Continued on next page 2 2 continued from previous

Info icon This preview shows pages 2–4. Sign up to view the full content.

View Full Document Right Arrow Icon
(continued on next page) 2-2
Image of page 2

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
(continued from previous page) Apple's balance sheet is very liquid as many of its assets can be readily converted to cash. Indeed, Apple holds over two- thirds of its assets in cash and marketable securities. Liquidity is important for companies like Apple that must react quickly to opportunities and changing market conditions. Like other technology companies, much of Apple's production is subcontracted. Consequently, Apple's property, plant and equipment make up only 6% of its assets. On the financing side of its balance sheet, almost two-thirds of Apple's resources come from owner financing: from common stock sold to shareholders and from past profits that have been reinvested in the business. Technology companies such as Apple, which have uncertain product life-cycles and highly volatile cash flows, strive to avoid high debt levels that might cause financial problems in a business downturn. Apple's nonowner financing consists of low-cost credit from suppliers (accounts payable) and unpaid overhead expenses (accrued liabilities). Consider Apple's income statement: driven by the popularity and high profit margins of iPods and iPhones, Apple recently reported over $18.3 billion of operating income. This is impressive given that Apple spends three cents of every sales dollar on research and development and runs expensive advertising campaigns. Yet, companies cannot live by profits alone. It is cash that pays bills. Profits and cash flow reflect two different concepts, each providing a different perspective on company performance. Apple generated over $18.5 billion of cash flow from operat- ing activities, and invested most of this cash flow in marketable securities. We review Apple's cash flows in this module. Apple pays no dividends and its newly issued common stock relates primarily to executive stock options. These capital transactions are reported in the statement of stockholders' equity. While it is important to understand what is reported in each of the four financial statements, it is also important to know what is not reported. To illustrate, Fortune reported that "Jobs cut a deal with the Big Five record companies ... to sell songs on iTunes, but they were afraid of Internet piracy. So Jobs promised to wrap their songs in Apple's FairPlay-the only copy-protection soft- ware that is iPod-compatible. Other digital music services such as Yahoo Music Unlimited and Napster reached similar deals with the big record labels. But Apple refused to license FairPlay to them. So those companies turned to Microsoft for copy protection. That means none of the songs sold by those services can be played on the wildly popular iPod. Instead, users of the services had to rely on inferior devices made by companies like Samsung and SanDisk that supported Microsoft's Windows Media format." Apple's copy-protection software described above creates a barrier to competition that allows iPod to earn above- average profits. This represents a valuable resource to Apple, but it is not reported as an asset
Image of page 3
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern