Can I get some help with questions F,G and I ? It needs to be fully answered on those questions. Thank you

I -37- Apple Inc. designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players and sells a variety ofrelated soffioare, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesctlers, resellers, and value-added resellers. (Source: Company Form l0-K) a. In your own words, define "revenues." Explain how revenues are different from "gains." b. Describe what it means for a business to "recognize" revenues. What specific accounts and financial statements are affected by the process of revenue recognition? Describe the revenue recognition criteria outline in the FASB's Statement of Concepts No. 5. c. Refer to the Revenue Recognition discussion in Note 1. In general, when does Apple recognize revenue? Explain Apple's four revenue recognition criteria. Do they appear to be aligned with the revenue recognition criteria you described in part b, above? d. What are multiple-element contracts and why do they pose revenue recognition problems for companies? e. In general, what incentives do managers have to make self-serving revenue recognition choices? f. Refer to Apple's revenue recognition footnote. In particular, when does the company recognize revenue for the following types of sales? i. ii. iii. o b. iTunes songs sold online. Mac-branded accessories such as headphones, power adaptors, and backpacks sold in the Apple stores. What if the accessories are sold online? iPods sold to a third-party reseller in India. Refer to Apple's revenue recognition footnote. Consider the sale of peripheral products obtained from other companies, such as Logitech speakers. How would Apple determine the amount to record for such speakers sold from the Apple stores? What if the speakers were drop-shipped from Logitech for an online Apple-store order? h. Consider the following hypothetical sales scenario. A large community college buys and takes delivery of 50 iMac computers from a local Apple store. The invoiced price is $2,800 per unit and includes hardware, software essential to the flrnctionality of the hardware, third-party software including Microsoft Office for Mac and Adobe Creative Suite, and two years of tech service and support. Apple uses vendor-specific objective evidence to determine unit prices of $2,500 and $300 for hardware and the essential software, respectively. The third-party software typically retails for @ Copyright 201 5 by Cambridge Business Publishers, LLC. any purpose without the written permission of the publisher. All rights reserved. No part ofthis publication rnay be reproduced in any I -38- $500 (but Apple purchases it at a 50% discount) and equivalent service and support contracts are $100 per year. The customer (the community college) can opt to purchase subsequent essential software and OS upgrades. Indicate how Apple should record gross revenue for the transaction at the time the customer takes delivery of the computers. Your response should include specific dollar amounts. for the following accounts: accounts receivable, deferred revenue (combine the current and non-current deferred revenue accounts into one T-account), and net sales. Enter the Create T-accounts opening balance (as at September 26,2009) and closing balance (as at September 25,2010) for the two balance sheet T-accounts and enter the ending balance for the Net sales T-account. i. Assume that the cu:rent portion of deferred revenue is recoguized in the next fisca1 year. Prepare the fiscal 2010 journal entry to record Net sales for previously deferred revenue. Post the transaction to the T-accounts. ii. Assume that fiscal 2010 sales transactions included $44,000 of sales on account (in millions) with all other sales conducted in cash. Prepare the fiscal 2010 journal entry to record the 2010 sales transactions, including