A. At the time of the case, what are the types of products that Apple sells, and the types of services that Apple provides? Be specific. B. In general, what is the criteria for revenue to be recognized by a company? What does "performance obligation" refer to when selling a product, or providing a service? Be specific by giving some examples related to Apple. C. Apple employs the use of Multiple Element Contracts (MECs) for many of its sales. (i) What are multiple-element contracts (MECS)? In general, why are the revenues associated with MECS difficult to measure and record? (ii) What are some of the elements in Apple's MECs? What method or methods does Apple use in measuring the revenue associated with the various elements in its MECs? D. Suppose Apple had approximately $1 billion of gift cards for the fiscal year outstanding. Where would this amount be reported in the financial statements? When would revenue be recognized from these gift cards? (iii) In which account would the components of Other Comprehensive Income be closed into? Wher Comprehensive Income presence m ancial What are the options as to how Comprehensive Income is reported currently? G. Give three specific examples fro estimates in measuring and reporting revenues. required the use of H. Why would a manager be tempted to unethically recognize revenue earlier than GAAP guidelines allow? Is it unethical to purposely postpone the recognition of revenue to a later reporting period? Why or why not? APPLE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except share amounts which are reflected in thousands and per share amounts) Three years ended September 25, 2010 Not sales Cost of sales Gross margin Operating expenses: Research and development Selling, general and administrative Total operating expenses Operating income Other income and expense Income before provision for income taxes Provision for income taxes Net income Earnings per common share: Basic Diluted Shares used in computing earnings per share: Basic Diluted 2010 2009 2008 $ 65,225 $ 42,905 $ 37,491 39,541 25,683 24,294 25,684 17,222 13,197 1,782 1,333 1,109. 5,517 4,149 3,761 7,299 5,482 4,870 18,385 11,740 8,327 155 326 620 18,540 12,066 8,947 4,527 3,831 2,828 $ 14,013 $ 8,235 $ 6,119 $ 15.41 $ 9.22 S 6.94 $ 15.15 S 9.08 S 6.78 909,461 893,016 881,592 924,712 907,005 902,139 See accompanying Notes to Consolidated Financial Statements. Apple Inc.-Revenue Recognition Apple Inc. designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players and sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retall stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. (Source: Company Form 10-K) APPLE INC. CONSOLIDATED BALANCE SHEETS (s milions, except share ASSETS: Current ac Cadaquival 11,200 1203 Short-ins marketable securities 14359 18,201 Accounts receivable, les alowanons of $35 and 852 respectively 5,530 3361 Invescien 1,051 455 Deed tax 1436 135 Vendor con-de receivables 4,454 1896 3,447 LAM Total 41,678 31355 Long term marketable 25,391 30,508 Property, plant and equipment, 4,766 2954 Goodwi Acquired intangible asset 741 206 342 247 Other sets 2363 2011 Total sets LIABILITIES AND SHAREHOLDERS' EQUITY 25, Current liabilities Acable Accrued expens Deferred reve Other non-curt abilities Total current liabilities Deferred revenue-son-cent Tabl Commitments and contingmoles Starhalders' equity Common Mock, so par value; 1,800,000,000 shares authorized; 915,970,050 and 899,805.500 Ised and outstanding, rapoctively Retained sings Accumulated other comprehensive Coincom Total shareholders' equity Total liabilities and shareholders' egy See smpanying Notes to Codied Fal S 12,013 $ 1,723 3,812 2003 11.304 L139 5411 27082 833 10,668 1210 37,3 2130 (4) 47.791 210 APPLE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Cash and cash equivalents, beginning of the year Operating Net income $830 Adjustment to reconcile net income to cash genered by operating 16,013 8235 6339 Depreciation, amoration and action Stock-based compensation expe Deferred income tax expan 1007 734 879 T1B 516 1,440 040 358 Loss on disposition of property, plant and equ Changes in operating sets and liabilities Accounts receivable, net 24 17826 Q140 (TRD) (796) 54 (163) Vendor non-trade receivables 07 206 130 Other current a (514) ON Other (120) (NED) Accounts payable 4,307 92 316 De 1,217 271 O RED Cash gested by operating activities 18.595 L 8396 Inverting svition Purchases of marketable securities 37,793) GLMB Proceeds tho maturities of klei 