GROUP

2 ACG 6176

Apple Inc. Case Analysis

Part 1
Aguilar, Christian Delaosa, Dominic Garcia, Anthony Mark, Joshea Sanchez, Anais 9/19/2011

Table of Contents

Summary of Financial and Operational Characteristics....2 Economic Conditions within the Industry.4 SWOT Analysis.........5 Major Accounting Principles.8 Adjustments of Financial Statements...14 Financial Analysis15 Cash Flow Analysis.19 Horizontal Analysis..23 Vertical Analysis..24 Financial Ratios25 References26

Apple Inc. Financial and operational characteristics of the industry and the key drivers of profitability. Interesting enough, Apple expanded in personal computers and gained recognition for it. However, as of late, the company has expanded to other areas of the technology sector, which has slightly altered whom they compete against; notably music and then communications. Moreover, the advent of the IPod, started a revolution; not only did they become the standard for MP3s in hardware, they revolutionized the market place for a remote yet easily accessible music store (i.e. ITunes). In conjunction with its strategy, the Company continues to build and host a robust platform for the discovery and delivery of third-party digital content and applications through the iTunes Store. The iTunes Store includes the App Store and iBookstore, which allow customers to discover and download third-party applications and books through either a Mac or Windows-based computer or wirelessly through an iPhone, iPad or iPod touch. (SEC). Furthermore, Apple is a market leader because they focus on innovation, design, and quality. Therefore, due to the composition of its sales mix, Apple Inc is considered a technology company, and by its nature, it is in a very competitive industrial environment. The competiveness is further extended since the Company is involved in world markets, which experience technological advances at an accelerated pace. As such, the industry is primarily driven by innovation as well the ability to offer an array of products. If a participant in this industry is unable to keep up with the technological changes, not only can profitability can be adversely affected but also, the company could be run out of business.

In addition, the companies involved in this type of industry must be able to introduce and deliver their new product expeditiously. Otherwise, the company can run the risk of having another company introduce the same product preemptively, granting them greater market share. Also, the technology industry in which the Company is involved in is driven by the ability to reduce costs in order to pass it on to customers. However, in this aspect precisely, Apple differentiates itself from its competitors. Apple offers high quality and aesthetically designed products, which are sold at a premium. Despite the heightened quality offered by Apple, the lowcost products offered by its competitors are considered the norm in the industry. Therefore, the industry seeks profitability by offering affordable products at a larger scale, while Apple offers relatively more expensive products at much smaller scale. Moreover, an operational characteristic of the industry is having a Chief Executive Officer (CEO) that contributes talent. In Apples case, they were fortunate to have Steve Jobs as their CEO, who is considered the brain behind the company. Additionally, he was a main driver of the company because he instituted his vision in the company. He transitioned the company from being just a computer company to a diversified technological company. Unfortunately, in August of 2011, Steve Jobs resigned as CEO of Apple, leaving several unanswered questions such as: with the resignation of Jobs, how will the company perform in the future? What is the probability of maintaining the market leader position Apple holds in an industry that demands constant innovation? Jobs resignation is of great concern considering that in the companys 2010 10-ks specifically noted that The Companys success depends largely on the continued service and availability of key personnel. (SEC) When this statement was made, it was addressing not just key personnel, but specifically, Steve Jobs as its CEO. Jobs is an incredibly talented individual

that has allowed Apple to compete in Global Markets at an impressive rate of profitability. Furthermore, the 2010 10-k further explain that there is no assurance of being capable of maintaining such key personnel. (SEC) In an effort to calm uneasiness in investors and Apple-users, when Steve Jobs resigned, he personally recommended Tim Cook to be named CEO. Cook was previously Apples Chief Operating Officer. As COO, Cook was previously responsible for all of the companys worldwide sales and operations, including end-to-end management of Apples supply chain, sales activities, and service and support in all markets and countries. (http://www.apple.com/) Research relevant information about economic conditions and events affecting your company specifically and the industrial environment in general. Given that Apple is involved in Global markets, several economic conditions affect the company. For example, the United States has been experiencing a recession that has directly impacted many countries economies. Consequently, people in the United States as well as abroad, have held back from spending excessively, or rather have been behaving as more prudent spenders. Consequently, demand for technologically advanced products may be diminishing. As such, the products offered by the company could experience a decrease in demand. In addition, the raising costs of energy costs and the tightened credit markets affect the consumers behavior, which could negatively impact the demand of not just the Company but competitors in the industry as well (SEC). Another type of event that could affect the company and the industry is unfavorable weather and/or natural disasters. For example, in the first quarter of 2011, Japan experienced an earthquake and tsunami. This natural disaster devastated several parts of Japan and harmed the economy. In addition, some of Apples suppliers located in Japan were affected by earthquake
4

and tsunami and could not produce the supplies that Apple anticipated. Therefore, if a company is unable to deliver in a timely manner, the company can be adversely affected in the current period as well as future periods.

SWOT Analysis Apple Inc., or simply Apple, is arguably one of the most iconic and successful companies in modern history. Apple has forever transformed the digital landscape by producing a cornucopia of ground breaking digital devices that have come to revolutionize how we do everything from listen to music to use our cell phones. A global Juggernaut, Apple has grown from a small computer company started in 1976 to the amazing global brand we have all come to know and love today. But what strengths has Apple utilized to reach such phenomenal growth? What weaknesses if any, is Apple susceptible to? What opportunities lay ahead for Apple? And finally, what threats lurk on the horizon for Apple? The following is an analysis of Apple, Inc.s strengths, weaknesses, opportunities, and threats (SWOT). Unparalleled innovation, employee experience and knowledge, superb product quality, financial prowess and endless resources, an effective mass marketing strategy , top quality leadership and vision fostered by management, a strong corporate culture, industry differentiation, and a vast global distribution network; these are just a mere fraction of Apples strengths. Considering an entire page could be filled with Apples strengths, it is practical to focus on those factors which have led to its success more than any others. Therefore, it is the competitive advantage Apple has created by crafting consumer electronics that are innovative and beautifully designed, and its ability to create industry differentiation that are among Apples most important strengths.
5

The computing world would not know the personal computer as it does today without Apples first master piece, the Macintosh. Likewise, The MP3 player would not exist today as we know it without the creation of Apples iPod. Not to mention, the smartphone would not be smart without Apples creation of the iPhone. It is the innovation of new products like these that have led to Apple being a dominate player in the consumer electronics industry. Rather than shy away from taking risks on new and untested products, they have embraced research and development of entirely new devices. As one can see from the short but immensely influential items aforementioned, this has been immensely important factor in their success and it has become a major strength. They have managed to become the industry leader when it comes to devices like MP3 players, smart phones, and tablets as they essentially created the market for these devices. The design aesthetic incorporated by Apple into its product line is another major strength of Apple. Starting with the release of the iMac G3 in 1998, which looked like nothing that had come before it to the sleek metallic appearance of its current products, Apple has always been keen to design amazing looking products. This is evident in more recent years when Apple hired visionary designer Jonathan Ive in 1997 to its industrial design team. It is Ive that was responsible for the design of the iPod and iPhone, two of Apples must recognizable and popular devices, which have received wide spread acclaim for its minimal but awe-inspiring looks. This emphasis on design has helped their product line become the most desirable electronic devices on the market and have contributed to its growth over the years. Another major strength of Apple is its ability to differentiate itself in a market that is saturated with competitors. They have been apple to do so with catchy and clever advertising that brands Apple as not your typical corporate company. This has given the public the perception
6

that their products are superior when it comes to such areas as computer graphics, music recording and manipulation, and video editing. Also, they have successfully produced their on operating system and software linking all of their products with one another. For example, Apple computers are currently running the OS Lion X, which is arguably, the only major competitor to the Windows operating system. They have used this fact to their advantage and have branded their OS as more user friendly and safer as it is less susceptible to computer viruses. This differentiation strategy, along with their innovative products and sleek design aesthetic has allowed Apple to consistently outperform its competitors and are therefore major company strengths. Weakness What weaknesses could befall this behemoth? A major development of late is the departure of Steve Jobs, one of Apple Inc.s original founders and its CEO. Steve Jobs has been at the helm of Apple since its inception in 1976 besides a stint from 1985 to 1997 when he was forced out of the company, and has been the major driving force behind what many have dubbed the second golden age of Apple. The importance of Jobs can definitely be viewed as a weakness, considering that his recent departure leaves many wondering if anyone will be able to lead Apple as effectively and continue the recent successes of the company. Another weakness of Apple, when it comes specifically to the iPhone, is their exclusivity. Apple has not provided this extremely popular product on any other service provider besides AT&T and thereby limiting their potential customer base and lessening revenues. This has allowed competitors such as Samsun and HTC to catch up and design smart phones with comparable abilities to the iPhone, and provide these phones to people who were unable to

