Accounting for the Iphone at Apple

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(1) Assessment of Apple’s Recent Financial Performance

According to the Statements of Operations, Apple has a positive topline growth showing increasing revenue in 2007 and 2008. The bottomline growth is also a positive number and the income is positive as well. These numbers show that Apple is a growing company with a very positive development. According to the Balance Sheets of 2007 and 2008, working capital of Apple is lean. Receivables amount to less than ten percent of assets and inventory is very low with also less than ten percent of assets, which is a typical number for technology and software companies. Another important indicator is the positive cash flow from operating activities which increased in 2008 compared to 2007. In both years, cash flow from operating activities was higher than cash flow from investing activities. Thus Apple is able to finance its investments from operations through internal financing.

(2) Apple’s Account for iPhone under U.S. GAAP and Impact on Company’s Financial Statements Apple applies the software revenue recognition rule for sales of the iPhone and uses the subscription method of accounting. This method means that Apple recognizes revenue on a straight line basis over 24 month, which is the usual length of an iPhone contract. When an iPhone is sold, cash is collected at the time of sale while revenue is recorded as deferred revenue in the balance sheet. Revenue and costs of goods sold are amortized over 24 months. All other costs for the iPhone as engineering, sales and marketing costs are expensed as incurred. According to Apple, this accounting method does neither have an impact on cash flow nor on the economics of the business. In fact, the chosen accounting method smoothes the revenue curve as part of the revenue is deferred to the future. Furthermore, Apple shares decrease to a lower level and affect the balance sheet. The Statement of Cash Flows will remain unchanged. 3

(3) Apple’s Account for iPhone...
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