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Apple, Inc.: Financial Reporting Problem

Total Cost and Book Value

Based on the historical cost principle, companies are required to record the assets in the balance sheet statement at cost. This value is reduced periodically using accumulated depreciation. The cost of an asset should be calculated properly because failure to do that can affect the income. Only items that are regarded as capital costs should be added to the cost of an asset (Goyal & Goyal, 2012). Further, when a business is bought, the purchase price should be allocated correctly to the different categories of assets.

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This is based on the fact that different depreciation treatments can affect income. For instance, if the value of land is recorded in the wrong class of assets which is depreciable, then it will erroneously reduce net income because the depreciation expense is not calculated on the land (Kimmel, Weygandt, & Kieso, 2014).

The property, plant, and equipment for Apple Inc. majorly comprise of land and building, leasehold improvement, and machinery, equipment, and internal-use software. The total cost of this category of assets in 2014 was $39,015 million. This was up from $28,519 that was reported in 2013 (Apple PLC, 2017). The increase is an indication that some assets were purchased during the year. The book value is the amount at which the property, plant, and equipment are carried in the balance sheet. The value is arrived at by deducting the accumulated depreciation from the cost of the asset. Further, accumulated depreciation is the sum of depreciation expense from the time an asset is acquired.

For the financial year ended in September 2014, the book value amounted to $20,624 million. This was a 24.26% increase from the value reported in 2013. The accumulated depreciation in 2014 amounted to $18,391 million. This is a growth from $11,922 million that was reported in 2013 (Apple PLC, 2017). The analysis of the balance sheet shows that the total cost and book value of property, plant, and equipment grew in 2014 (Apple PLC, 2017). Further, it can be observed that as the total cost of the asset increases, the book value also grows (Kimmel et al., 2014).

Methods of Depreciation

Depreciation entails apportioning to expense the cost of a property, plant, and equipment over its useful life. The calculation of depreciation expense depends on the cost, useful life, and the salvage value of an asset (Kimmel et al., 2014). It is worth mentioning that depreciation affects both the income statement and the balance sheet. In the income statement, it is reported as an expense, while in the balance sheet, it is added to accumulated depreciation, which is used to reduce the cost of the asset. Depreciation expense is important because it quantifies the usage of property, plant, and equipment in the business. It captures the wear and tear of the asset as a result of using it. The three most common depreciation methods are straight line, declining balance, and units of activity.

The company makes use of the straight-line method of depreciation. Under this method, an equal amount of depreciation is expensed annually over the useful life of the asset. The useful life of an asset depends on the experience and prospects of the management. The useful life of machinery and equipment is estimated to range between 2 and 5 years. This category also includes manufacturing process equipment and product tooling, among others.

The useful life for buildings is slightly longer than that for machinery and equipment. It is the lower of the remaining life or thirty years. Finally, for leasehold improvements, the company uses the shorter of either ten years or the lease term. Further, the Company capitalizes all subsequent qualified costs that are incurred to purchase or develop internal-use software. The straight-line method is also used to amortize capitalized costs that are associated with internal-use software. The useful life of these costs is estimated to range between 2 to 5 years.

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Depreciation and Amortization Expense

The depreciation and amortization expense of property, plant, and equipment were $3,277 million, $6,757 million, and $7,946 million for 2012, 2013, and 2014, respectively (Apple PLC, 2017). The growth in depreciation expense is a clue that the company purchased additional assets.

Purchases

The purchases of property, plant, and equipment are listed in the cash flow statement under investing activities. The assets that were purchased in 2012 totaled to $8,295 million. The value dropped slightly to $8,165 million in 2013. In 2014, the number of purchases grew to $9,571 million (Apple PLC, 2017).

Accounting for Intangible Assets

An evaluation of the financial statement shows that Apple, Inc. reviews intangible assets for impairment. This excludes goodwill. This review is carried out when an event occurs or when there was a change in circumstances that signifies that the carrying amount of an asset cannot be recovered. The recoverability of the intangible assets is estimated by comparing the future discounted cash flow that the asset is expected to generate with the carrying amount.

Thus, if it is established that the intangible asset is impaired, then the impairment that will be recognized in the books of accounts is the difference between the carrying amount and the market value. The intangible assets for Apple Inc. comprise of indefinite-lived and non–amortizable and definite-lived and amortizable acquired intangible assets (Kimmel et al., 2014).

The company does not amortize goodwill and intangible assets that have indefinite useful lives. These assets are tested for impairment on an annual basis or when there are changes that show that the assets may be impaired. The company carries out the impairment tests in the fourth quarter of each financial year. It is worth mentioning that the responsibility of testing for impairment of intangible assets and goodwill is assigned to the reporting unit that is associated with the asset. For instance, in 2014, the task was assigned to Europe and America’s operating segments. Intangible assets that have definite useful life are amortized over a period between 3 to 7 years. These assets are also tested for impairment from time to time (Marshall, McManus, & Viele, 2016).

The gross carrying amount of the acquired intangible assets in 2014 was $7,227 million, while the accumulated amortization was $3,085 million. Thus, the net carrying amount of the intangible assets was $4,142 million. This was a slight drop from $4,179 million that was reported in 2013. The amortization expense for the year 2014 was $1.1 million. Further, there were no significant impairments in 2014 (Apple PLC, 2017).

References

Apple PLC. (2017). FY 17 fourth quarter results. Web.

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Goyal, V. K., & Goyal, R. (2012). Financial accounting (4th ed.). New Delhi, India: PHI Learning Private Limited.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2014). Financial accounting: Tools for business decision making (6th ed.). New Jersey, NJ: John Wiley & Sons, Inc.

Marshall, D. H., McManus, W. W., & Viele, D. F. (2016). Loose leaf for accounting: What the numbers mean (11th ed.). New York, NY: McGraw-Hill/Irwin.

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StudyCorgi. (2020, December 25). Apple, Inc.: Financial Reporting Problem. Retrieved from https://studycorgi.com/apple-inc-financial-reporting-problem/

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"Apple, Inc.: Financial Reporting Problem." StudyCorgi, 25 Dec. 2020, studycorgi.com/apple-inc-financial-reporting-problem/.

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StudyCorgi. "Apple, Inc.: Financial Reporting Problem." December 25, 2020. https://studycorgi.com/apple-inc-financial-reporting-problem/.

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StudyCorgi. 2020. "Apple, Inc.: Financial Reporting Problem." December 25, 2020. https://studycorgi.com/apple-inc-financial-reporting-problem/.

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StudyCorgi. (2020) 'Apple, Inc.: Financial Reporting Problem'. 25 December.

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