switch to a different cell phone provider. Apples unwillingness to work with other service providers is a weakness. Another are of China Opportunities Apple has many opportunities on its horizon. With its most recent release of the iPad, it has created an entirely new revenue stream from users who will be downloading songs via iTunes and software on its App Store on their iPad. Also, Apple is at the forefront of new and innovative technologies such as cloud computing with the iCloud and further tapping into new customers with Apple TV. Apple has proven that it can develop entirely new technology and profit handsomely from it and as mentioned is willing to take risks when it comes to such endeavors. Apple can also There are many threats that Apple has to contend with to continue its industry dominance. The foremost of these is the intense competition from such companies as Google, Microsoft, Samsung, ect. Google for instance, has been getting more and more of the mobile phone market share with its Android OS. Additionally, Apple has had increasing problems with lawsuits against Apple claiming patent infringement. Even though these lawsuits may amount to nothing, they are costly and tie up resources.

Major accounting principles and policies Companies such as Apple use specific policies and procedures in an effort to prepare their financial statements in accordance with United States Generally Accepted Accounting Principles (GAAP). The preparations of such statements require management to make estimates and
8

assumptions that influence the amounts reported within the companys financial statements and accompanying footnotes. These estimates and assumptions are based on historical experience and on various other assumptions in which top management believes to be reasonable with respect to current circumstances affecting the company. These policies are in accordance with Apples 10-K report regarding the presentation and preparation of their consolidated financial statements. Furthermore, Apple prepares their consolidated financial statements based on either a 52 or 53-week fiscal period that ends on the last Saturday of September. Historically, Apple has reported sales revenues using the subscription accounting method for products with multiple components and arrangements, including the software and hardware components of the product. Also, Apple provides future unspecified software upgrades and features free of charge to their customers. The iPhone, iPad, iPod, Apple TV are amongst a few examples of product lines that fit this criterion mentioned above. Under this method, revenue and cost of goods sold for these products are deferred, and recognized on a straight-line basis over each products economic life. The deferral of revenue and expenses resulted in Apples earnings to be unfavorable in comparison to their actual earnings amount. However, Apple eliminated the subscription accounting method for accounting for these products, and in the first quarter of 2010 Apple elected a retrospective change with respect to their accounting standards related to revenue recognition for these products. As of June 2010, the new accounting principle required the company to account for the sale of iPhones, iPad, Apple TV, or iPod Touches as two separate pricing components. The first pricing component is the hardware and software thats essential to the functionality of the product delivered at the time of sale. While the second pricing component relates solely to the future unspecified software updates, and features relating to the products essential software. The

company has allocated revenue to these two components using the relative selling pricing method (ESP). Therefore, revenue recognition occurs at the time of sale for the amounts allocated to the hardware and related essential software. While the revenue recognition for the second component of the product encompassing the unspecified software upgrade rights are deferred and recognized on a straight-line basis over 24-month, which is the estimated life of each of these products. Furthermore, all estimated warranty costs associated with the product, are recognized at the time of sale. Moreover, Apple recognizes revenue when persuasive evidence of an arms length transaction exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Apple products containing multiple elements that consist only of software, or software related products, including the sale of upgrades to previously sold software are valued at their fair market value with respect to each element of the product. Thus the fair market value is determined by vendor-specific objective evidence of fair value (VSOE). Apple uses this pricing model only when products are sold separately at a price thats actually charged by the company. Moreover, Apple defers revenue recognition of these products at the point in which they can no longer reasonably determine with certainty the fair market value of any undelivered products. Revenue recognition for these undelivered products will reoccur if either of these three criterias are met: 1) When all accompanying components of the product are delivered to the end customer 2) When services have been performed, or 3) If fair market value can be determined for any remaining undelivered product elements. Apple recognizes revenue in accordance with GAAP regarding the sale of Macs, iPhones, iPads, iPods, peripherals, hardware accompanied with software thats essential to its functionality, and third-party digital content sold on the iTunes Store. Furthermore, revenue

