Apple Inc. Annual Report: 2016

SEC Project: Apple Inc.

1. Background Information

1. Name of the company:  Apple Inc. (SEC Form 10-K, pg.1)

1. Fiscal year covered by the annual report: 2016 (SEC Form 10-K, pg.1)

1. Stock exchange where shares are traded and stock ticker symbol:  The NASDAQ Stock Market LLC; AAPL (SEC Form 10-K, pg.1)

1. State of incorporation: California (SEC Form 10-K, pg.1)

1. Describe the company’s business (es), eg., types of products manufactured. The Company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company’s products and services include iPhone ® , iPad ® , Mac ® , iPod ® , Apple Watch ® , Apple TV ® , a portfolio of consumer and professional software applications, iOS, macOS™, watchOS ® and tvOS™ operating systems, iCloud ® , Apple Pay ® and a variety of accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store ® , App Store ® , Mac App Store, TV App Store, iBooks Store™ and Apple Music ® (collectively “Internet Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party Apple compatible products, including application software and various accessories through its retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers. The Company’s fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company is a California corporation established in 1977. (SEC Form 10-K, pg.5)

1. What are the Company’s major corporate values? The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content and applications through its Internet Services, which allows customers to discover and download digital content, iOS, Mac, Apple Watch and Apple TV applications, and books through either a Mac or Windows personal computer or through iPhone, iPad and iPod touch ® devices (“iOS devices”), Apple TV and Apple Watch. The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings. The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customers. Therefore, the Company’s strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience. The Company believes ongoing investment in research and development (“R&D”), marketing and advertising is critical to the development and sale of innovative products and technologies. (SEC Form 10-K, pg.5)

1. Who are the Company’s major competitor(s)?  The markets for the Company’s products and services are highly competitive and the Company is confronted by aggressive competition in all areas of its business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities and use of mobile communication and media devices, personal computers and other digital electronic devices. The Company’s competitors that sell mobile devices and personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. The Company’s financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to the Company include price, product features (including security features), relative price and performance, product quality and reliability, design innovation, a strong third-party software and accessories ecosystem, marketing and distribution capability, service and support and corporate reputation. The Company is focused on expanding its market opportunities related to personal computers and mobile communication and media devices. These markets are highly competitive and include many large, well-funded and experienced participants. The Company expects competition in these markets to intensify significantly as competitors attempt to imitate some of the features of the Company’s products and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. These markets are characterized by aggressive pricing practices, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by competitors and price sensitivity on the part of consumers and businesses. The Company’s digital content services have faced significant competition from other companies promoting their own digital music and content products and services, including those offering free peer-to-peer music and video services. The Company’s future financial condition and operating results depend on the Company’s ability to continue to develop and offer new innovative products and services in each of the markets in which it competes. The Company believes it offers superior innovation and integration of the entire solution including the hardware (iOS devices, Mac, Apple Watch and Apple TV), software (iOS, macOS, watchOS and tvOS), online services and distribution of digital content and applications (Internet Services). Some of the Company’s current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Company’s offerings. (SEC Form, 10-K, pg. 9)

1. Audit Report

1. The company’s external auditor is Ernst & Young, the accountancy giant who has served as Apple’s independent registered public accounting firm since 2009. (Proxy Statement, pg. 45)

1. It was Ernst & Young’s opinion that the financial statements presented fairly, in all material respects, the consolidated financial position of Apples Inc. and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 24, 2016, in conformity with U.S. generally accepted accounting principles. It was also their opinion that Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 24, 2016, based on the COSO criteria. (SEC Form 10-K, pg. 70)

1. The standards of the Public Company Accounting Oversight Board of the United States require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. So yes, the auditors did examine all the evidence of all the financial statements. (SEC Form 10-K, pg. 70)

1. Financial Statements are the responsibility of the Company’s management. It is the auditor’s responsibility to express their opinion of the financial statements based on their audits. (SEC Form 10-K, pg. 70)

1. It is the Company’s management’s responsibility to handle the Financial Statements. (SEC Form 10-K, pg. 70)

1. The company’s management did acknowledge its responsibility for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. It was the auditor’s opinion that Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 24, 2016, based on the COSO criteria. (SEC Form 10-K, pg. 72)
2. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). (SEC Form 10-K, pg. 72)

1. The audit was conducted under the standards of the Public Company Accounting Oversight Board (United States). (SEC Form 10-K, pg. 71)

III. Profitability

1. What is the net income for the year covered by the report?  How does net income compare to previous years?  Why did net income increase or decrease? (SEC Form 10-K, p.39)

Net income in 2016 is 45687 million dollars. Net income in 2015 is 53394 million dollars. Net income in 2014 is 39510 million dollars. Net income in 2015 is higher than in 2014. Net income in 2016 is lower than in 2015. Compare to 2014 and 2016, operating income in 2015 is higher.

1. When is revenue recognized? (SEC Form 10-K, p.44)

The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.