any portion deferred to a future period. Post the transaction to the T-accounts. iii. Prepare the journal entry to record cash collections driring 2010 for sales made on account. Note 2 discloses that in Septernber 2009, Apple adopted a new accounting principle for revenue recognition for sales of certain products including iPhones. i. Explain, in your own words, how Apple recognized revenue for iPhones before and after the change in accounting principle. ii. What is the difference between applying a new accounting principle retrospectively and prospectively? Which did Apple do? Refer to Note 2 and the retrospective adjustments to Apple's fiscal 2009 income statement related to the new accounting principle for certain products including iPhones. i. In general, what effect did the rekospective application of the new accounting principle have on Apple's fisca12009 net income? ii. iii. For each income statement item adjusted, explain why the adjustment was necessary. Did the new revenue recognition principle improve or weaken the company's gtoss margin for fiscal 2009? t. Refer to Note 2 and the retrospective adjustments to Apple's fiscal 2009 balance sheet related to the new accounting principle for certain products including iPhones. For each balance sheet item adjusted, explain why the adjusffnent was necessary. Hint: Other current assets and other assets include the pro rata cost of products (such as the iPhone) that were sold but for which revenue was deferred. Accrued expenses and other non-current liabilities include current and non-current portion of warranty accruals, respectively. m, What was the cash flow effect of the new revenue recognition principle? n. Prior to the FASB's announcement of the new revenue recognition rules, there were suggestions in the business press that some companies, including Apple, actively lobbied for the new standard and would likely opportunistically adopt the standard early in order to increase profits (see for example: lrttIr:l/rnnnrw.bqdnessinsider.com/gpples-iphone-accounting-change-gets-votg:tornon"ow-2009-9 and http:#wwr+'.businessinsider.comlhenry-blodget-new-apple-iph*ne-accounting-change-could-send- profits-and-stock-to-moon-2009-9). Assume that you are Peter Oppenheimer, Apple's CFO. Draft a short response to counter the suggestions that your company is more interested in reporting higher profits than in good accounting. I -39- APPLE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except share amounts which are reflected in thousands and per share amounts) Netmles :: Cost of sales .tt':t]Gr.osgrn r,l expenses: Operating ' ::fri ,:::::-=r ' 39,54r ',i'i,,..,-' I "' iini"b, ,i ',.,,,,- ,, geneial ;d 25,68#:, ril;?$ nesearih and development ;d*inis#d"e *oid eratin$'axpC-*ses.., i . : ',;,t,::tl::' .s-qffi, ,$..E :r,ilLil?i22 :r,iiiti'5,i191. 24,294 25,683 t,t'[i 5,517 =,'l;e= 4,149 739 .,.::,,5j482 .lirir.4;870 r1,740 8_;327 - 18,385 Operating income 2008 2009 2010 Three Qiker,.inCameand'@&se i',.-.,,,,, Income before prov-ision for income taxes Provision for income taxes Net income $_14,013 Eamings per common share: ,, 155 i8,540 ,,,,i,,,,4ru , 1. :L.1 'l Basic $ Diluted .$1t., 1s.41 ,15 .= -':i3,26 12,066 ,.i,,.,,.,.. $;S3i q_8,235 3,',761 - ::.:67fi ,$ $ 9.22 $ 8,947 21828 6,119 6.94 g,-:.]$.'9.-,,.. .,,,'C?t Shares used in computing earnings per share: Basic Diluted ':.9.6 +61 924,7L2 See accompanying Notes to Consolidated Financial Statements. 893,0i6 907,005 881;592 902,139 .I 4r- APPLE INC. CONSOLIDATED BALANCE SIIEETS (In millions, except share amounts) Septep,ber 25, rtl;' . i, Current assets: .=.ii1i.ie.- t'. ,, ..