10

recognition regarding the shipment of Apples products occurs at the point of shipment to the customer at which time title and risk of loss have been fully transferred to the buyer. However, revenue recognition regarding online sales to individuals differs from when the products are shipped from the store. With regards to online sales the company does not recognizes revenue until the customer receives the products because the company still retains a portion of the risk of loss on the sale while the product is in transit. Revenue recognition from the selling of software and other secondary products obtained from other companies are based on gross amounts billed, and are treated with the same revenue recognition principles and procedures as if they were Apple products. For instance, Apple establishes its own pricing and retains related inventory risks, and assumes the credit risk for amounts billed to its customers. However, when certain products are sold via the iTunes Store, including the sales of third-party software applications for Apples iOS products, the company does not have ownership of those products. Therefore causing Apple to account for such sales based solely on the commission Apple retains from each sale. Note that the portion of the sales price that has to be paid back to the third-party will not be reflected within Apples consolidated financial statements. Apple records deferred revenue when it sells gift cards at retail, and online stores for the purchase of their products. Therefore, Apple records the deferred revenue at the point of sale of the gift cards, and recognizes revenue upon the point of use of the cards by the end customers. Furthermore, revenue from the AppleCare service contracts are also deferred and recognized over the service coverage periods. Revenue reductions occur as a result of estimated commitments relating to price protection, and for customer incentive programs, which encompasses reseller and end-user rebates, and other sales programs and volume-based

11

incentives. For transactions involving price protection, Apple recognizes revenue net of the estimated amount to be refunded. Furthermore, for customer incentive programs, Apple estimated the cost of these products to be recognized at either the later date at which Apple has offered the product, or has sold the product. Apple leases various equipment and facilities, including retail space, under non-cancelable operating lease agreements. Facility leases are normally no more then 10-years, and generally provide renewal options for terms not exceeding five additional years. Whereas, leases regarding retail space normally are subject to 20-years, which also may contain multi-year renewal options. Furthermore, as of September 25, 2010, Apple had operating lease commitments in the amount of $3.8 billion, which consisted of both facility and retail space leases. Apple does not extensively use off-balance sheet financing within their operations. As indicated within Apples 10-K report, Apple as of September 25, 2010, had outstanding off-balance sheet transactions relating to third-party manufacturing commitments and component purchase commitments in the amount of $8.2 billion. In addition, to the operating lease agreements Apple does not use any other off-balance sheet financing arrangements. Apple has an employee savings plans in which qualifies as a deferred salary arrangement under Section 401(K) of the Internal Revenue Code (IRS). Under this plan employees whom partake in this savings plan are allowed to defer a portion of their per-tax earnings. Apple will match 50% to 100% of each employees contribution to the savings plan, depending on two factors such as: 1) length of service the employee has vested in the company, & 2) Employer contribution cannot exceed a maximum of 6% of the employees eligible earnings. Further analysis based on Apples 10-K report reveals that their matching contributions for 2009 were $59 million.

12

Apple states there inventory using the first-in, first out-method in computing their inventory figures. Apple uses the lower of cost or market method in their computation of inventory, which consists of components and finished goods for all periods. Moreover, Apple accounts for their property, plant, and equipment at their stated cost. Apple depreciates their fixed assets using the straight-line depreciation method over the estimated useful life of the assets. For insistence, for buildings its the lesser of either 30 years or the remaining life of the building and equipment has a five-year useful life. Costs incurred after the preliminary project stages used to develop internal-use software are deferred using the straight-line method over the estimated useful lives of the assets, which can range from three to five years. These principles and estimates regarding depreciation methods have remained consistent in prior years. Bloomberg Businesswek revealed at 6:03 PM Eastern Time on September 16, 2011 how the shares of some top computer companies were mixed at the close of trading. For instance, Apple Inc. rose 1.9% up by $7.54, while Dell, Hewlett Packard, IBM, and Lexmark experienced 0.7%decrease, 1.1%-increase, 1.7%-increase, and 1.3%-decrease respectfully. This analysis illustrates the comparison between Apple and its competitors within its industry. Furthermore, these fluctuations can be further explained by the competitive landscape of the personnel computer industry. This personal computer industry thats driven by frequent product introductions and technological advances thus, causing Apple to expand its market opportunities further regarding their mobile communication and media devices. The commonality amongst Apple Inc and their fellow competitors would be their similar product lines. In addition to our analysis we did not find any major accounting principle differences amongst their competitors with respect to inventory evaluation methods, and revenue recognition principles.

