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apple income statement analysis

Category: Business Paper Type: Homework Reference: APA Words: 1500

Company Background and business summary
Apple Inc. manufactures designs and sells the personal computers, media and mobile communication devices, watches, and portable digital music players across the world. This company was established in 1977 and is based in California. Apple is one of the most prestigious, cash rich and profitable companies in the world and not only sells the above mentioned devices and equipment but also does business in software, networking solutions, services, accessories and also sell digital content applications through its online and retail stores.

Products and services of Apple include iPad , the iOS and OS X operating systems, Mac , Apple watch and Apple TV , iPhone , iPod , iCloud , a portfolio of consumer and professional software applications, and a variety of accessory, service and other offerings. In addition, it has launched Apple Watch in 2015 and also sells and delivers the digital applications and content through its retail stores online through third party cellular network carriers.

Financial Statement Analysis
In this project, financial performance of Apple, Inc., is studied and analyzed for the financial year (FY) from 2012 to FY 2015. In the first part, balance sheet (BS) of the company is analyzed by studying the important financial ratios and trends in different assets and liabilities over the years.

Common size balance sheet
The common size balance sheet is presented in the following table:

Table I

Common Size Balance Sheet of Apple, Inc. from FY2012-2015

2012-09

2013-09

2014-09

2015-09

Assets


Current assets


Cash


Cash and cash equivalents

6%

7%

6%

7%

Short-term investments

10%

13%

5%

7%

Total cash

17%

20%

11%

14%

Receivables

6%

6%

8%

6%

Inventories

0%

1%

1%

1%

Deferred income taxes

1%

2%

2%

2%

Other current assets

8%

7%

8%

8%

Total current assets

33%

35%

30%

31%

Non-current assets

Property, plant and equipment

Gross property, plant and equipment

12%

14%

17%

17%

Accumulated Depreciation

-4%

-6%

-8%

-9%

Net property, plant and equipment

9%

8%

9%

8%

Equity and other investments

52%

51%

56%

56%

Goodwill

1%

1%

2%

2%

Intangible assets

2%

2%

2%

1%

Other long-term assets

3%

2%

2%

2%

Total non-current assets

67%

65%

70%

69%

Total assets

100%

100%

100%

100%


Liabilities and stockholders' equity


Liabilities


Current liabilities

Short-term debt

3%

4%

Accounts payable

12%

11%

13%

12%

Taxes payable

1%

1%

1%

0%

Accrued liabilities

5%

3%

3%

9%

Deferred revenues

3%

4%

4%

3%

Other current liabilities

1%

4%

4%

0%

Assignment Apple’s Financial Statement Analysis Date By Table of Contents TOC \o "1-3" \h \z \u I.Company Background and business summary PAGEREF _Toc436412404 \h 3II.Financial Statement Analysis PAGEREF _Toc436412405 \h 31.Common size balance sheet PAGEREF _Toc436412406 \h 4a)Assets of Apple: PAGEREF _Toc436412407 \h 5b)Analysis of account receivables PAGEREF _Toc436412408 \h 6c)Allowance accounts of Apple PAGEREF _Toc436412409 \h 8d)Description of Liabilities: PAGEREF _Toc436412410 \h 8e)Summary of BS PAGEREF _Toc436412411 \h 102.Common Size Income Statement PAGEREF _Toc436412412 \h 11a)Cost of Goods Sold (COGS): PAGEREF _Toc436412413 \h 12b)Gross profit Margin PAGEREF _Toc436412414 \h 12c)Operating Expenses: PAGEREF _Toc436412415 \h 13d)Operating profit PAGEREF _Toc436412416 \h 14e)Earnings before Interest and Taxes (EBIT) PAGEREF _Toc436412417 \h 15f)Net Earnings PAGEREF _Toc436412418 \h 15g)Earnings per share (EPS): PAGEREF _Toc436412419 \h 16III.Conclusion PAGEREF _Toc436412420 \h 17IV.References PAGEREF _Toc436412421 \h 18 Apple Inc. Financial Statement Analysis Company Background and business summaryApple Inc. manufactures designs and sells the personal computers, media and mobile communication devices, watches, and portable digital music players across the world. This company was established in 1977 and is based in California. Apple is one of the most prestigious, cash rich and profitable companies in the world and not only sells the above mentioned devices and equipment but also does business in software, networking solutions, services, accessories and also sell digital content applications through its online and retail stores. Products and services of Apple include iPad , the iOS and OS X operating systems, Mac , Apple watch and Apple TV , iPhone , iPod , iCloud , a portfolio of consumer and professional software applications, and a variety of accessory, service and other offerings. In addition, it has launched Apple Watch in 2015 and also sells and delivers the digital applications and content through its retail stores online through third party cellular network carriers. Financial Statement AnalysisIn this project, financial performance of Apple, Inc., is studied and analyzed for the financial year (FY) from 2012 to FY 2015. In the first part, balance sheet (BS) of the company is analyzed by studying the