Apple’s Report Solutions

Assignment 2 Apple’s Report Solutions  

1. What is Apple’s largest expense on its income statement 2014 and what is the amount?

How has this expense item changed since 2013?

The largest expense on its income statement 2014 is cost of sales. It is measured at $112,258 million. This expense item accounts for 61% of the total revenue, slightly decreased from 62% in 2013. (The decrease in cost of sales may be caused by better cost control, more efficient production process, and/or raw material price decreases. If we go back one more year, the cost of sales is actually only 56% of revenue. The significant increase in cost of sales in 2013 was because “…multiple factors including introduction of new versions of existing products with higher cost structures and flat or reduced pricing; a shift in sales mix to products with lower margins; introduction of iPad mini with gross margin significantly below the Company’s average product margins; higher expenses associated with changes to certain of the Company’s service policies and other”. In fact, by studying Apple’s previous gross margin, when they experience favorable changes in gross margin is when they experience higher mix of iphone sales. All these trends, including reduced iphone sales, increased cost of production, therefore reduced margin in 2013 add pressure on the buyback plan of shares so as to give cash back to shareholders).

1. What amount does Apple report as operating profit for 2014? What amount does it report as profit before tax? What explains the difference between the two?

The operating profit for 2014 is $52,503 million. The income before tax is 53,483. The difference is the net other income. In Apple’s case, they include financial cost and financing income in other income. (unlike mostly companies they enjoy tax benefits from the interest expenses, Apple actually will have to pay more taxes because of the financing income. This is not what you will find in a typical manufacturing company. According to Apple’s 10-k, other income include interest and dividend income (1,795 million), interest expense (384 million) and other expense (431 million). The interest and dividend income result from the Apple’s holding of marketable securities.)

1. What is Apple’s effective tax rate for 2014 (effective tax rate is the rate at which its pre-tax profits are taxed)?

Apple’s effective tax rate for 2014 is about 26% (13973/53483). (According to Apple’s 10-k, the computed expected tax at the statutory rate is about $18,719 million, about 35.6% of taxable income. The amount of tax provision to US governments however reduces because of $4,744 million earnings of foreign subsidiaries, and R&D credit, domestic production activities deduction etc. This again highlights that most of Apple’s cash are held by foreign subsidiaries and subject to US taxation on repatriation to the US).