13

In assessing the quality of Apples disclosure and footnotes, we analyzed six key measures in assessing this level of quality: 1) Does Apple provide adequate disclosures to assess their business strategy and their economic consequences? 2) Do the footnotes adequately explain the key accounting policies and assumptions? 3) Does Apple adequately explain their current performance? 4) Does Apple provide quality segment disclosures? & 5) How forthcoming is management with respect to bad news? Based on this analysis, we find Apples disclosures to be both adequate and understanding. Within Apples 10-K report, the company provides a thorough detailed description of their business strategy, potential economic consequences, and their current performance. As mentioned above, we noted that Apple provided ample detail within their footnotes explaining key accounting policies and assumptions. Furthermore, Apple provided a detailed description on their performance by product and geographic segments. In our analysis we concluded that management does disclose scenarios that can lead to a negative effect on their consolidated financial statements and operating results, as well as, disclosing current losses within their financial statements. Adjustments of Financial Statements Based on a review of the Companys financials, we have found that the method used to recognize revenue and the method used to account for pensions are in conformity to industry standards and is in accordance with GAAP. Please refer to the section titled Accounting Principles and Policies for further detail. Currently, Apple treats its leases as operating leases. Unfortunately, sufficient information was not found regarding the useful life of the asset or if ownership would be transferred at the end of the lease. As a result, we are unable to determine if in fact the leases should be reclassified as capital leases. However, it worth noting that if the operating leases would instead be classified as capital leases, certain accounts would be affected
14

in their financials. For instance, assets would increase; however, liabilities would increase as well. Consequently, several ratios would be altered; for instance, return on assets, return on invested capital, capital intensity, debt to equity, debt to capitalization, and cash flow to debt would all be modified if the leases were reclassified as capital leases. An assessment was done between accounts receivable, sales, inventory, and cost of goods sold. Based on our analysis, accounts receivable is accurately correlated to sales. From FYE2009 to FYE2010, sales increased by 64%, and correspondingly, accounts receivable increased by 52% for the same periods reviewed. Moreover, an impairment of receivables would be considered if accounts receivables was increasing on an exponential basis when compared to sales. For instance, if accounts receivables is experiencing an increasing trend, but sales is experiencing a declining trend, then there is reason to believe that accounts receivables needs to be reassessed for impairment. However, as indicated, this is not that case for Apple; as such, no impairment is needed. Financial Analysis Over the past two years Apple has displayed strong financial growth. One of Apples major financial strengths is their solvency. Their cash ratio is currently at $1.24, which means they will not have any issues using their liquid assets to cover their current liability obligations. Furthermore, Apple maintains a high current ratio with $2.01 of current assets for every $1.00 of current liabilities. In addition to being solvent, the majority of Apples current assets are extremely liquid. Currently, Apple has over 60% of its current assets in cash and short term marketable securities, strengthening our belief that Apple should have no complications in meeting its current obligations as they mature. This is a trend that will continue in the future as Apple currently only has $0.36 of total debt for every $1.00 of an asset it owns. This is a great
15

indicator that apple is not only solvent for the current year, but will also remain solvent for the foreseeable future. In addition, for Apples fiscal year in 2010 they incurred no interest expense and have no debt outstanding. Moreover, Apple currently has no existing contingencies that may threaten their solvency in the near future. There are no foreseeable financial complications in Apples future. Another major financial strength of Apple is its financial flexibility. Currently Apple is operating with close to $21 million of working capital. With twice as much current asset as current liabilities, Apple is given the flexibility to aggressively grow or seize business opportunities quickly. Additionally, Apple has not declared a dividend for its shareholders in the last two years. Despite this fact Apples share price has increased dramatically, trading at a range of $119.68-$79.14 in the first quarter of 2009 to trading in the range of $293.53-$235.56 in the fourth quarter of 2010. The recent growth of Apples stock price will allow Apple the option to raise large amounts of capital quickly. Furthermore, Apple has indicated that it does not plan on issuing any cash dividends in the foreseeable future, allowing the company to aggressively grow if it chooses to. In the retail industry it is typical for companies to have a high asset turnover ratio. This is due to the cutthroat nature of the industry and competitive pricing. Currently, Apple generates $0.87 for every $1.00 in total assets it currently has. This may seem like a negative indication to Apples operating efficiency however, that is not the case. At the end of 2010, Apples inventory and receivables only accounted for only 8.73% of its total assets, indicating they have good inventory turnover as well as good receivable turnover. In addition, due to the competitive pricing in the retail industry profit margins tend to be low for retail companies. However, Apple has been able achieve a gross profit margin of nearly 40% in 2010, which extremely high in their
16

