a periodicbasis. The SEC requires its registrants to submit financial statement information not only onan annual basis, but also quarterly for the first three quarters of each fiscal year.

Information is timely if it is available to users before a decision is made.

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RELIABILITY

Reliability is the extent to which information is verifiable, representationally faithful, andneutral. Verifiability implies a consensus among different measurers. For example, thehistorical cost of a piece of land to be reported in the balance sheet of a company is usuallyhighly verifiable. The cost can be traced to an exchange transaction, the purchase of theland. However, the market value of that land is much more difficult to verify. Appraiserscould differ in their assessment of market value. The term objectivity often is linked toverifiability. The historical cost of the land is objective but the land’s market value issubjective, influenced by the measurer’s past experience and prejudices. A measurementthat is subjective is difficult to verify, which makes it more difficult for users to rely on.

Representational faithfulness exists when there is agreement between a measure ordescription and the phenomenon it purports to represent. For example, assume that theterm inventory in a balance sheet of a retail company is understood by external users torepresent items that are intended for sale in the ordinary course of business. If inventoryincludes, say, machines used to produce inventory, then it lacks representationalfaithfulness.

Representational faithfulness means agreement between a measure and a real-worldphenomenon that the measure is supposed to represent.

Several years ago, accountants used the term reserve for doubtful accounts to describeanticipated bad debts related to accounts receivable. For many, the term reserve meansthat a sum of money has been set aside for future bad debts. Because this was not the case,this term lacked representational faithfulness. The description “reserve…” now has beenchanged to “allowance for uncollectible accounts” or “allowance for doubtful accounts.” InFedEx Corporation’s financial statements, the balance sheet in Appendix B reportsReceivables, less allowances of $151 million and $149 million at the end of 2004 and 2003,respectively.

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Reliability assumes the information being relied on is neutral with respect to partiespotentially affected. In that regard, neutrality is highly related to the establishment ofaccounting standards. You learned earlier that changes in accounting standards can lead toadverse economic consequences to certain companies, their investors and creditors, andother interest groups. Accounting standards should be established with overall societalgoals and specific objectives in mind and should try not to favor particular groups orcompanies.

Accounting standards should not favour any particular groups or companies nor influencebehaviour in any specific way.

The FASB faces a difficult task in balancing neutrality and the consideration of economicconsequences. A new accounting standard may favour one group of companies over others,but the FASB must convince the financial community that this was a consequence of thestandard and not an objective used to set the standard. Donald Kirk, one of the members ofthe first group to serve on the FASB, stressed the importance of neutrality in the standard-setting process.

The qualities of relevance and reliability often clash. For example, a net income forecastprovided by the management of a company may possess a high degree of relevance toinvestors and creditors trying to predict future cash flows. However, a forecast necessarilycontains subjectivity in the estimation of future events. GAAP presently do not requirecompanies to provide forecasts of any financial variables.

A trade-off often is required between various degrees of relevance and reliability.

DONALD KIRK

If financial reporting is to be credible, there must be public confidence that the standard-setting system is credible, that selection of board members is based on merit and not theinfluence of special interests, and that standards are developed neutrally with the objectiveof relevant and reliable information, not purposeful manipulation.28

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SECONDARY QUALITATIVE CHARACTERISTICS

Graphic 1-7 identifies two secondary qualitative characteristics important to decisionusefulness—comparability and consistency. Comparability is the ability to help users seesimilarities and differences between events and conditions. We already have discussed theimportance of the ability of investors and creditors to compare information acrosscompanies to make their resource allocation decisions. Closely related to comparability isthe notion that consistency of accounting practices over time permits valid comparisonsbetween different periods. The predictive and feedback value of information is enhanced ifusers can compare the performance of a company over time.29 In the FedEx financialstatements in Appendix B, notice that disclosure Note 1 includes a summary of significantaccounting policies. A change in one of these policies would require disclosure in thefinancial statements and notes to restore comparability between periods.

Accounting information should be comparable across different companies and overdifferent time periods.

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FINANCIAL ANALYSIS

OVERVIEW

Is Apple Computer Inc., (Apple) growth sustainable? This is the research report on Apple’sYear 2009 and 2010 financial statements to analyse its business and financial sustainability.

Apple had a long history in the design, manufacture, and marketing of personal computers(Power Mac) and related software, services, peripherals, and networking solutionsworldwide. Apple currently enjoyed more than 87.3% market share worldwide for its iPodon MP3 players’ and its personal computer products Macintosh enjoyed approximately 2%of worldwide PC markets. Along with iPod, the company also designs, develops, and marketsthe related accessories and services. Apple also offers online music stores with its iTunessoftware made available for both Mac OS and Windows. Its online music store accountedfor 70% of the legal download market. Apple offers PowerSchool software product, a Web-based student information system for K-12 schools and schools districts; and a variety ofother service and support offerings. It also offers various Apple-branded computerhardware peripherals, including iSight digital video cameras, iTalk voice recording toolfor iPod, iTrip FM transmitter, and a range of flat panel TFT active-matrix digital colordisplays. In addition, the company sells a variety of third-party products, includingcomputer printers and printing supplies, storage devices, computer memory, digital videoand still cameras, personal digital assistants, iPod accessories, and various other computingproducts and supplies.

The company offers its products to education, consumer, creative professional, business,and government customers. Apple sells its products through its online stores, retail stores,direct sales force, as well as through third-party wholesalers, resellers, and value addedresellers. The company operated 110 retail open stores, as of June 30, 2005.