34,900 18,79 11304 Proceeds from is of mark securit 217 4409 Pard of our lag-te i (18) pta 06 Com Payments made in connection with binations, acquired Position of property, plant and equip Pynes for sation of intangible Cash and in investing activities B CL06) (344) 11160 Ca 07AM Proceeds from iance of cook 912 475 Exx beats to stock-hest conge 279 Tax paid related to set share setion of equity awards Cbd by fining activitie 1406 E Increase decrease) in cad and cal trans 1396 Cheval end of the year Supplemental ch De disclosure Cayed for $ 2,67 1 1347 See saying Notes to Cold Finial Statemen 1-Summary of Significant Accounting P APPLE INC. Net sales consist primarily of revenue from the sale of handwas, software, digital content and appli peripherals, and service and support ostraca. The Company or when per idence of angement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable Product is considered delivered to the outer once it has been shipped and title and risk of los have be transferred. For most of the Company's product sales, these criteria are met at the time the product is shipped For online sales to individuals, the Company defers revenue until the customer receives the product because the Company legally retains a portion of the risk of loss on these sales during transit. The Company is rev from the wale of hardware products (eg, Mac, iPhones, iPads, iPods and peripherals), schware bundled with dware that is also the functionality of the hardwars, and third-party digital content wild on the Tum Store in accordance with general revenue recognition accounting guidance. The Company i 00 standalone sales of software products, (3) sales of software upgrades and (i) sales of a bed wi Sandware not essential to the functionality of the hardware The Company sells software and peripheral products obland from other companies. The Copy pilly establishes its own pricing and retains relased inventory risk, is the primary oblige in sales tra bed. For comes, and the credit risk for amounts bitied to in customers Accordingly, the Company gevelly recognizes revenue for the sale of products obtained from other companies based on the grows a certain sales made through the Tunes Sure, the Company is not the primary obligat third-party developers determine the selling price of their wars. Therefore, the Company at on a set basis by recognizing only the common train from his and nuding that oma sales in the Consolidated States of Openstims. The portion of the wis price paid by users that is ed the Company to third-party developers is not reflected in the Company's Comidated of Open The Company records deferred revenue when it receives payments in shance of the delivery of s performance of services. This inshades an that have been defamed related to bedded p specified software upgrades rights. The Company sells gitands and words defed p cand, which is relieved upon redemption of the and by the atomer Reve an AppleCare a contracts is deferred and recognized bly over the service coverage period Revenue Recon for mangement w Malb Forings that hade angible products that is c product's factionality and undelivered software in the Company allocates ce their live selling prices. In sub cit, he Company w be used for allowing revenue to delivwable() venda-pide stjectives 0nd-party evidence of selling price (TPE and bene gically is aly when the Company sells the deliverable Company for that deliverable. ESPs relect the Company's best would be if they were sold regularly on a stand-al VICE taly charged by the As described in more detall below, the all post and sales of Ph Apple TV d med d hardwww and s touch beginning in Jass 2010, the Company has indicated it may from se sodware upgral and fees thee of charge to at The Company has amage evebing the sale of these devices. The tre deliverse is t Anctionality of the handwas device delivered at the time if sele. The second deli included with the purchase of iPhoes, al, Pod touch and Apple TV prefie ovddies Sure specified adware upgrade and Suresisting to te prod's metals The C allocated severe between these two deliverables aing the tale sling priced Bea VSG 77 e de diversis, be satisfaham bad An the delivered hardware and the related seal past The Company's pov for determining its ESP e deliveries with The Company believes its caters would be recent t primerly hand on the but that unspecified grade nga do not oblig Company has concluded that if were to all p VOETE Company to provide relatively low Key tues