particular market segments. The only area of concern regarding Apples financial strength is the fact that 33.33 % ($25,391 million) of its total assets are in long term marketable securities. This fact may hinder their liquidity at a later point if they wish to aggressively expand or grow their business operations. When conducting a horizontal analysis of Apple, it is apparent that investing in long term marketable securities is part of its business model. At the end of 2009, Apple had (in millions) $10,528 in long term marketable securities. This amount increased by 141 % by the end of 2010 to (in millions) $25,391. Furthermore, Apple was able to maintain a consistent gross profit margin for the last two years with it being 40% in 2009 and 39% in 2010. Furthermore, Apple seems to be operating more efficiently with its gross sales increasing by nearly 50% while its operating expenses only increased by 33 %. Moreover, Apples total assets increased by $27,682 million while its total liabilities only increased by $11,531 million. Also, since Apple has a history of not declaring cash dividends for its shareholders it is no surprise that its retained earnings increased by $13,816 million. The trend that seems to be developing in Apple is that the company is taking a conservative approach when deciding to reinvest its capital. First off, the company increased its cash equivalents and marketable securities by $16,468 million in 2010 while its property, plant and equipment only increased by $1,814 million. Furthermore, research and development only increased by $449 million. These factors indicate that Apple is planning to expand modestly and hoard capital. The results of the vertical analysis reveal Apple has maintained a consistent business model for the previous three years. Furthermore, Apple has become more efficient in their business operations with operating expenses decreasing (in proportion to gross sales) each year for the previous three years. As a result net income (in proportion to gross sales) has increased
17

from 16.32% in 2008, to 21.48% in 2010. Furthermore, the only main difference in the balance sheet for Apple between 2009 and 2010 are the balances in its short-term marketable securities and its long term marketable securities. Apples short term marketable securities decreased from 38% (in proportion to total assets) in 2009, to 19% in 2010. Conversely, Apples long term marketable securities increased from 22% (in proportion to total assets) in 2009, to 33% in 2010. Lastly, as Apple continues the trend of not paying cash dividends their retained earnings balance has remained at 49% (in proportion to total liabilities and shareholder equity) for the previous two years. Utilizing Hewlett Packards model for sustainable growth, Apple has a sustainable growth rate of 26.03% in 2009, and a sustainable growth rate of 29.32 % in 2010. When comparing Apples growth in sales over the previous two years to its sustainable growth rate, you will discover their actual sales growth in 2009 (12.62%), was less than their sustainable growth rate, while in 2010 their sales growth (34.22%) exceeded their sustainable growth rate. This is not a cause for concern considering in 2009 Apple was well under their sustainable growth rate and retained a lot of its 2009 earnings to support its 2010 growth. Furthermore, Apple plans to continue retaining their income for the foreseeable future indicating Apple will have no problem supporting future growth. In addition, to Apples sustained growth in sales, they have become more efficient in their operations; this is indicated with the increase return on assets ratio from 2009 (17%) to 2010(19%). Furthermore, there is no indication that Apple will stop its trend of continued growth in sales and profitability for the foreseeable future.

18

 Cash Flow Analysis Apples 10K states, Apples business strategy is committed to bringing the best user experience to its customers through its innovative hardware, software, peripherals, services and internet offerings. The Companys unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers stems from its dedication to Research and Development (R&D). Continual investment in R&D is critical to the development and enhancement of new innovative products and technologies. Furthermore, to ensure a high quality buying experience, the company is committed to expanding the number of its own retail stores. Historically, Apple has opened between 20 and 50 new stores per year. In 2011, the company is expected to continue this trend, with the majority of new locations opening outside of the US (Apples 10K, SEC.gov). A cash flow analysis of Apple will provide an indication of the quality of the information in the firms income statement and balance sheet. The Company reported their cash flows using an indirect method. Analysis of the cash flow statement will give insight of the companys flexibility as related to free cash flow. Over the past three years, Apple has managed to maintain a strong ability to generate internal cash. The Company has maintained Net Income of $14,013, $8,235, and $6,119 (all numbers stated in millions) in 2010, 2009 and 2008 indicates an increasing growth. Breaking down net income gives insight to where cash is being generated and dispersed. Apples 10K reports cash generated by operating activities is $18,595, $10,159, and $9,596 (all number stated in millions) in 2010, 2009 and 2008. A steady incline shows the firm strength and ability to generate internal cash. Accounts Receivable and Payable seem to be largest changes in operating cash flows in 2010. As compared to 2009, Accounts Payable has the largest
19

