Case Study-AW-Q267

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Apple, Inc.
ACCT6371 – Advanced Auditing
Section 25062
December 6, 2011

Apple Inc. was founded in 1977 and is headquartered in Cupertino, California. Apple Inc. and its subsidiaries design, manufacture, and market mobile communication and media devices,personal computers, and portable digital music players and sell related software, services, peripherals, networking solutions, and third‐party digital content and applications worldwide.
The company sells its products and services to consumers, small and mid‐sized business,education, enterprise, and government customers through its retail stores, online stores, and direct sales force, as well as through third‐party cellular network carriers, wholesalers, retailers,and value‐added resellers. As of September 24, 2011, the company had 357 retail stores,including 245 stores in the United States and 112 stores internationally. Apple has a fiscal year end on the last Saturday of September, for 2011 it was September 24.
Company Industry: Personal Computers
Company Sector: Technology
Primary Products: iPhone, iPad, Mac hardware products, iPod, iTunes, Apple TV, the iOS and Mac OS X operating systems, iCloud, and various accessory and support offerings, as well as a range of consumer and professional software applications Raw Materials Used: Various electronic components, ideas & innovations

Sales: $108,249,000 as of September 24, 2011
Assets: $116,371,000 as of September 24, 2011
Employees: 60,400 full‐time employees and 2,900 full‐time temporary
Company Location: Cupertino, California
Companies and people associated with Apple
John Couch – VP of Education
Hon Hai Industries – builds parts only for Apple in China Quanta Computers – builds parts for iPods and iPhone components,ZAGG, Inc – creates accessories specifically for Apple products like the
iPod, iPhone, and iPad
What image does it intend to convey?
Apple, Inc intends to convey an image of increased profits. Looking at the three year comparison of the Consolidated Statements of Operations, Net Sales have been increasing dramatically from year to year. Each year the increase is even higher than the year before. Net income has coincided with Net Sales.
Apple intends to expand its market opportunities related to mobile communication and media devices. Research and development will increase to develop and offer new innovative products and services.
What are the segments and functional contents of the report?
Part I, Item 1, Business
Company Background, Business Strategy, Business Organization, Products, Product Support & Services, Markets & Distribution, Competition, Supply of Components, Research & Development, Patents, Trademarks, Copyrights & Licenses, Foreign & Domestic Operations & Geographic Data, Seasonable Business, Warranty, Backlog, Employees, Available Information
Item 1A, Rick Factors
Item 1B, Unresolved Staff Comments
Item 2, Properties
Item 3, Legal Proceedings
Item 4, omitted
Part II, Item 5, Market Registrant’s Common Equity, Related Stockholder Matters & Issuer Purchases of Equity Securities
Price Range of Common Stock, Holders, Dividends, Purchase of Equity Securities by the Issuer & Affiliated Purchasers, Company Stock Performance
Item 6, Selected Financial Data
Item 7, Management’s Discussion & Analysis of Financial Condition & Results of Operations
Executive Overview, Japan Earthquake, Tsunami and Thailand Flooding, Critical Accounting Policies & Estimates, Net Sales, Segment Operating Performance, Gross Margin, Operating Expenses, Other Income & Expense, Provision for Income Taxes, Liquidity and Capital Resources, Off‐Balance Sheet Arrangements & Contractual Obligations, Indemnification
Item 7A, Quantitative & Qualitative Disclosures About Market Risk
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Interest Rate & Foreign Currency Risk Management, Interest Rate Risk, Foreign Currency Risk Item 8, Financial Statements and Supplementary Data
Consolidated Financial statements, Notes: (1) Summary of Significant Accounting Policies, (2) Financial Instruments, (3) Consolidated Financial Statement Details, (4) Goodwill & Other Intangible Assets, (5) Income Taxes, (6) Shareholders’ Equity & Share based Compensation, (7) Commitments & Contingencies, (8) Segment Information and Geographic Data, (9) Selected Quarterly Financial Information (Unaudited) Item 9, Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A, Controls & Procedures Evaluation of Disclosure Controls & Procedures, Inherent Limitations Over Internal Controls,Management’s Annual Report on Internal Control over Financial Reporting, Changes in Internal Control over Financial Reporting
Item 9B Other Information
Part III, Item 10, Directors, Executive Officers & Corporate Governance
Item 11, Executive Compensation
Item 12, Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13, Certain Relationships & Related Transactions and Director Independence
Item 14, Principal Accounting Fees & Services
Part IV, Item 15, Exhibits, Financial Statement Schedules
Apple Inc’s Business Conduct Policy
Ernst & Young Consent
Certifications of CEO & CFO
What are the key economic factors about the industry?
The Company’s operations and performance depend significantly on worldwide economic conditions. Uncertainty about global economic conditions poses a risk as consumers and businesses postpone spending in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values, which could have a material negative effect on demand for the Company’s products and services.
Demand also could differ materially from the Company’s expectations because the Company generally raises prices on goods and services sold outside the U.S. to offset the effect of a strengthening of the U.S. dollar. Other factors that could influence demand include increases in fuel and other energy costs, conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit, consumer confidence, and other
macroeconomic factors affecting consumer spending behavior. These and other economic factors could materially adversely affect demand for the Company’s products and services and the Company’s financial condition and operating results.
Where is the company in its life cycle?
• Netbooks & IPhone: are in the growth stage
• Pods: are in the maturity stage
• Mac desktop: are in the early stages of decline.
What are the five or six most important factors for success in this business?
1. Continued innovation
2. Expertise in technology/research
3. Customer service/satisfaction
4. Reliability of products
5. Custom built PC
6. Continued service & availability of key personnel