ooidered by the Company in developing the 25 for prices charged by the Company for sim ghe upgrade rights and the relative ESP of the segrade rights as compared to the balling price of the pra For all periods presel, Be Cony's ESPA TV di The Congery's BSP e s Compe cond quarter of 2000w $25 gi 1054 run, the Cangany lowered t Beginning with inalis of iPad in April 2010, the Company has a beddedre segrade right included with previously sold iPod touch nodes would mave - und soare preds bedded software upgrade right included with each had such sold begiming Note 1- Adoption of New Accounting Principles (c In September 2009, the Facial Ang Sark (TAS) ang principle) The counting principles Company pective adoption during the eq 200 Under the historical sooving principle, the Compaty pecified are spgrades and f The sew ating principle affet the Company's ag TV for fed such beginning ise 2010 The new cut for the sale of these derim as t to e fitinality of the hardware device delimat at the s sve na wm-ddevebols bis, finire ale. These ausding prinsips pecited a it i stimate a standalone selling prive for the spesifieds Apple Amounts allocated to the embedded unspecified software upgrade rights are deferred and recognized on a straight- line basis over 24-months. Cost of sales, including estimated warranty costs, are recognized at the time of sale. The Company's process for determining its ESP for deliverables without VSOE or TPE considers multiple factors. The Company believes its customers would be reluctant to buy unspecified software upgrade rights. This view is primarily based on the fact that unspecified upgrade rights do not obligate the Company to provide upgrades at a particular time or at all, and do not specify to customers which upgrades or features will be delivered. Therefore, the Company has concluded that if it were to sell upgrade rights on a standalone basis, the selling price would be relatively low. Key factors considered by the Company in developing the ESPs for these upgrade rights include prices charged by the Company for similar offerings, the Company's historical pricing practices, the nature of the upgrade rights and the relative ESP of the upgrade rights as compared to the total selling price of the product. For all periods presented, the Company's ESP for the embedded software upgrade right included with each Apple TV sold is $10. The Company's ESP for the software upgrade right included with each iPhone sold through the Company's second quarter of 2010 was $25. Beginning in April 2010 in conjunction with the announcement of IOS4 for iPhone, the Company lowered its ESP for the software upgrade right included with each iPhone to $10. Beginning with initial sales of iPad in April 2010, the Company has also indicated it may from time-to-time provide future unspecified software upgrades and features free of charge to iPad customers. The Company's ESP for the embedded software upgrade right included with the sale of each iPad is $10. In June 2010, the Company announced that certain previously sold iPod touch models-would-receive an upgrade to iOS 4 free of charge and may from time- to-time receive future unspecified software upgrades and features free of charge. The Company's ESP for the embedded software upgrade right included with each iPod touch sold beginning in June 2010 is $5. Note 2-Retrospective Adoption of New Accounting Principles (excerpts) In September 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements ("new accounting principles"). The new accounting principles permitted prospective or retrospective adoption, and the Company elected retrospective adoption during the first quarter of 2010. Under the historical accounting principles, the Company was required to account for sales of both iPhone and Apple TV using subscription accounting because the Company indicated it might from time-to-time provide future unspecified software upgrades and features for those products free of charge. Under subscription accounting, revenue and associated product cost of sales for iPhone and Apple TV were deferred at the time of sale and recognized on a straight-line basis over each product's estimated economic life. This resulted in the deferral of significant amounts of revenue and cost of sales related to iPhone and Apple TV. The new accounting principles affect the Company's accounting for all past and current sales of iPhone, iPad, Apple TV and for sales of iPod touch beginning in June 2010. The new accounting principles require the Company to account for the sale of these devices as two deliverables. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale, and the second deliverable is the right to receive on a when-and-if-available basis, future unspecified software upgrades and features relating to the product's essential software. The new accounting principles result in the recognition of a substantial portion of the revenue and all product costs from the sale of these devices at the time of their sale. Additionally, the Company is required to estimate a standalone selling price for the unspecified software upgrade rights included with the sale of these devices and recognizes that amount ratably over the 24-month estimated life of the related hardware device. Short-term marketable securities Note 2-Retrospective Adoption of New Accounting Principles (excerpts)-continued The following tables present the effects of the retrospective adoption of the new accounting principles to the Company's previously reported financial statements as of September 26, 2009: Consolidated Balance Sheets (in millions, except share amounts) Current assets: Cash and cash equivalents September 26, 2009 As Reported Adjustments As Amended $ 5,263 S $ 5,263 18,201 18,201 Accounts receivable, less allowance of $52 3,361 3,361 Inventories 455 455 Deferred tax assets 2,101 (966) 1,135 Other current assets 6,884 (3,744) 3,140 Total current assets Long-term marketable securities Property, plant and equipment, net Goodwill Acquired intangible assets, net Other assets Total assets Current liabilities: Accounts payable 36,265 (4,710) 31,555 10,528 10,528 2,954 2,954 206 206 247 247 3,651 (1,640) 2,011 $ 53,851 $ (6,350) S 47,501 S 5,601 $ S 5,601 Accrued expenses 3,376 476 3,852 Deferred revenue Total current liabilities Deferred revenue-non-current Other non-current liabilities 10,305 (8,252) 2,053 19,282 (7,776) 11,506 4,485 (3,632) 853 2,252 1,250 3,502 Total liabilities Commitments and contingencies Shareholders' equity. 26,019 (10,158) 15,861 Common stock, no par value; 1,800,000,000 shares authorized; 899,805,500 shares issued and outstanding Retained earnings Accumulated other comprehensive income Total shareholders' equity Total liabilities and shareholders' equity Consolidated Statements of Operations (in millions) Net sales Cost of sales Gross margin Operating expenses: Research and development 8,210 8,210 19,538 3,815 23,353 84 27,832 (7) 3,808 77 31,640 $ 53,851 $ (6,350) $ 47,501 Fiscal Year Ended September 26, 2009 As Reported Adjustments As Amended 36,537 S 6,368 $ 42,905 23,397 2,286 25,683 13,140 4,082 17,222 1,333 1,333 Selling, general and administrative 4,149 4,149 Total operating expenses 5,482 5,482 Operating income 7,658 4,082 11,740 Other income and expense 326 326 Income before provision for income taxes 7,984 4,082 12,066 Provision for income taxes 2,280 1,551 3,831 Net income 5,704 $ 2,531 $ 8,235 believe the adjustment to net income for FYE 2009 was material for Apple? Why or why not? Be specific. (Hint: Look at the financial statements in Note 2) F. The following questions relate to Apple's Comprehensive Income and related accounts for fiscal year ended 2010. (i) Give the components and dollar amounts of Total Comprehensive Income for fiscal-year-ended 2010. (ii) From your answer above, which of these components constitute Other Comprehensive Income? (iii) In which account would the components of Other Comprehensive Income be closed into? Where are the components of Comprehensive Income presented in Apple's 2010 financial statements? What are the options as to how Comprehensive Income is reported currently? G. Give three specific examples from the case in which Apple required the use of estimates in measuring and reporting revenues. H. Why would a manager be tempted to unethically recognize revenue earlier than GAAP guidelines allow? Is it unethical to purposely postpone the recognition of revenue to a later reporting period? Why or why not? (iii) In which account would the components of Other Comprehensive Income be closed into? Wher Comprehensive Income presence m ancial What are the options as to how Comprehensive Income is reported currently? G. Give three specific examples fro estimates in measuring and reporting revenues. required the use of H. Why would a manager be tempted to unethically recognize revenue earlier than GAAP guidelines allow? Is it unethical to purposely postpone the recognition of revenue to a later reporting period? Why or why not