variance, $6,307 from $92 (all numbers stated in millions) in 2010 and 2009. As related to Revenue, the increase is due in part to new products being introduced to the market. Products such as the iPad, developed in 2010, may have affected Cost of Sales as well as increased Revenues $22.32 billion from 2009 to 2010. Apples commitment to innovation has maintained a competitive advantage over their competitors. The cash flows from operating activities parallel the companys business strategy, as seen through the expenditures in R&D. Apples 10K provides this layout of operating expenses (in millions, except for percentages): 2010 Research and Development o Percentage of net sales 3.0% Selling, general and administrative o Percentage of net sales 10.0% R&D expense increased 34% or $449 million to $1.8 billion from 2009 to 2010. Apple states in its 10K, the increase was primarily due to an increase in headcount and related expenses in the current year to support expanded R&D activities. The decrease in percentage of net sales is due to the 52% increase in net sales from 2009 to 2010. This percentage of sales is not a good indicator because net sales have increased so much from 2009 to 2010. The Company continues to invest its cash into R&D for innovation and to stay consistent with its business strategy. $5,517 8.5% $4,149 9.7% $3,761 $1,782 2.7% 2009 $1,333 3.1% 2008 $1,109

20

As for expansion, Apples 10K reports investing activities are by far the largest inflows and outflows of cash. Purchases of marketable securities is $57,793, $46,724, and $22,965 (all stated in millions) in 2010, 2009 and 2008, these numbers are extremely high considering net income of $14 billion in 2010. Proceeds from maturities of marketable securities are $24,930, $19,790 and $11,804 (all stated in millions) in 2010, 2009 and 2008. Proceeds from sales of marketable securities are $21,788, $10,888 and $4,439 (all stated in million) in 2010, 2009 and 2008. Also, $2.055 billion of property, plant and equipment was purchased in 2010, doubling the amount spent in 2009. Compared to Apples competition, Dell spent $1.383 billion on purchasing investments and received $1.538 billion on maturities and sales of investments in 2010 (Forbes.com). These figures give a clear picture on the scale the Apple is operating on. They rely heavily on their investing activities for expansion although net cash used in investing activities is negative three years consecutive. Furthermore, Apples 10K reports financing activities as the smallest activity but one that has increased cash flow in three consecutive years. Cash from financing has varied from 2008 to 2010, from $1,116 to $663 to $1,257 (all stated in millions). The major contributor to the increase in 2010 was due to the issuance of common stock from $475 million in 2009 to $912 million in 2010. Apple most relies most heavily on is equity for financing. After reviewing the statement of cash flows, Apple has and maintains a steady cash flow. The cash and cash equivalents at year end over the last three years have been very high ranging from $11,261, $5,263 and $11,875 (all stated in millions) in 2010, 2009 and 2008. These figures show Apple remains liquid as well as flexible even through slower years, like that of 2009. This free cash flow allows Apple the ability to expand its fleet of stores, continue to develop new

21

products, continue investments and invest in new property, plant and equipment. There is readily available cash for the Company to invest into R&D which it so heavily depends on, as well as make investing opportunities available. This allows Apple to continue is its aggressive business strategy.

22

Tax Burden Interest Burden Return On Sales Asset Turnover Leverage Ratio Return on Assets Compound Leverage Factor Working Capital (in millions) Current Ratio Quick Ratio Acid Test Ratio Debt-to-Equity Solvency Ratio Cash Ratio Debt Ratio Gross Profit Margin ROI ROE

75.58% 100.00% 28.42% 86.75% 157.32% 24.66% 157.32% $ 20,956 $ 2.01 $ 1.96 $ 1.91 $ 0.57 54.91% $ 1.24 $ 0.36 39.38% 18.64% 29.32%

Affordable Growth Measure By Hewlett Packard Sustainable Growth= Earnings Retention x Asset Utilization x Profitability x Financial Leverage 2010 2009 29.32% 26.03%

Sources

1. http://sec.gov/Archives/edgar/data/320193/000119312510238044/d10k.htm 2. http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=AAPL 3. http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=DELL 4. http://www.studyfinance.com/lessons/sustaingrowth/index.mv?page=04

5. http://www.netmba.com/finance/financial/ratios/