How does this company stand with respect to these factors?
Apple is committed to bringing the best user experience t its customers through its innovative hardware, software, peripherals, and services. With respect to expertise in technology and research, Apple believes that continual investment in research and development is critical to the development and sale of innovative products. They continue to expand its platform for discovery of new technology and support the development of third‐party products that
complement the products that they offer.
Apple is expanding their distribution network to provide great customer service and be able to satisfy each and every customer. They train their employees to be knowledgeable about the products and services that they offer in order to retain and attract customers. Apple offers a range of support options for all their customers.
In order for Apple to have reliable products and custom built PCs, they depend highly on research and development, licensing of intellectual property, and acquisition of third‐party businesses and technology. They have spent a total of $2.4 billion in 2011 which is an increase of $1.1 billion from 2009. They have nearly doubled their research and development expense to make sure that they come out with new and better technology year after year. They want to
retain loyal customers by providing outstanding technology.
Describe four or five key business risks related to the client’s business and industry.
1. Competition – Global markets for the Company’s products and services are highly competitive and subject to rapid technological change.
2. Commodity shortages and price fluctuations ‐ Future operating results depend upon the Company’s ability to obtain components in sufficient quantities.

3. Third party licenses required ‐ The Company relies on third‐party intellectual property and digital content, which may not be available to the Company on commercially reasonable terms or at all.
4. Reliance on third parties – the company relies heavily on third parties for transportation, logistics and manufacturing. Also depends on their network of distributors, carriers and other resellers, who have been negatively impacted by weak economic conditions. If resellers weaken or stop distributing there would be significant impact on Apple’sfinancial condition and operation structure.
5. Global economic conditions ‐ company operations & performance depends substantially on worldwide economic conditions. Uncertainty poses a risk as consumers & businesses postpone spending.
What notable accounting considerations are there for companies in this industry?
1. Inventory write‐downs ‐ The Company faces substantial inventory and other asset risk in addition to purchase commitment cancellation risk. The Company records a write‐down for product and component inventories that have become obsolete or exceed anticipated demand or net realizable value and accrues necessary cancellation fee
reserves for orders of excess products and components.
2. Warranty liability – the company generally provides for the estimated cost of hardware & software warranties at the time of related revenue recognition, they assess the adequacy of pre‐existing warranty liabilities and adjust amounts as needed based on actual experience and changed in future estimates.
3. Unrealized gains and losses on securities – the company has investments in available for sale securities which are reported at fair market value. Unrealized gains and losses are recognized in the company’s comprehensive income, net of tax.
4. Accruals for cancelled vendor orders – the company records accruals for estimated cancellation fees related to component orders that have been cancelled or are expected to be cancelled due to change in or lack of demand or technology requirements.