important financial ratios and trends in different assets and liabilities over the years. Common size balance sheetThe common size balance sheet is presented in the following table: Table I Common Size Balance Sheet of Apple, Inc. from FY2012-2015 2012-09 2013-09 2014-09 2015-09 Assets Current assets Cash Cash and cash equivalents 6% 7% 6% 7% Short-term investments 10% 13% 5% 7% Total cash 17% 20% 11% 14% Receivables 6% 6% 8% 6% Inventories 0% 1% 1% 1% Deferred income taxes 1% 2% 2% 2% Other current assets 8% 7% 8% 8% Total current assets 33% 35% 30% 31% Non-current assets Property, plant and equipment Gross property, plant and equipment 12% 14% 17% 17% Accumulated Depreciation -4% -6% -8% -9% Net property, plant and equipment 9% 8% 9% 8% Equity and other investments 52% 51% 56% 56% Goodwill 1% 1% 2% 2% Intangible assets 2% 2% 2% 1% Other long-term assets 3% 2% 2% 2% Total non-current assets 67% 65% 70% 69% Total assets 100% 100% 100% 100% Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt 3% 4% Accounts payable 12% 11% 13% 12% Taxes payable 1% 1% 1% 0% Accrued liabilities 5% 3% 3% 9% Deferred revenues 3% 4% 4% 3% Other current liabilities 1% 4% 4% 0% Total current liabilities 22% 21% 27% 28% Non-current liabilities 0% 0% 0% 0% Long-term debt 0% 8% 13% 18% Deferred taxes liabilities 0% 8% 9% 8% Deferred revenues 2% 1% 1% 1% Other long-term liabilities 9% 2% 2% 3% Total non-current liabilities 11% 19% 25% 31% Total liabilities 33% 40% 52% 59% Stockholders' equity Common stock 0% 0% 10% 9% Additional paid-in capital 9% 10% 0% 0% Retained earnings 58% 50% 38% 32% Accumulated other comprehensive income 0% 0% 0% 0% Total stockholders' equity 67% 60% 48% 41% Total liabilities and stockholders' equity 100% 100% 100% 100% Assets of Apple:As stated in the balance sheet given above, Apple has many assets in its balance sheet which are of primary importance to the company, however, its humongous short term and long term equity and other investments and extra ordinary cash pile (total cash) of Apple are more significant assets. Apple has nearly $203 billion spare cash in its accounts which is huge and even bigger than GDP of many countries in the world CITATION Tim15 \l 1033 (Higgins, 2015). Its cash has increased by staggering $50 billion in last 12 months, which shows the internal strength of the company and popularity and success of its products. It cash position is highlighted in following graph: Over the years, company has invested in money market funds, mutual funds, UF agency securities, non- US government securities, Us Treasury securities, commercial papers, certificates of deposit and time deposit, municipal securities, corporate securities mortgage and asset backed securities which shows the diversity of the company’s portfolio. Apple typically invests in highly rated securities. In addition, its share repurchase program has used the cash to repurchase its outstanding shares and analysts argue that its buyback program cannot be compared to any ordinary buy back because its effectiveness goes beyond that. It has increased the per share intrinsic value of each share for Apple’s shareholders. EPS of Apple soared its EPS by 43% and its stocks are trading now 13 times its earnings CITATION Dan15 \l 1033 (Sparks, 2015). Analysis of account receivablesApple has considerable amount of receivables which are to be collected from a 3rd party cellular networks carriers, valued added resellers, medium and small sized businesses, wholesaler retailers, educational enterprises and government departments. Apple has policy to bit receive collateral from its traders but to limit the credit risk, company now requires it. To reduce and mitigate the risk, Apple has opted to introduce the credit insurance for many customers through third party financing, loans and leases support for supporting credit exposure. These measures were taken by the company in 2014 as reported in its annual report of FY14 CITATION App14 \l 1033 (AppleInvestors, 2014). The impact of these policies is reflecting in the following graph: It shows that days sales outstanding have declined in 201 5 after witnessing continues rise in recent years, which indicates that company is recovering its outstanding amount better than before. It was taking more than 30 days to recover its cash from sales, which has now declined to nearly 28 days. Similarly, Apple has increased its efficiency as it is turning its accounts receivables into cash in shorter time in 2015 than in 2014. However, still company is yet to reach the level of FY12, when it was turning receivables into cash 19 times a year. This indicates that company must improve its working capital management and changes should be made in this department to improve the performance of the company. In FY14, Apple had customers which were 10% or more of the total receivables. One of these was 13% and other was 16% of the total receivables. The trend was a little different in FY13, as on accounted for 13% and other was 16%. . The additions and write-offs to the Apple’s allowance for bad debts during 2014, 2013 and 2012 were not significant. As