Accounting Statement Analysis Ratios and FinanciaL indicatorS

Question: Part A: The Income Statement What are the major sources of income for the organization? What is the breakdown of each source of revenue as a percentage of total income? What are the costs? Part B: The Balance Sheet How much does the company have in cash and short-term investments? Look at the cash against current liabilities? What are the current liabilities? Does the company have enough cash to pay off its short-term debt (current liabilities)? What is the companys working capital? (Hint: you have to calculate this.) What is the companys current ratio? What does this mean? What is the companys debt-to-equity ratio? What does this mean? Answer: Major sources of income in Apple Inc The net amount of sales are mainly generated from the sales of software, hardware, applications, digital content, accessories, support contacts and services. Whenever there is persuasive evidence related to the arrangement of fund it is found that the company recognizes the revenue after the consideration of delivery of product or services on fixed rate that belongs to a probable collection. The product is said to be delivered when it is shipped with the risk of loss, title and reward of ownership, which has been relocated. Online sale to individual or sale to educational customers from US, the company accepts revenue only after the product is received by customer. In addition to this, when the terms of payment is decided by the standards of company it indicates that it is at higher level than the revenue gained by itself. To justify the fixed price of its manufactured product company keep their payment due until they have some proper evidence related to the transactions. Without con cession, it was considered as the successful collection based on the equivalent arrangements. Breakdown of revenues The customers of the company are distributed among the consumers, education enterprise mid- size or large business and government markets. The company utilizes a policy to sell their products directly to the third- party products among its major target markets. This sales are directly related to the small or mid size business and consumers though the online and retail stores. There are several indirect distribution channels employed by the company, such as: wholesalers, third- party sellers, third- party cellular network carriers, retailers and resellers who provides value to service. Around 2015, there was 26% and 74% of direct sales experienced by the company through direct and indirect channels. Net sales comparably increased by 28% in between 2014 and 2015. Specifically there was 52% net sale for iPhone on annual basis. In 2014, the net sales rose by 7% in comparison with 2013. This increment was totally based on the sales of Mac, iPhone and services. Specifically, sales of iPhone was based on factors such as the successful introduction of the iPhone 5c and 5s in the middle of 2013, introduction of iPhone 6 Plus and 6 in 2014 and expanded distribution. Cost of shipping The revenue is classified as the amount charged from the customers for shipping their product. The cost of handling and shipping the products are known as the cost of sales. Warranty costs The company as guarantee provides an estimated cost to their customer for the hardware and software at the time of recognition of the related revenues (Weil et al., 2013). In future estimates, the company has the right to adjust the necessary amounts according to experiences. Development cost of software RD costs are expenses considered by the company for development. Development cost is considered according to the selling, leasing and marketing of the software. The technological feasibility is checked before making the product available in the market. Advertising costs Cost involved in selling, operating general aspects and covering the administrative expenses are considered as the administrative costs. As an example 1.8 billion dollar, 1.2 billion dollar, 1.1 billion dollar was the advertising expenses involved in 2015, 2014 and 2013 respectively. Part B- Balance Sheet Cash and short-term Investments As per the financial reports, Apple cash and cash equivalent for the financial year of 2014 consisted of $13,884 million, whereas in the fiscal year of 2015, its cash and cash equivalents stood $21,120 million. On the other hand, Apple Incs short-term marketable investments represented a balance of $11,233 million for the financial year of 2014, whereas during the fiscal year of 2015, the short-term marketable securities or investments stood at $20,481 million respectively. It should be noted that the entire liquid investments having a maturity period of below three months from the original date of purchase are classified under the cash and cash equivalents. Apple Incs marketable investments have been categorised for sale. The management of Apple Inc takes into the considerations the appropriate categorisations of its investments during the time of its procurement and considerably re-evaluates the classifications at date when balance sheet is framed. The short-term investments of Apple Inc are usually classified based on the maturity of 12 months or less depending upon the nature of each of investments and its availability for use under existing operations. The companys cash and marketable investments are carried at fair value