What legal or regulatory matters are of concern?
1. Patent (Intellectual Property) infringement ‐ The Company’s future results could be materially adversely affected if it is found to have unintentionally infringed on intellectual property rights.
2. Laws & regulations changing in any of the major countries where the Company does business, changes could adversely affect the company and how it operates in that country.
3. Tax rates & legislation – changes to the current tax laws and rates could expose the Company to additional tax liability What social matters are of concern?
1) Economic perceptions & predictions‐ economic uncertainty causes consumers and businesses to cut back on spending
effectively and keep up with the rapid technological changes. According to the company’s statement, Apple Inc’s ability to “compete successfully depends heavily on its ability to ensure a continuing and timely introduction of innovative new products and technologies to the marketplace” (September 24th 2011 10K, Page 10).
3) War, terrorism, geopolitical uncertainties, and public health issues are listed as factors that can affect the company. According to the statement, interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile acts, labor disputes, public health issues, and other events beyond the company’s control could decrease demand for products. public health issues, such as pandemics, causes restrictions in employee travel, limitations in freight services,governmental actions limiting the movement of products between regions, delays in roduction ramps of new products, and disruptions in the manufacturing and
component suppliers operations.
4) Tax rates. Changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or its interpretation will adversely affect Apple Inc income.
Assess the financial strength of the company?
Review of the debt to equity ratio, as well as the remaining debt ratios, shows that Apple is carrying small amount of debt, as most firms in the industry. This means that Apple has a proportionately large equity base, and a high amount of unused borrowing capacity. Apple’s current ratio is the same as the industry and even greater than S&P 500. This means that Apple has enough assets that can be converted into cash in less than 12‐months to cover the
company’s current debt. This ratio also indicates that Apple’s short term financial strength is good. Quick ratio at 1.6 indicates that the company is able to meet its current financial liability.
In comparison to the industry, Apple is at the same ratio but performing better when compared to S&P average. The quick ratio leads us to conclude that the amount of inventory on hand is smaller than the industry average, or exclusion of inventory of assets would have a greater effect on this ratio.
Financial Condition Company Industry S&P 500
Debt/Equity Ratio 0.00 0.07 1.03
Current Ratio 1.6 1.6 1.4
Quick Ratio 1.6 1.6 1.0
Interest Coverage NA 1.8 315.5
Leverage Ratio 1.5 1.7 3.6
Book Value/Share 82.45 76.90 26.35
When compared to the industry (22.0) and S&P 500 (8.2), Apple’s return on assets is higher (23.0). This shows that Apple’s assets are profitable in generating revenue. The company also has a lower return on equity (36.2) than the industry average of (37.2). Though this ratio indicates that the company is not as efficient in generating profits from shareholder equity, the company is still appealing to investors because its ratio is higher than the industry average.Investment Returns % Company Industry S&P 500
Return On Equity 41.7 42.1 26.4
Return On Assets 27.1 25.8 9.0
Return On Capital 36.3 35.0 11.9

Apple has a gross profit margin ratio of 40.5, which is higher than the industry average of 39.2. This indicates two things, that Apple is either more efficient at reducing production costs than the average firm in the industry or that it has more efficient pricing policies and/or sale techniques than the average firm in the industry. Net profit margin is 24.0, compared to the industry average of 22.7. This informs us that Apple’s products are priced higher than most companies in the industry.
Profit Margins % Company Industry S&P 500
Gross Margin 40.5 39.2 40.0
Pre‐Tax Margin 31.6 29.9 18.1
Net Profit Margin 24.0 22.7 13.2
Management Effectiveness
Inventory turnover ratio is 70.5, while the industry average is 68.0. This high inventory turn rate
can be attributed to a period of high growth and increasing sales during FY2011. Receivable
turnover rate is very close to the industry. This rate is also affected by the increase sales activity
in the fiscal year.
Management Efficiency Company Industry S&P 500
Receivable Turnover 19.9 19.1 16.0
Inventory Turnover 70.5 68.0 12.5
Asset Turnover 1.1 1.1 0.9
Review of the Company’s balance sheet shows Apple to be fairly strong financially. The company has sufficient current asset ($44.9 million) to cover current liability ($27.9). There has also been increase in cash, short term investment since 2007. Attention needs to the paid to current liabilities as this amount continues to rise every fiscal year. Retained earnings on the other hand continue to increase. Review of FY 2011 financial results leads us to conclude that company is at a strong growth period, and performing efficiently.
Product Code-Case Study-AW-Q267

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