of September 27, 2014 Apple’s cellular network carriers had been accounted for 72% and 68% of trade receivables Allowance accounts of AppleAccording to Apples annual statements, write-offs and additions to the Apple’s allowance for bad debts accounts during 2015, 2014, 2013 and 2012 had not been significant. Description of Liabilities:Apple has increased its liabilities in last two years, primarily it long term debt and its short term debt, which was zero on its BS in 2012 and 2013 respectively. In addition, companyhas witnessed the increasing trend in its payables. Another liability which showed significantincrease in FY15 is accrued liability. The following graph shows their trend in last four years. One of the main changes in capital structure of Apple has been issuance of debt in recent years as argued earlier; company has issued $12 billion in 2014 and $17 billion in 2013 of long term debt. Besides, Apple carry’s other significant liabilities such as accrued liabilities which have witnessed increasing trend in recent years as shown in the following graph: Fundamental reasons for rise in accruals is significant increase in company’s accrued warranty and related costs, which increased from $1638 million in FY12 to $4159 million in FY14 based on assessments made on adequacy of its adjusts the amounts and pre-existing warranty liabilities depending in future estimates and actual experiences CITATION App14 \l 1033 (AppleInvestors, 2014). Similarly, company’s payables have increased significantly, indicating that company is holding on to its cash more effectively now, but it can have repercussions on company’s ability to acquire loans in future or may affect the terms of loans or terms and conditions of its purchases from vendors. Summary of BSBased on analysis of Apple’s BS, it can be stated that company is in stable condition and company is continuously doing well and has improved its financial positioning through huge sales and cash file it has accumulated over the years. However, Apple must not accumulate too much debt, both short and long term because in recent years, it has continuously increased its liabilities; which are reflected through the following paragraph: It shows that though company has increased its short and long term investments but, its liabilities have seen staggering increase and could be threatening the company’s long term future. IF we analyze, company’s equity position, since company has started its buyback program, its retained earnings have declined. Though, they have increased form FY14, but are still below the level of FY12 and FY 13. Common Size Income StatementApple's Common Size Income Statement 2012-09 2013-09 2014-09 2015-09 Revenue 100.00% 100.00% 100.00% 100.00% Cost of revenue 56.13% 62.38% 61.41% 59.94% Gross profit 43.87% 37.62% 38.59% 40.06% Operating expenses Research and development 2.16% 2.62% 3.30% 3.45% Sales, General and administrative 6.42% 6.34% 6.56% 6.13% Total operating expenses 8.58% 8.96% 9.87% 9.58% Operating income 35.30% 28.67% 28.72% 30.48% Interest Expense 0.00% 0.08% 0.21% 0.31% Other income (expense) 0.33% 0.76% 0.75% 0.86% Income before taxes 35.63% 29.35% 29.26% 31.03% Provision for income taxes 8.96% 7.68% 7.64% 8.18% Net income from continuing operations 26.67% 21.67% 21.61% 22.85% Net income 26.67% 21.67% 21.61% 22.85% Net income available to common shareholders 26.67% 21.67% 21.61% 22.85% Income Statement Analysis In this section, income statement of Apple is reviewed and some of the key financial ratios such as gross profit margin, EBIT, Income margin, EPS are its primary focus. Cost of Goods Sold (COGS):If we analyze cost of goods sold figure, it is witnessed that in FY14, comparative growth of COGS was higher than increase in sales but it declined in subsequent years. Gross profit MarginFollowing table reflects the gross profit margin in last 3 years: 2013-09 2014-09 2015-09 Revenue 170910 182795 233715 Cost of revenue 106606 112258 140089 Gross profit 64304 70537 93626 Gross Profit Margin 37.62% 38.59% 40.06% This shows that company has witnessed steady growth in its gross profit margins. The multiple factors which drove the profits higher are the lower commodity, improved Leverage on fixed cost from higher net sales, a favorable shift for products with higher margins, however, it was offset by the weakness shown by the foreign currencies in relation to reductions in US dollar, decline in price of selected products and higher cost structure on certain products CITATION App14 \l 1033 (AppleInvestors, 2014). Operating Expenses:The operating expenses for the company can be broken into selling, general and administrative expenses along with research and development. Following is the change seen in the operating expenses. Operating expenses 2013-09 2014-09 2015-09 Research and development 4475 6041 8067 Sales, General and administrative 10830 11993 14329 Total operating expenses 15305 18034 22396 Percentage change Research and development 32.36% 34.99% 33.54% Sales, General and administrative 7.87% 10.74% 19.48% Total operating expenses 14.04% 17.83% 24.19% The increase