and gains are recorded in the balance sheet in the form of accumulated comprehensive income. Current Liabilities The current liabilities of Apple Inc comprises of accounts payable, accrued expenses, deferred revenue, commercial paper and current portion of long-term debt. These items combines a total current liabilities for the accounting year of 2014 $63,448 million where as in the financial year of 2015 Apple Inc sum total of current liabilities comprised of $80,610 million. Out of this, accounts payable alone stood $35,490 million for 2015 while in the preceding year it stood at $30,196 million. The commercial paper and deferred revenue stood $8,491 and $8,999 million respectively for the year 2015. During the year 2014, the board of directors of Apple Inc authorized the company to issue short-term promissory notes with regard to its commercial paper programme. The company usually intends to utilize the net proceeds from the commercial paper for common corporate reason to pay of dividends and share re-purchase. However, it must be noted that the organisation has sufficient amount of cash and other liquid assets to pay of short term debts. As per the financial reports, obtained Apple Inc currently has current assets of $89,378 million including cash balance of $21,120 million, which is sufficient to pay off its current liabilities. Working Capital Computation of Apple Inc Working capital Particulars Amount ($) millions Amount ($) millions Current Assets Cash and cash equivalents 21,120 Inventories 2,349 Accounts receivable 16,849 Vendor non traded receivables 13,494 53,812 Current Liabilities Accounts payable 35,490 Current Portion of long term debt 2,500 Commercial paper 8,499 46,489 Working Capital 1,00,301 Current ratio: Current ratios are also known as liquid ratios which measures the capability of Apple Inc in order to meets its short term obligations out of its current assets and reflects the short term financial strength or solvency of the company. Current ratios can be defined as the excess of current assets over current liabilities. The adequate amount of surplus is interpreted, as reliable indicators of the fact the company are solvent. The main objective of this ratio is to further shed light on the short-term solvency of Apple Inc and more precisely speaking, its ability to pay off its debts as and when they fall due by computing the relations between the current assets and current liabilities. A widely regarded rule of accounting ratios is that a current ratio of 2:1 is considered as an ideal situation (Thanos Papadakis, 2012). Although this is often considered as one of the useful guidelines however, such generalizations are not considered as truth. The standard ratio will vary from industry to industry and from season to season, depending upon the rate at which the current assets are converted into cash and how quickly current liabilities are paid off. Currently the currently ratio of Apple Inc for the year 2015 signifies 1.10. This represents that Apple Inc can pay off its short term obligations and meet the needs of its creditors. Current ratio of Apple Inc Apple 2014 2015 Current Ratio 1.077276 1.108771 Figure 1: (Current ratio of Apple Inc) (Source As created by Author) Debt equity ratio: Debt equity ratio is concerned with creating the relationship between the external and internal long-term financing. The use of long-term debt under the financial structure has both advantage and disadvantage as well. The main advantage associated with the debt is that it provides an opportunity for greater returns to the shareholders without the need to provide greater amount of capital (Coates et al., 2012). Apple Inc can borrow fund at a predetermined rate of interest but use those funds in business to get high amount of return, the entire amount of extra benefit yielded accrues to the equity shareholders. The higher is the amount of fund borrowed the greater will be the amount of returns that will be generated to the shareholders. Debt also has few disadvantages as well. If the return on assets falls down considerably or interest on debt increases, return on shareholders fund will be subjected to greater fluctuations. It is because the amount of interest is ought to be paid irrespective of the amount of profit. High debt is associated with high greater potentiality to risk of loss on shareholders equity. It should be noted that the relationship between debt and equity is frequently referred as gearing leverage. An organisation with low leverage has small proportion of debt. Whereas, an organisation with high leverage represent high proportion of debt. Apple 2014 2015 Debt equity ratio 1.243384 1.950066 Figure 2: (Debt-equity ratio of Apple Inc) (Source As created by Author) The debt equity ratio for Apple Inc for the year ended 2015 represents 1.95 and this represents that the company operates at a medium risk level in order to assess its efficiency for long-term financing. Reference List: Coates, C. R., Jones, A., Coates, M. W. (2012). Accounting ratios and financial performance indicators.Veterinary practice management, 117-121. Deegan, C. (2012).Australian financial accounting. McGraw-Hill Education Australia. Thanos, I. C., Papadakis, V. (2012). Assessing the use of accounting ratios in gauging MA performance. Weil, R. L., Schipper, K., Francis, J. (2013).Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.