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Let starts the research by gathering all the financial data of Apple for analyzing thebusiness and financial performance for the companies, and draw conclusion to supportthe research findings. The Income Statements, Balance Sheets and Statement of Cash Flowsfor both companies are attached as Appendixes.

Profitability Measures

i) Return on Investment

2009 (in mil.) 2010 (in mil.)Net Income 1,335 3,043Operating Income 1,650 4,254Beginning Assets 8,050 9,311Ending Assets 11,551 23,215ROI on Net Income 13.62% 14.31

%ROI on Operating Income 16.84% 20.01%

Apple had strong ROI above market average of 8% – 12%. They both gave investors muchhigher return comparing to the average market rate. Apple had a much stronger salesgrowth of 68% from Yr2009 to Yr2010 (mainly due to its iPod sales that craze the digitalmusic players market).

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Return on Investment (DuPont Model)

Net Sales2009 (in mil.)

13,9312010 (in mil.)

49,205Gross Profit 4,043 9,015Operating Income 1,650 4,254Net Income 1,335 3,043Beginning Assets 8,050 19,311Ending Assets 11,551 23,215Margin (Gross Profit) 29.02% 18.32%Margin (Operating Income) 11.84% 8.65%Margin (Net Income) 9.58% 6.18%Turnover (Net Income) 1.42 2.31DuPont Model on Net Income 13.62% 14.31%DuPont Model on Operating Income 16.84% 20.01%

2009Gross Margin

29.02%OE Operating Margin

11.84%FE Net Margin

9.58%

17.18% 2.26%

2010 18.32%9.68%

8.65%2.46%

6.18%

Based on the calculation of Gross Margin, Operating Margin and Net Margin, computedbased on the percentage of Net Sales for the company; we can see that 2009 has a higherGross Margin of 29.02% compared to 18.32% from 2010.

Both companies had wide range of product offerings; however, Dell probably adopted alower selling price mix strategy due to its business nature; it is to sell direct to customersand in volume. In contrast, Apple’s new inventions of iMac personal computer range and itsmost popular iPod digital music players had given Apple the edge to enable higher sellingprice mix and this explained why Apple’s gross margin is higher.

Judging from the same list from above, the differences between Operating Margin and NetIncome Margin show the Financial Efficiency (FE) for the companies in terms of percentageto net sales. This shows that how well Apple managed their financial expenses in order togenerate higher net income from their management activities. Apple enjoyed gains fromtheir short-term investment and those gains increased the net income by 10% and 4% forthe company

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Return on Equity (ROE)

ROENet Income

2009 (in mil.)1,335

2010 (in mil.)3,043

Operating Income 1,650 4,254Beginning Owners' Equity 5,076 6,280Ending Owners' Equity 7,466 6,485ROE on Net Income 21.29% 47.68%ROE on Operating Income 26.31% 66.65%

From the industry average of 10 – 15%, Apple was exceptionally well performed. They cangive stockholders a return of more than 20%. For Apple it was extremely high mainly dueto its stock buyback activities since year 2009 and now from the latest data, it has $10.758billion of Treasury Stocks and the number manipulated the actual return on equity for thisinstance.

Debt/Equity Ratio

2009 (in mil.) 2010 (in mil.)Total Liabilities 4,085 16,730Total Owners' Equity 7,466 6,485Debt/Equity Ratio 0.55 2.58

On 2009 Apple has a very healthy debt-equity ratio of 0.55; this emphasized that thecompany has been good in managing its total Owners’ Equity to payout its short- and long-term payment obligations. But on 2010 Apple has a very unhealthy debt-equity ratio of2.58, but look further to its balance sheet, it has a total of $10,758 mil of Treasury Stock thatreduces its Total

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CONCLUSION

Finishing up the research analysis of Apple financial health and its future sustainability, Istrongly recommend investors to invest in Apple Computer Inc. Apple not only has strongfinancial stability, but also continues to invest in research and development to gainsustainable growth in the future. This research report also proven that Apple has strongoperation teams to manage its costs and revenue generation. Further to its operationefficiency, Apple is currently rich in cash and short-term investments of $8,261 mil as ofSeptember 2009. Last but not least, Apple is well managed in terms of its debt to equitymeasures. This company has sufficient Owners’ Equity, retained earnings to fund itsfuture growth and Apple has managed to keep its liabilities in a comfortable level.Operation efficiency is one of the key success factors in supporting the company’sbusiness strategies. Therefore, this company will still go strong for at least another two tothree financial periods.

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REFRENCE

1. Rob Price (1987). So Far: The First Ten Years of a Vision. Apple Computer.ISBN 978-1-55693-974-7.

2. http://apple2history.org/appendix/ahb/ahb2/

3. http://en.wikipedia.org/wiki/Timeline_of_Apple_products

4. http://www.ifoapplestore.com/db/

5. http://www.pcworld.com/article/130994/10_things_we_hate_about_apple.html

6. http://www.businessinsider.com/15-amazing-facts-about-apple-2010-10

7. http://www.crunchbase.com/company/apple

8. http://smallbusiness.chron.com/qualitative-characteristics-accounting-information-3952.html

9. http://www.ehow.com/list_6811021_qualitative-characteristics-accounting-information_.html

10.http://spiffyd.hubpages.com/hub/Financial-accounting-Qualitative-characteristics-of-financial-statements

11.http://bizfinance.about.com/od/yourfinancialposition/a/finstateanal.htm

12.http://www.investopedia.com/university/financialstatements/

13.http://faculty.philau.edu/lermackh/financial_analysis.htm