Company from the US market.

Sample Solution

   

Company: Apple Inc. (AAPL)

Financial Statement: 2022 Annual Report (Form 10-K)

Revenue Recognition

Apple Inc. primarily recognizes revenue from the sale of its products, including iPhones, iPads, Macs, wearables, accessories, and services. The company uses the accrual basis of accounting to recognize revenue, which means that revenue is recognized when it is earned, regardless of when cash is received.

Full Answer Section

          Apple uses several managerial assumptions in its revenue recognition process. These assumptions include:

• Product returns: Apple estimates the number of products that are likely to be returned and reduces revenue accordingly.
• Warranty costs: Apple estimates the cost of warranties and accrues expenses for future warranty claims.
• Channel inventory: Apple estimates the amount of inventory held by its channel partners and reduces revenue accordingly.

Allowance for Bad Debts Apple uses the percentage-of-receivables method to estimate its allowance for bad debts. This method estimates the amount of uncollectible receivables based on a percentage of total receivables. The company's allowance for bad debts has increased from $2.6 billion in 2020 to $3.2 billion in 2022. Inventory Valuation Method Apple uses the first-in, first-out (FIFO) method to value its inventory. This method assumes that the first items purchased are the first items sold. As a result, the cost of goods sold (COGS) is based on the cost of the earliest purchased inventory. If Apple had used the last-in, first-out (LIFO) method, its COGS would have been higher and its inventory would have been lower. This is because the cost of inventory has been increasing in recent years, so using LIFO would have resulted in a higher cost of goods sold. The approximate tax savings from using LIFO over FIFO can be calculated using the following formula: Tax savings = (Inventory under LIFO - Inventory under FIFO) * Tax rate In Apple's case, the tax savings from using LIFO over FIFO in 2022 would have been approximately $2.3 billion. Depreciation Apple uses the straight-line method to depreciate its property, plant, and equipment. This method assumes that assets depreciate evenly over their useful lives. Apple's depreciation expense has increased from $11.1 billion in 2020 to $16.0 billion in 2022. Conclusion Apple Inc. uses a variety of accounting methods to recognize revenue, estimate bad debts, value inventory, and depreciate assets. These methods are generally in line with industry practices and are consistent with the company's business model. One unusual assumption that Apple makes is its estimate of product returns. The company estimates that approximately 2% of its products will be returned. However, this assumption is based on historical data and may not reflect future trends. If the return rate were to increase, Apple's revenue could be negatively affected. Overall, Apple's accounting methods are transparent and consistent. The company provides detailed disclosures in its financial statements that allow investors and other stakeholders to understand how the company recognizes and measures its financial performance.