Does Accounting Matter? - Appl 10-K Analysis

Part 1: Book Value vs. Market Value

(Refer to Apple Q3 2018 balance sheet)

1. How much is the reported Book Value of Apple’s Assets (Total Assets)?

$ 349,197,000,000

2. How much is the total stockholders’ equity (one way to measure Book Value of Equity (BVE))?

$ 114,949,000,000.00

3. What is the BVE/MVE ratio?

Apple’s book-to-market ratio is 0.129, which shows us how the market strongly believes in Apple’s capacity to continuously generate profit over time through its assets as it is common for consistently profitable companies. This is because investors have confidence in the companies' ability to continue generating revenue growth and ultimately earnings growth.

4. Perform an internet search and find Apple’s estimated brand value in 2017 (e.g. Forbes magazine reports the estimate of most valued brands). Refer to Apple 2017 balance sheet; how much intangible assets (sum of Goodwill and Acquired Intangible Assets) does apple report at the end of 2017 fiscal year?

Estimated Value $ 170,000,000,000

$ 5,717,000,000 (Goodwill) + $ 2,298,000,000 (Intangible Assets) = $ 8,015,000,000

5. Comment on value relevance of reported accounting numbers

Accounting numbers serve as a truth check on actual assets and value in a historical sense. It serves as a baseline to compare the market value against which may reflect what the future return might be on shareholder’s equity.  While this represents upside, it also displays the amount of expected growth or sentiment baked into the market price vs. actual current value based on assets.

From an (possible and current) investor perspective, reported accounting numbers matter due to the consolidated reporting [that]captures all the information from the parent company and all its subsidiaries (accounting best practices). These accounting reports help investors read an identify in a short amount of time how much wealth is controlled by the parent company, which most of it is scattered around the subsidiaries. By gathering subsidiary financials to parent company financials, valuable information is disclosed.

Furthermore, accounting information and values matter in order to read and determine how subsidiaries of large corporations are managed and controlled: If the parent company owns 50% or more common shares from its subsidiary, it is presumed that it controls all activities and operations. From an analyst standpoint, this helps to determine if the parent-controlled subsidiaries are aligned with the headquarters’ mission and vision, but more importantly, if they are profitable.

Finally, it helps to detect undisclosed information and (possible current or future) problems: If a parent company doesn’t disclose the accounting values of certain subsidiaries, this usually means [that] these subsidiaries are in trouble and are not disclosed in order to present ‘better numbers’. Also, by checking how the accounting values of their previous and current investments, we can determine if something is trying to be hide, how the company is aligned with its mission and vision for generating profits, and what is the future path that this company is trying to follow.

In summary, accounting values are the universal language that help us determine the current status of a company and have a clear picture of its past, being able to interpret in the most accurate way possible their current state, and have a better understanding on where the company is being headed and what it can become in the future.

Part 2: Off-balance Sheet Obligations

1. Are Apple Warranty obligations recorded in their balance sheets? If not, where are they reported?

These are not included in the balance sheet. They are located in the section ‘Notes to the consolidated financial statements’ (Note 10 – Commitments and Contingencies).

2. How much Off-balance sheet liabilities apple recorded in 2017? What are those liabilities?

$157,251,000,000 - $104,021,000,000 = $53,230,000,000

These Off-balance consist of operating leases, manufacturing and purchase obligations and other purchase obligations.

3. What percentage of apple total liabilities are off-balance sheet in 2017?

$ 53,230,000,000 / $ 294,502,000,000 = 18.07%

Part 3: The market response to Apple’s earnings release

On Jul 31, 2018, Apple released its Q3 fiscal earnings results

1. On July 31, 2018 how much was the consensus analysts’ forecast of Apple’s quarterly earnings per share (EPS). (Go to yahoo finance, enter APPL in Quote lookup, and find it under Analysis tab.)

Current: 2.76

June 29, 2018 estimation: 2.18

Actual: 2.34

Source

2. How much quarterly EPS did Apple reported on Jul 31, 2018? Did Apple miss, meet, or beat Wall Street analysts’ expectation? How much was the extent of earnings surprise (i.e. Actual EPS – EPS forecast)?