=aca r.06 i1...:=-.. Sigf31 +,tL* "-,j,,,..t'l ,it'=r,"= tt#l' ,,,,,.'t="';r1g : el$: i ,, o,thdieurre t,636 4,414 t:',',,'::i:::t't 3;447 tas t-'= 4r,6',78 Total current assets Lo-ng,tdffi-**Ournb*.s ltiei= t,,ii =... I :.. .. .,-..,,, Property, plant and eqqlpmqrt,.net Good#i1f ,,,ll ,l'.. ,,, ': i "=.il.r;-r= : Acquired intangible assets, net Other assets Total assets ,= 25,39L 4,768 , =";ilil ;:.. ACcountip*rtble ., ,5:'..;.,:.,, , Accrued expenses r, r i,', -ir:ti'ilriiriii::=:l:lri $.iiiili.:=.=.=.1, 18,201 ,,,,..,, .. , ai;?63 ; : il,r:: r' iii;:i 3136,1 455 1.35 1,696 :..,tr'44i 31,555 : i,li;l ig;2$ 2,954 , 11.;:.:...1..266' 247 342 ,,:i,l:rtlii, $_?5,183 r,f nrr S Current liabilities: i, '.;5,510 1,051 : Deferred tax assets Vendor non-trade receivables *#w 14,359 Short-terrn marketable securities Accoults receivable; less allowances of$55 and $52, eSpecit 'lt. 1....,.-...,.,,:.l', Irrventories , "?910 t, i ili ;;::....+;-0ri n . $___flr91 ,SEARffiOTDER$'.rOulrY; " I ",,, $;r;:1,,:: Deferred revenue Total current liabilities s lab0ls 2,;P84 2',053 24,',|22 11,506 .-,,1,...u139 i 5,531 O&er non-current liabilities 1 3,852 5,723 , '-iifi-=s3 3,502 ','15;86i . Commitnents and contingencies Shareholders' equity: Common stock, no par value; 1,800,000,000 shares authorized; 9 1 5,970,050 and 899,805,500 shares issued and outstanding, respectively ', i ". r:',,- -'.,&ainedearnings Accumulated other comprehensive :,': l (loss)/income Total shareholders' equitY Total liabilities and shareholders' equity See accompanying Notes ,-.,: ' .. $ 8,210 10,668 ,.371169 23, 53 (46) 77 ,,, 31,640 4'lJgI 75,183 to Consolidated Financial Statements. $ 47,501 - -l-l '-l:ll 3s=9*esq51 3Es=l*:n*sl3l $-=*rS1BEseter ..#ol*l =Esl$lI l-l 13l- : o qo c.t'Q\\ \\O,:d c.llO aal \\ol + b Esl I - =I i(\\ V'v,',:' FEI OEI (J-l : flEl= 3-o o.' $o o;ft; = lrl * EElil G - 'e *--' - 3-lfil v go lfrl i o o.,,,.,-,o s'l olull ll ,E a lz) h ^= AY Cti5 A'1 \\90 tio)o Uor, H()r EE t4*tr 29 ;:E u,r 4VE j. cnOrOlf-l rO - $ c.t t-l tr' *l-lt-l :llS cll =l 5l:l OOOO l*l F--toolol (> O F.-l Fil ,- r "l:!l OOOO \\OcqO\\looll F- o F*l \\oll 6-) r- ool\\oll o l;ll a oo l-l (E E v-a O0oO\\Ol\\Ol @o le.tl .lRlo ril lsl l$l #lsl H ,ra te OOOo ';-llll OOol\\Ol cb lol i lrl lsl o = d o O o o Fid o A -d^ o tr tr - e 5 v ia,,e 5 +{ F >g aio o G >-g ed= O I E E cE U tr oE ijr qts EJ= -: +-{ E;g BE=! 99EHg BI=E E39 ;I:E ;E= X$r EEF,i={iu=r EsF,Es*[:r Etti=CIX $I$EEE +:r EEt + $IIEEEE e $IIEEee# oH;E5 Ep.* .6EE 6Ei 5E':E a = Ei".EEEjFIS F.5 : * E EEa[EEEEE g E g'2655 -'+9!666r s56 E E E;gg$=EEE E EEggg=EEE t i,EsSEE #sSSE ;8#E EE E- i z60 x g o () (.) a - APPLE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Three years ended September 25' 2010 ., , 2010 , tUeVex;:t"t""tfli"'i;;:::l"r I4;0,X'3.' Si':1'1 v5"- 9..=..9jl5* ;::::r8#s= 1:.1-$J$'.' Adjustments to reconcile net income to cash generated by operating activities: "'1,0171 770 879 Stock-based compensation expense .t,449,' , , 1,040', Accounts receivable, net lnventories Vendor non-trade receivables Other current assets Other assets Accounts payable Deferred revenue i,'''-',' (2,142) 586 {1,514} =,163. ,a.92.: a::::aa sil 1,217 '::;ffi&a: (57,793) 24,93U", l'..':.' 9,596 (46,724) "19,'79_* 10,888 21,788 (181' =,',' Paymentsfo:.acquisitionof intangib1e.,1s1ets., Other Proceeds from issuance of common stock :="' ofiG,*.o*.stoCt:,,bcsea, tax Taxes paid related to net share settlement of equity awards compensa , """' 0 .,,, (i,1+l) (1 16) .",. {2} '' ,'t=.. Financing activities: (101) =, (638) ..-.(2,aos) (13,854) Cash used in investing activities See accompanying Notes 289 1,.....39t718 )- 4 (3,84j' :l Payments made in connection with business acquisitions, net of cash acquired .,, ,,,: f-a qSnii fu;eeq*siiiorrnf prryerfy;'pffimd g.quipqent Supplemental cash flow disclosure: 110 = (e02) (120) 18,595 (78s) , (163), 54 (2,718) 6ila7:, Cash generated by financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents, end ofthe year 576 t'398 22 (e3e) '"' {se6i Investing activities: Purchases of marketable securities Proceeds from maturities of marketable securities Proceeds from sales of marketable securities Purchases of otler long-term investments b i il' Cash generated by operating activities .','iicess .t 26 Loss on dispositiol of property, plant and equipmenl- Change#,opb.ra&gas$ei;fiA*ati*iesi-..,,--'- ,,'4$6i , ,,,i,i".7i-+,' -, .l 9t2 i,,,751',, ' ,,1t -25.11 ,,-,, 1' $ 2,6et: to Consolidated Financial Statements. 