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Apple Case Study

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Apple case questions:

1. Explain GAAP, non-GAAP numbers and their impact on financial statements

GAAP vs. IFRS affects financial statements in many different areas and must be adjusted accordingly. Revenue Recognition, extraordinary items, receivables, inventory, long-lived assets, and debt and equity would all have to be altered when switching between the two. For example, LIFO inventory valuation is not permitted under IFRS. Because of this, a company would have to recalculate under the FIFO method as well as adjust COGS and tax expenses.

2. Which method best reflects the economic reality?

For investors, IFRS may present more approachable and comprehensive financial statements making them easier to analyze and understand. However when IFRS is applied, balance sheet differences in inventory, PPE, goodwill and other areas may pose shareholders in a better or worse position depending on what you are looking at.

3. Should Apple lobby for their non-GAAP numbers to be sanctioned by FASB?

Yes; the impact of subscription accounting and deferred revenue under GAAP skews the company’s numbers to reflect a small portion of the company’s sales and net income making it a less accurate predictor of overall performance. Any company would obviously highlight on the method that shows the most favorable performance.

4. Does it matter if the revenue recognition rule for smartphones changes?

Yes; the deferred revenues from the use of subscription accounting are adding up and could have a huge impact on the financial statements. IFRS also allows the cost-plus margin measure which does not restrict them from only reporting a fraction of revenues from bundled sections. Investors have driven Apple shares down ignoring the fact that these deferred earnings

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