in research and development figures from FY13 to FY14 has been primarily driven through increasing in headcount and other associated expenses which include the costs of machinery and equipment used in support for extended activities and share based compensation costs. Since, company believes in innovation, it is central to its strategy to grow. Similarly, the growth in SG&A was due to same reason as explained in above paragraph. In addition, there has been increase in advertising, professional service costs, extension of retail segments and marketing costs, which resulted in increase in operating expenses from FY13 to FY14. Operating profitOperating profit has witnessed the increasing trend as shown in the following table. It shows that company improved on its negative percentage increase in its operating profitability in FY13 to post huge increase in FY14 and FY 15. 2013-09 2014-09 2015-09 Operating income 48999 52503 71230 Change -11.30% 7.15% 35.67% It was primarily due to the reasons discussed in above sections. One of the main reasons is the surge in revenue of the company which increased by following percentages in last two years. FY14 FY15 Change in Revenue 6.95% 27.85% Though, company’s operational costs have continued to increase in recent years but, its operational costs have also increased, however, magnitude of increase in revenue was greater than magnitude of operational costs. Earnings before Interest and Taxes (EBIT)Similarly, operational income or EBIT of the company has witnessed the tremendous growth in FY15 and showed the continues increasing trend as shown in the following graph Net EarningsFollowing graph shows the increasing trend in net earnings of Apple. Though, company had witnessed decline in percentage increase in net earnings in FY13, but it increased in subsequent years as seen in the following table. Net Earnings 2012-09 2013-09 2014-09 2015-09 Net income 41733 37037 39510 53394 Change -11% 7% 35% The main reasons Apple emerged as winner in FY15 was huge surge in business in Chinese market and was credit to their efforts to make the best, most innovative products. Company opted to make changes in prices of their most priced product 6s and 6s plus and increased the prices of their products and results were seen by huge surge in their profits as revenue from smart phones rose by 59%. In addition, Mac also had record/highest sales in FY15. Earnings per share (EPS):Apples EPS have also witnessed increase in recent years as shown by the increasing trend in the following graph. Since, Apple has been on share repurchase program and net earnings have increased tremendously, it all worked to increase the EPS of the company in FY15, when it also received the great boost from increase in its share prices which skyrocketed this year and are expected to increase heavily in future. ConclusionBased on analysis and discussion on company’s financial performance in last 3 years, it can be stated that Apple will continue to show surge in performance, if it retains its brand value by continuing investing in its core phone products. In addition, company is venturing into new businesses as it launched its Apple watch and is working on launching a car in future. According to the analysis on company’s income, statement, it witnessed that company has continued to improve its sales revenue primarily based on sales of its core product Mac and smart phones (6s & 6s plus). Company profited from increase in its prices in different countries. Similar increasing trend is witnessed in operational costs and operational income. The operational costs increased due to continues increase in the R&D of its existing core products and increasing costs due to expenditure on marketing, advertising and in opening new stores worldwide. Besides, boosted by remarkable operational performance, company has improved on its EPS and based on forecasts it is expected to grow in future. In balance sheet, there have been some changes as company has started accumulating both short term and long term debt, however, it continues to hoard on to huge cash pile and has continued to invest in short and long term investments. However, it must not increase its dependence on debt, because on comparing the percentage increase in its assets and liabilities, it emerged that its assets grew by merely 3% and liabilities grew by staggering 79% which is crucial figure. It must not increase its liabilities to keep its status as world best performing company. References: BIBLIOGRAPHY \l 1033 AppleInvestors. (2014). Retrieved November 27, 2015, from Apple: http://investor.apple.com/secfiling.cfm?filingid=1193125-14-383437&cik= Higgins, T. (2015, July 23). Retrieved November 27, 2015, from BloombergBusiness: http://www.bloomberg.com/news/articles/2015-07-22/tim-cook-s-181-billion-headache-apple-s-cash-held-overseas Sparks, D. (2015, November 26). Retrieved November 27, 2015, from The Motley Fool: http://www.fool.com/investing/general/2015/11/26/apple-incs-share-repurchase-program-is-moving-the.aspx?source=eptfxblnk0000004

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