475 270 (82) 5 (6,612) ,:,,,a'l:'a 5,998 $.1.I fl4) -w) (406) " (6e) i,rg1 , ',.,,.' , (38): (220) (1,091) (108) ' . (10) (8,189) ;: , ::.:. 483 ist.. (124) a , 5r? $J,1,875' ,$ '$ (22,965) .r.11,8$4 4,439 '&"'.+.267 I 43- APPLE INC. Note L - Summary of Sisnificant Accounting Policies (excerpts) Revenue Recognition Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, peripherals, and sirvice and support contacts. The Companyrecognizes revenue when persuasive evidence of an anangement exists, delivery hiJoccurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company's product sales, these criteria axe 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 recognizes revenue frorrthe sale of hardware products (e.g., Macs, iPhones, iPads, iPods and peripherals), software bundled with hardware that is essential to the functionality of the hardware, and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following tpes of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware. The Company sells software andperipheral products obtained from other companies. The Company generally establishei iti own pricing and retains related inventory rislg is the primary obligor in sales transactions with its customers, and assgmes the oedit risk for amormts billed to its customers. Accordingly, the Company generally recognizes revenue for the sale of products obtained from other companies based on the gross amount billed. For certain sales made through the iTunes Store, the Company is not the primary obligor to users of the software, and third-parfy developers determine the selling price of their software. Therefore, the Company accounts for such sales on a net basis by recognizing only the commission it retains from each sale and including that commission in net sales in the Consolidated Statements of Operations. The portion of the sales price paid by users that is remitted by the Company to third-party developers is not reflected in the Company's Consolidated Statement of Operations' The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts that have been deferred related to embedded unspecified and specified software upgrades rights. The Company sells gift cards and records deferred revenue upon the sale ofthe card, '*tich is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized ratably over the service coverage periods. Revenue Recognition for Arrangements with Multiple Deliverables For multi-element arrangements that include tangible products that contain software that is essential to the tangible product's functionality and rmdelivered software elements, the Company allocates revenue to all deliverables based -on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specif,rc objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE'), and (iii) best estimate of the selling price ("ESP"). VSOE generallyexiits only when the Company sells the deliverable separately and is the price actually charged by the -o-p*y for that deliverable. ESPs reflect the Company's best estimates of what the selling prices of elements would be if they were sold regulady on a stand-alone basis. As described in more detail below, for all past and current sales of iPhone, iPad, Apple TV and for sales of iPod touch beginning in June 2010, the Company has indicated it may from time-to-time provide future unspecified software upgrades and features free of charge to customers. The Company has identified two deliverables in urr-g"-"rir involving the sale of these devices. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with the purchase of iPhone, iPad iPod touch and Apple TV to receive on a when-and-if-available basis, future unspecified software upgrades and features relating to the product's essential software. The Company has allocated revenue between these two deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for the two deliverables, the allocation of revenue has been based on the Company's ESPs. Amounts allocated to the delivered hardware and the related essential software are recognized at the time of sale. I 4- Amounts allocated to the embedded unspecified software upgrade rights are deferred and recognized on a straightline basis over 24-months. Cost of sales, including estimated warrant;r 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 factlhat unspecified upgrade rights do not obligate the Company to provide upgrades at a particular time or at all, and do not specifu 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 April2010, 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 timeto-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 ('TASB") 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 rehospective 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 ofcharge. 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 sipificant 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 fust 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 lslsfing 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. I "45- 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) assets: Current - -- September 26,2009 Cish and cash equivalenls SiCcuritie$ ,, ,,,.Sh&+ $ ''-,,',,.... .:.' .-fu+etltorie-S=.r,:",,1,, ,asscts . i' "" ,, ,.1,,,,,,,.. li=-" , .-;,,:;, =, ' ,, - "' ''fuarutdexpenses':=,..:1 : , qp{t 2 9s4 zo6 '20$ , 1,250 ,;:,t;,,:,:,,:',,ZrZ.Sbl 5,601 1',852 2,053 --,11,506 ,' '.'r,, (10,158) 26,019 Total liabilities 47,501 , (3,632) 4,485 -':': 247 '2;0tr1 'r1 640"' (6,350) $ s 5,601 $-$ .:,_4,76 --i;.j1e --- 10,305 (8,252) l9,zl82 ,- {::1,7:1'6} .. , fiabilities non-current 0,528 r 247 ,1:: 31,555 2,954 3,65I $ 53,851 $ I Q4reinon:a#eniliabilidbs,=r:-::::::'':' Deferred revenue (3#4),rii.i:.= r 10,529 ,. '"':: 455 1,135 (4,710) 36,265 Deferred revenue ='Tdal rli:" -.' :: .-:,,, : 5,263 18,201 (966) -'6,884 .,. r: .,,:,, i.Li::i.]:.r' Accounts payable li"=fj : Total assets Currentli$ilffi: $ - 3,361 2,10I Acquired intangible assets, net Other assets .= $ 3,361 = "'','.-'1,,,,.1.1,; Deferred tax assets :::. ,, ,,r.- 'r:"'6*1gr,.qryf Total current assets Long-term marketable securities Property- plant and equiPment, net 5,263 ,.:..$20,f: ACcounts receivable, less allowance of $52 .-.GOOd11{ll .= i Renorted Adiustments As Amended ,A.s 853 3;50I 15,861 Commitments and contin genci es Shareholders' equity: eo@e'stoek, nggar v afu e ; 1, 800, 000,:000 shme1 . $ , 53,851 $ Net sales Cost of sales - 23,397 2,286 3.140 4,082 r expenses: :'':Operating Re$earch.ant,dgveloplneni,'"''- '.11;333 Selling, general and administrative 4,149 Total operating expenses 5,482 ,P,io*isioaft iucorne taies,'. Net income -- ,,36,53J,-,$ ,.. 6,368'.$'' 429As 25,683 Cross margin Operating income Other income and expense Income before provision for income taxes $, $'.,, .{6,350) -- '7,658 t .+ 4,082 17,222 ,l'1,333 " ,-l l'. 11,740 7,984 4,082 2,280 1,551 $ 5,704 $ 2,531 $ 12,066 : ----- ,.,32,6 '::,"t:ttgA6 3,831 8,235 ,.'7'1 3r,640 3,808 Fiscal Year Ended Seotember 26.2009 As Reoorted Adiustments As Amended -- , ,, ' (7.I 27,832 Total liabilities and shareholders' equity 23,353 3,815 '84 Total shareholders' equitY Consolidated Statements of Operations 1in millions) ,8,210 8,210 19,538 authoiizcdl,899,805;500,shares,issued and oulstanding Retained earnings r: Accumulated othef comprehensive income .47,501