I chose Apple for my course project mainly based on the fact that they release all their records to the public and they have excellent accounting practices. Their paper work is easy to read and follow and based on their records they have an endless amount of revenue in the billions. As we have discussed about Apple in class I was very intrigued how they looked in the books on a specific level of detail and this course project was the perfect way to take initiative to find out just how their numbers actually add up answering the following questions.
1. What amount of deferred tax assets or deferred tax liabilities are on the two most recent years on the balance sheet? What gives rise to these deferred taxes? What information is disclosed in the footnotes related to deferred taxes? Please define a deferred tax asset and deferred tax liability. At year end September 24 2011 the balance sheet shows following amount of deferred tax assets and liabilities:
Deferred tax asset is arising due to deductible temporary differences, tax losses, and tax credits of $3.2Billion and deferred tax liabilities of $9.2Billion. Deferred revenue is recorded when the company receives payments of their products in advance or for the performance of services. It includes amount for unspecified and specified software upgrade rights and non-software services that are attached to the products of the company. It is disclosed in the footnotes that Deferred tax assets and liabilities shows the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of current assets and liabilities and their respective tax bases and are measured using en-acted tax rates that apply to their taxable income in the years in which these temporary differences are expected to be recovered or settled. Footnotes also states that company records a valuation allowance in order to reduce the deferred tax asset to the amount it thinks cannot be realized.
Deferred tax asset:
Deferred tax asset is defined as reduction in company’s future taxes as the company has already paid for these taxes in past. It is like a prepaid tax. It is used to reduce later period’s income taxes.
Deferred tax liability:
Deferred tax liability is defined as liability that the company owes but they don’t have to pay it in the current time but will be due in some future time. This often results due to difference in tax regulations and accounting practices.
2. What temporary and permanent differences does the company disclose in its footnotes? What are some other examples of temporary and permanent differences?
Operating loss to carry forward /carry forward:
The company had unrecognized tax benefits of 1.4 billion
Guidelines for carry forwards and carrybacks:
Tax law allows corporation to carry forward loss up to 20 years and they can carryback tax losses only up to 2 years. A carry forward can be used to reduce future income and in the end reducing future tax payments.
4. Does the company have a defined benefit or defined contribution plan? What are the key elements of the plan discussed in the footnotes? What amounts on the balance sheet relate to this plan? What are the differences between defined benefit and defined contribution plans? Employee contribution plan:
The key element discuss in the footnotes is the rate to which the contribution is made and matching of contribution by company itself. The Company’s matching contributions to the Savings Plan were $90 million, $72 million and $59 million in 2011, 2010 and 2009, respectively.
Difference between Benefit and contribution plan:
In contribution the employer put certain fixed percentage of employees to the fund and invest it no loss or gain is recognized because its liability is of contributing that amount only. However in benefit plan the company promised to pay certain amount to employees due to which it has to recognize gain or losses and liability.
5. What are the earnings-per-share amounts disclosed on the income statement for the most recent year? What dilutive securities are discussed in the footnotes? Please identify and describe other examples of dilutive securities. How do these impact earnings per share? Diluted EPS:
Effect on EPS of Dilutive:
Dilutive EPS is calculated due to the Debt securities company issued to which company offers for conversion from debt security to Company shares. If converted, the denominator will increase and hence EPS will decrease. Other types of dilutive shares:
The other types of diluted shares are warrants and share option. Bonus shares may also dilute EPS.
6. What kind of share-based compensation does the company have? What was the compensation expense for the two most recent years? What are the key elements of this plan discussed in the footnotes? Please identify and describe other types of share-based compensation.
Share based Payments
The Company has two kind of share based compensation one is that the company receives employees’ service in exchange of equity instrument, or of recognizing liabilities that are based on the fair value of the company stock or may be settled through issuance.
The key element in the foot note is the difference between restricted stock Unit and stock option plan. In RSU’s the compensation cost is measured by closing fair value of stock at grant date. However in stock option the valuation at grant date is done through Black-Scholes-Merton (“BSM”) option-pricing model.
Other types of compensation:
The other types of compensation is that employees to whom compensation is paid is left with the choice whether to take cash settled i.e. by incurring liabilities or by equity settlements.
7. Does the company use the direct or indirect cash flow presentation method? What is the difference between these two methods? How does the cash flow statement agree to the other financial statements?
APPLE INC. uses indirect method of cash flow. The main difference in direct and indirect method is of operating activities section. In direct method of cash flow there is a sum of all check and deposits in a particular category whereas in indirect method of cash flow we have to make adjustments in order to arrive at net cash flow from operating activities. Net cash balance calculated in the cash flow statement agrees with cash balance in the balance sheet.
8. What investing and financing activities does the company have? What are some other examples of investing and financing activities? Company has following investing activities:
Purchases of marketable securities, Proceeds from maturities of marketable securities, Proceeds from sales of marketable securities, Payments made in connection with business acquisitions, net of cash acquired Payments for acquisition of property, plant and equipment and Payments for acquisition of intangible assets. Other examples of investing activities are purchase/sale of long term investments and purchase/sale of debt or equity securities of other companies.
Financing activities of company:
Proceeds from issuance of common stock, Excess tax benefits from equity awards and Taxes paid related to net share settlement of equity awards. Other examples of financing activities are sale of equity securities, issuance of bonds and notes, dividend paid and redeem long term debt.
9. What non-cash transactions does the company have on its cash flow statement? What are some other examples of non-cash transactions?
Following are the non cash transactions of the company on its cash flow statement:
$(000) Depreciation, amortization and accretion 1,814 Share-based compensation expense 1,168 Deferred income tax expense 2,868 Other non cash-transaction examples are provisions, unrealized foreign currency gains/losses and minority interests.
This course project shows evidence in Apple’s strict guidelines and how they run their business. Comparing the numbers they have posted on their site I’m able to physically see how certain liabilities and Assets are moved and balanced in different quarters throughout the year. Seeing this also allows me to understand on how they operate in a bigger scale from a bird’s eye view. Since they are such a large company they do not hesitate to report all their taxes and pay the full amount without using shortcuts that most smaller companies are able to get away with.
Based on the report from 2011 and 2010 Apple prioritizes their tax expenses with alacrity and with their triple checked system it truly leaves no room for error in their accounting department. By looking into their books, I can conclude that this company is in strong standing and that they will be around for a long time maybe for another 100 years. Most companies don’t have that kind of net value since they fall into category of accrued debt paying off an impossible bill of benefits to their employees.
http://investor.apple.com/secfiling.cfm?filingID=1193125-11-282113&CIK=320193 http://investing.money.msn.com/investments/stock-balance-sheet?symbol=AAPL& http://finapps.forbes.com/finapps/jsp/finance/compinfo/IncomeStatement.jsp?tkr=aapl&period=qtr http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=aapl
Courtney from Study Moose
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