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M o d u l e Two Introducing Financial Statements and Transaction Analysis leArning Objectives LO1 Describe information conveyed by the financial...

• Complete Problems: P1-36, P1-42

2-1 A P P L E L E A R N I N G O B J E C T I V E S LO1 Describe information conveyed by the financial statements. (p. 2-3) LO2 Explain and illustrate linkages among the four financial statements. (p. 2-20) LO3 Illustrate use of the financial statement effects template to summarize accounting transactions. (p. 2-22) In 1985, the board of directors of Apple along with the new CEO John Sculley, dismissed Steve Jobs, Apple’s co-founder. Fast forward 12 years—Apple is struggling to survive. After a series of crippling financial losses, the com- pany’s stock price is at an all-time low. In a complete about- face, the board asks Steve Jobs to return as interim CEO to begin a critical restructuring of the company’s product line. True to form, Jobs shows up at his first meeting with Apple senior executives wearing shorts, sneakers, and a few days’ beard growth. Sitting in a swivel chair and spinning slowly, Jobs begins quizzing the executives. “O.K., tell me what’s wrong with this place,” asks Jobs. Mumbled replies and embarrassed looks ensue. Jobs cuts them short and jumps up: “It’s the products! So what’s wrong with the products?” Again, more weak answers and again Jobs cut them off. “The products SUCK!” he roars. “There’s no sex in them anymore!’’ Jobs was right—Apple was mired in a sea of problems, many stemming from a weak product line. The company’s decision to design proprietary software that was often incompatible with Windows had relegated Apple to a niche player in the highly competitive, low-margin PC business. Years before, Microsoft had replicated the Mac operating system and licensed the software to PC manufacturers such as Dell . Apple’s cumulative profit from 2001-2003 was an anemic $109 million and its prospects were dim. That was then. This is now. Apple’s iPod sales now surpass $8 billion annually, one-third of the company’s total sales. Accompanying the meteoric rise of its music player, Apple’s iTunes now accounts for over 10% of total sales. Apple’s shares (ticker: AAPL) traded around $100 in late 2008, a staggering 25 times the $4 they fetched ten years earlier when Jobs rejoined the team. Indeed, Apple’s stock has doubled in price in the past two years, as the follow- ing price chart illustrates. The total stock market value of Apple stock (called the market capitalization or market cap) exceeded $130 billion in late 2008. Apple Stock Price $80 $60 $40 $20 $0 $100 $120 $140 $160 $180 $200 2004 2005 2006 2007 2008 This module defines and explains the components of each financial statement: the balance sheet, the income statement, the statement of cash flows, and the statement of stockholders’ equity. Let’s begin with a sneak preview of Apple’s financial statements. Apple’s balance sheet is very liquid as many of its assets can be readily converted to cash. Indeed, Apple holds over 60% of its assets in cash and marketable securities. Liquid- ity is important for companies like Apple that must react quickly to opportunities and changing market conditions. Like other technology companies, much of Apple’s produc- tion is subcontracted. Consequently, Apple’s property, plant and equipment make up only 7% of its assets. Introducing Financial Statements and Transaction Analysis Module Two
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