Micah Nystedt, Matthew Cortez

Project 2

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

Apple’s Income Statement is presented in multi-step format. It includes Gross margin, Operating
expenses, Other income/(expense), and Income before provision for income taxes, all of which
are steps on the multi-step format.

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 reports other comprehensive income in a separate statement, and it includes Change in
foreign currency translation, Change in unrealized gains/losses on derivative instruments, and
Change in unrealized gains/losses on marketable debt securities

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

“Depreciation on property, plant and equipment is recognized on a straight-line basis over the
estimated useful lives of the assets, which for buildings is the lesser of 40 years or the
remaining life of the building; between one and five years for machinery and equipment,
including product tooling and manufacturing process equipment; and the shorter of lease term
or useful life for leasehold improvements.”

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 recognizes revenue “at the amount to which it expects to be entitled when control of the
products or services is transferred to its customers.” For products, transfer of control occurs
when Apple has a right to payment and the legal title and significant risk/reward of ownership
has been transferred to the customer (most often when the product is shipped), for services it
occurs when the service is actually delivered. Furthermore, Apple records reduction to net sales
related to “future product returns, price protection, and other customer incentive programs.” For
long-term service arrangements, the company does not have a right to bill for the undelivered
services. Cost of sales includes estimated warranty costs and are recognized at time of sale.
Because Apple’s products and services are straightforward, and their revenue recognition
principles are clearly defined, we see no specific issues that need to be addressed given their
business model.
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.

2018: 15.862%

2019: -2.04%

2020: 5.51%

The change in sales can be explained through product releases set by Apple. In 2018, Apple
released the new version of the MacBook Air, Mac mini, and introduced the iPad Pro, marketing
it towards those in the professional and educational areas. Additionally, continued sales from
previous product launches contribute to the net sales. For 2018, the continued sales from the
iPhone X’s release greatly affected this change as product sales for this year are higher than
both 2019 and 2020. Additionally, it can be seen that the sales amount for Apple’s services
category have steadily increased over this 3-year period. This can be explained through Apple’s
increasing emphasis on and development of their services, such as Apple Music, Apple TV, and
a new service package marketed as Apple One.

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.

PM18: 22.41%

PM19: 21.24%

PM20: 20.91%

Line Item 2018 2019 2020

Product Revenue 85.03% 82.21% 80.41%
Service Revenue 14.97% 17.79% 19.59%
Total Net Sales 100% 100% 100%
COGS 61.66% 62.18% 61.77%
Gross Margin 38.34% 37.82% 38.23%
R&D Expense 5.36% 6.23% 6.83%
SG&A Expense 6.29% 7.01% 7.25%
Other
Income/(Exp.) 0.75% 0.69% 0.29%
Income Taxes 5.03% 4.03% 3.53%
Net Income 22.41% 21.41% 20.91%
 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.

2018: 23.12%

2019: -7.18%

2020: 3.9%

The percent change in revenue is larger than the percent change in net income for both
2019 and 2020. This signifies that as revenue goes up, expenses go up at a faster rate

c. Analyze and discuss your findings.

The COGS remains relatively consistent across the years, with the biggest changes
come from R&D expense and SG&A expense. Additionally, other income/expense is
highly variable, however its contribution to Net Income is minimal. As they progress, it
can be seen that the percentage of services sold is steadily increasing, indicating that
they are beginning to sell and distribute more services to consumers. Additionally, it can
be seen that the product percentage is decreasing over time, corresponding to the
increase in service sales.

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.

Current Ratio = Current Assets/Current Liabilities

C/R19: 1.54

C/R20: 1.36

D/E19: 2.74

D/E20: 3.96

Apple’s Current Assets (specifically cash, cash equivalents, and A/R) decreased from 2019 to
2020, while Current Liabilities remained the same. This led to a decrease in C/R, however, it is
still above 1, meaning they have more than enough assets to pay off their liabilities. Their D/E
ratio increased from 2019 to 2020, primarily as a result of a decrease in Retained Earnings. This
decrease occurred because Apple repurchased over 72B shares of common stock.

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’s C/R is 2.52, and their D/E is 1.55 for 2020. This means Microsoft has more Assets
compared to Liabilities than Apple, and they have also used less leverage than Apple.
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