Financial Analysis: Apple Inc - Term Paper Example

number Publish Financial Analysis: Apple Inc. Introduction The fiscal situation of companies is expounded through the use of financial instruments such as balance sheets and income statements. Various forms of financial instruments are utilised in order to configure how shifts in the company’s assets and liabilities would affect the company’s accounts (Helfert 40). A number of different standards are available and in use throughout the globe but the central contention remains the same. This report will look into the financial instruments used by Apple Inc. through the use of its reported 10 – K form for the fiscal year 2012 and how various journal entries tend to affect the earning per share (EPS) and the net income. Various journal entries will be administered to the 10 – K based financial instruments and their effects will be discussed. Journal Entries The financial statement of Apple Inc. for the year 2012 in the form of a 10 – K form is being used for analysis (Apple Inc. 43-44). The consolidated balance sheet for Apple Inc. is presented below and will be referred to when journal entries are being discussed. 29-Sep-12 ASSETS Current Assets: Cash and cash equivalents $ 10,746 Short-term marketable securities 18,383 Accounts receivable, less allowance of $98 and $53, respectively 10,930 Inventories 791 Deferred tax assets 2,583 Vendor non-trade receivables 7,762 Other current assets 6,458 Total current assets 57,653 Long-term marketable securities 92,122 Property, plant and equipment net 15,452 Goodwill 1,135 Acquired intangible assets, net 4,224 Other assets 5,478 Total assets 176,064 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 21,175 Accrued expenses 11,414 Deferred revenue 5,953 Total current liabilities 38,542 Deferred revenue non-current 2,648 Other non-current liabilities 16,664 Total liabilities 57,854 Commitments and contingencies Shareholder's equity: Common stock no par value, 1,800,000 shares authorized; 939,208 and 929,277 shares issued and outstanding respectively 16,422 Retained earnings 101,289 Accumulated other comprehensive income 499 Total shareholder's equity 118,210 Total liabilities and shareholders' equity 176,064 Issuance of Shares The first journal entry concerns the issuance of common stock by Apple Inc. It is supposed that Apple Inc. issues another million shares of common stock where each share is valued at $5 each. It is also assumed that all issued shares are bought off by the general public at the issuance price of $5 per share. This leads to a revenue generation of five million USD in the shape of cash. Only two accounts will be affected with the sale of common stock. The assets tab is increased as cash is increased by five million USD. The equilibrium of the balance sheet is restored when the released common stock is registered as the stockholders’ equity with an increase of a million shares. The net income of Apple Inc. will register no increase since any new income sources have not been added by sale of common stock. In contrast, the EPS of Apple Inc. will be affected as the number of shares has gone up to 2.8 million while the earnings have remained the same. The previous earning level of $41,733 million has remained the same while the number of shares has increased by one million. Consequently, the EPS would decrease from the current $44.64 (basic) to $21.57 per share (basic). The journal entries are shown in the table below: Cash and cash equivalent 5 Common stock no par value, 2,800,000 shares authorized; 1,939,208 and 929,277 shares issued and outstanding respectively 5 Acquisition of Equipment It is supposed that Apple Inc. acquires equipment worth one hundred million dollars. In addition, Apple Inc. does not pay the entire amount upfront but pays 25 million dollars in the form of cash while it defers the payment of 75 million dollars using signed notes. In such a case, the equipment, which is considered an asset, is delivered immediately to Apple Inc. and hence the total asset base of the company increases accordingly with immediate effect. On the other hand, the notes that are signed tend to act as liabilities of Apple Inc. As a consequence, the accounts payable tends to increase by the amount of the signed notes. The payment for the equipment has been made in the form of liquid cash which will mean that the cash sections of assets will decrease in line with the overall cash payments. The current situation represents a compound entry condition. The journal entries for the current situation are depicted in the table below: Property, plant and equipment net 100 Cash and cash equivalent 25 Accounts payable 75 As a result of the equipment acquisition, the net income of the company does not change at all. The acquisition of equipment by the company does not affect the sales and does not tend to increase or decrease the overall net income. In a similar manner, the acquisition of equipment by Apple Inc. has not effect on EPS since the earning of Apple Inc. remains unaffected. Although cash has been spent by Apple Inc. in acquiring equipment but this cash stream does not figure in the earnings of the company and hence the overall earnings of Apple Inc. remain unaffected. Consequently, Apple Inc.’s EPS does not change as a result of the acquisition of equipment. Provision of Services It is supposed that Apple Inc. provides various kinds of services to different clients that are valued at a total of 40 million dollars. The clients receiving the services are supposed to have been billed for the services but there has been no payment as yet from the client’s end. It is expected that the client will pay up for the services within the next few weeks but there has been no immediate payment to the company as yet. In this case, revenue has been earned by Apple Inc. but this revenue cannot be entered into the accounts as revenue since the cash has not been received as yet. Instead, this revenue will find place under the receivable accounts section. The generated revenue will only be entered into the company’s revenue tab when the actual cash is received. This practice lies in line with the revenue recognition principle and is considered a standard practice (Needles, Powers and Crosson 373). The journal entries for the current situation are depicted in the table below: Accounts receivable, less allowance of $98 and $53, respectively 40 Service based revenue 40 As a result of service provision, the net income of the company has not increased as yet but will increase in the future. For the current point in time, the net income of the company remains unchanged. On the other hand, the EPS of the company remains unaffected for the same reason that the net income remains unaffected. Overall, there is no change in either net income or EPS. Salary Payments It is supposed that Apple Inc. pays off the salaries of its employees valued at 10 million dollars. The employees are given cash payments in the form of salaries which are paid off with immediate effect. As a consequence, the payment of salaries would be considered as a regular expense of the company for the period when the 10 – K statement was created. Since the expense has been paid for by Apple Inc., the transaction would be recorded immediately on the account books. Two accounts would be affected being the Salaries tab in the expense section and the cash tab. The journal entries for the current situation are depicted in the table below: Salaries 10 Cash and cash equivalent 10 Since salaries are considered to be a company expense like other expenses, it affects the net income of the company as well as the EPS. The net income of the company sees a decrease of 10 million dollars on account of paid salaries. In a similar manner, the EPS of Apple Inc. would also be reduced though the reduction would be low given the small amount of expense represented by salaries when compared to the amount of earnings. Conclusion Four different scenarios were presented to highlight changes in financial instruments for Apple Inc. for 2012. All scenarios were investigated as journal entries and their effects on net income and EPS were looked into too. Results showed that net income and EPS is only affected by journal entries that affect the company’s received income directly. Additionally, the company’s books remain unaffected as long as actual cash has not been transferred for payable or receivable accounts. Suggested Area of Research It needs to be seen how the net income and the EPS position would be affected as the company’s fiscal base is expanded through the sale of common stock that represents a large part of the company’s overall stock. Moreover, the reinvestment of cash generated from such stock sales and its affect on income need to be investigated too. Works Cited Apple Inc. “Form 10-K: ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.” 2012. Apple Inc. 8 October 2013 . Helfert, Erich A. Financial Analysis - Tools and Techniques - A Guide for Managers. New York: McGraw-Hill, 2001. Print. Needles, Belverd E., Marian Powers and Susan V. Crosson. Financial and Managerial Accounting. New York: Cengage Learning, 2010. Print. Read More