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Accounting for the IPhone Essay

1. Compare the GAAP and Non-GAAP data and discuss their impact on the financial statements. In comparing data, when Apple reported it’s Q4 FY 2008 financial results on October 21, 2008, it reported both GAAP and Non-GAAP economic data. Under GAAP, Apple reported quarterly revenue of $7.9 billion and net profit of $1.1 billion. Under Non-GAAP, revenues amounted to $11.7 billion and net profit totaled $2.4 billion. The difference between GAAP and Non-GAAP revenues and net profit were $3.8 billion and $1.3 billion respectively. Needless to say, such a large difference will have a huge impact on the income statement and balance sheet. Both financial statements would be greatly understated. Apple reported both GAAP and Non-GAAP financial data because of this large difference and they felt that the GAAP data did not correctly portray Apple’s financial statements.

2. Which method best reflects the economic reality?

I believe both GAAP and Non-GAAP accurately reflect Apple’s economic reality. Each method just simply presents Apple’s financial data in a different way. Under GAAP, revenue from iPhone is deferred and is recognized on a straight line basis over a 24 month period. This type of subscription accounting is required because Apple chose to give future, free software upgrades with the iPhone. GAAP requires this to prevent companies from trying to over-inflate revenues by increasing sales with the promise of a free incentive in the future then not delivering on the promise.

Under GAAP, the huge increase in iPhone sales is represented in the deferred revenue accounts and the cash from operating activities on the statement of cash flows. Apple’s non-GAAP statements recognize revenue from iPhone sales immediately, instead of in a deferred account, and is represented by the increase in revenue and net profit. To investors, the non-GAAP statements are more impressive because of the large increase in revenue and net profit. However, the truth of the matter is that both methods present the same information but in different accounts and at different times.


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