Ryan Silver

Project 2, Apple Inc. 10-K

1. Describe the format of the income statement (single-step, multi-step, hybrid) and
identify why you describe it that way.

Apple utilizes a multi-step income statement. This is a multi-step income statement because
Apple clearly separates their operating income/expenses from non-operating income/expenses
and include all of the appropriate subtotals, most importantly operating income. The gross
margin is also determined before including operating expenses which helps to distinguish
product costs from operational G&A costs.

2. What items are included as part of the company’s other comprehensive income?
Does the company report comprehensive income as a continuation of the income
statement or as a separate statement?

Apple includes the change in foreign currency translation and change in fair value of derivatives
with an adjustment for net gains or losses realized and included in net income (all net of tax) for
their total change in derivative instruments . Apple includes the change in fair value of
marketable debt securities with an adjustment for net gains/losses and included in net income
(all of net of tax) for their total change in marketable debt securities. These two are summed
together to calculate Apple’s OCI of 42,000,000. This is reported on a separate statement named
the Consolidated Statements of Comprehensive Income.

3. Utilize the footnote addressing significant accounting policies to identify the method
used to depreciate PP&E.

Apple recognizes depreciation on their PP&E on a straight-line basis over the estimated useful
life of their assets. More specifically, it specifies that for buildings it is the lesser of 40 years or
the remaining life, for machinery and equipment it is between 1 and 5 years, and capitalized
costs related to internal-use software are amortized on the straight-line basis which range from 3
to 7 years.

4. Think about the business model utilized by your selected company (how do they sell
their products or services to customers). Utilize the footnote addressing significant
accounting policies to summarize how they recognize revenue and any specific issues
related to revenue recognition that they need to consider given their business model.
Examples could include selling on credit, receiving payments in advance, sales
returns, gift cards, collectability concerns, etc.

Apple sells a multitude of products and services via physical and online stores. As they are a
publicly traded company, they abide by GAAP and recognize revenue on the accrual method,
recognizing revenue when they have satisfied the performance obligation. Apple recognizes
revenue on the sale of iPhone, Mac, iPad and certain other products through three separate
performance obligations. These distinctive performance obligations are allocated on their relative
stand-alone selling prices. The first obligation, making up the majority of the sales price, is the
physical hardware and other software delivered at the sale. The second obligation is the
customer’s right to receive related bundled services like iCloud, Siri and Maps. Finally, the third
obligation is the customer’s right to receive upgrades to their software. It is important to note that
costs related to the hardware and bundled software, as well as estimated warranty costs, are
recognized at the time of the sale. The rest of these costs are recognized as they are incurred over
the obligatory periods.

5. Evaluate the trend in sales/revenue over the past three years. Calculate the year
over year percentage change in revenue. Discuss what you believe is driving the
change in sales considering what you know about the company, the industry, and
the overall economic conditions.

Apple was doing extremely well in 2018, took a dip in sales in 2019, then increased their sales
again in 2020. From 2018 to 2019, Apple sales decreased by 2.04%. From 2019-2020, Apple
sales increased by 5.51%. While sales did decrease going into 2019, then increase into 2020,
Apple sales in 2020 were 3.36% higher than sales in 2018. Due to the onset of COVID-19, Apple
factories in China were forced to halt production of all Apple products, and this created a supply
issue in the final quarters of 2019. Not only did people not have enough discretionary income to
buy expensive Apple products, but there was also not a lot of available product. Once 2020
started, factories started to get their production back in order and Apple products were stocked
up. Also, Apple released the super popular iPhone 12 along with new MacBook Pros in 2020
which saw great success in sales.

6. Evaluate the trend in net income over the past three years.
a. Calculate profit margin (net income as a percent of revenue). Perform
vertical analysis on key items (calculating each item as a percentage of
revenue) of the income statement to help identify reasons for the change in
profit margin rates between years.
2018
Sales 265595 100%
COGS 163756 62%
Gross Margin 101839 38%
G&A Exp. 16705 6%
Operating Income 70898 27%
Net Income 59531 22%

2019
Sales 260174 100%
COGS 161782 62%
Gross Margin 98392 38%
G&A Exp. 18245 7%
Operating Income 63930 25%
Net Income 55256 21%

2020
Sales 274515 100%
COGS 169559 62%
Gross Margin 104956 38%
G&A Exp. 19916 7%
Operating Income 66288 24%
Net Income 57411 21%
Apple had a profit margin of 22%, 21%, and 21% in 2018, 2019, and 2020, respectively. Their
COGS and Gross Margin percentage were the same year after year; however, G&A expenses
increased while operating income decreased year after year.

b. Calculate the year over year percentage change in net income. Compare the
percentage change in revenue from question #5 to the percentage change in
net income.

Apple had a decrease in net income of 7.18% from 2018 to 2019. Apple had an increase in net
income of 3.90% from 2019 to 2020. Overall, Apple had a decrease in net income of 3.56%
comparing 2018 to 2020. Compared to the change in revenue in 2018-2019, a 2.04% decrease in
revenue resulted in a 7.18% change in net income. In 2019-2020, a 5.51% increase in revenue
resulted in a 3.9% increase in net income. Comparing 2018-2020, the 3.36% increase in revenue
resulted in a 3.56% increase in net income

c. Analyze and discuss your findings.

It is seen on a year-by-year basis that even the slightest decreases of sales will have an
exponentially larger effect on net income. The opposite goes for an increase in sales. It is seen
that in increase in sales for Apple means a slight increase in net income (lower than sales %
increase). It is seen that the changes in net income are affected by changes in sales, but overall
they are more affected by operating expenses. As these G&A expenses increase significantly,
Apple’s bottom line will not increase exponentially with rises in sales. Overall these expenses
reduce their operating income and reduce their profit margin.

7. Compute your company’s current ratio and debt to equity ratio for both years
presented in the balance sheet. Analyze and discuss what these ratios tell you about
the company.

Apple had a current ratio of 1.54 in 2019 and 1.36 in 2020. Apple had a debt to equity ratio of
2.74 in 2019 and 3.95 in 2020. Apple’s current ratios show that they have the liquidity to remain
solvent for the time being. While their current ratio decreased in 2020, all this means is that
Apple does not have as much cash available. They are still over a value of 1.0, and Apple is a
large company which means investors should have no cause for concern. On the debt to equity
side, Apple has a large amount of liabilities in comparison to their shareholders’ equity. While
this may cause concern as investors may think Apple is overleveraged or in a risky position,
Apple simply must have a lot of liabilities as they are an enormous company. After all, it is
cheaper to finance through debt than it is through equity. Higher debt to equity ratios usually
mean that a company is in a riskier, more leveraged position.

8. Select a competitor and calculate current ratio and profit margin for the
competitor’s most recent year. Compare to your calculations for your company.
Analyze and discuss.
Microsoft had a current ratio of 2.52 and a profit margin of 30.96% in 2020 while Apple had a
current ratio of 1.36 and a profit margin of 20.91%. Microsoft had both a higher current ratio and
a higher profit margin than Apple in 2020. Based purely on this analysis, it appears that
Microsoft is both more solvent and more profitable than Apple. However, these ratios and
percentages do not reflect total net income, the distribution of assets, or a companies long term
investment strategies. Apple has significantly more cash and more net income, but they also have
more liabilities and expenses. All in all, these ratios and percentages can be used to compare
companies on specific attributes, like liquidity or profitability, but other metrics on the balance
sheet and income statement must be used to compare companies accurately.

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