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Apple Inc Reformulation. January 22 , 2014 Kristen Bachteler Module 2. Agenda. What is Reformulation Original Financial Statements Balance Sheet Income Statement Net Enterprise Assets Net Financing Liabilities Check Enterprise Profit After Tax Financing Expense After Tax Check

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Apple Inc Reformulation


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    1. Apple Inc Reformulation January 22, 2014 Kristen Bachteler Module 2

    2. Agenda What is Reformulation Original Financial Statements Balance Sheet Income Statement Net Enterprise Assets Net Financing Liabilities Check Enterprise Profit After Tax Financing Expense After Tax Check Reformulation Issues

    3. At the Core of Apple • Enterprise operations: • Business/production activities • Versus financing • Tangential • However, accounting fails to make this distinction • Though has been considered in the past • Reformulation process separates income & assets with these two activities • Allows a focus on the enterprise in the forecasting & valuation

    4. A Sour Apple? Issues with the Reformulation Acquisitions Items in NEA & EPAT

    5. Acquisitions “continues to develop new technologies to enhance existing products and to expand the range of its product offerings through research and development, licensing of intellectual property and acquisition of third-party businesses and technology”

    6. Acquisitions • Business philosophy of acquiring small companies that they can easily integrate into existing projects • Lots of cash & urge to grow through big acquisitions • However, Apple focuses on smaller companies • According to Forbes, Apple has had major acquisitions this past year but none of the past three years 10 Ks mention a specific company • 2013: 15 companies acquired • July 2012: AuthenTec, mobile security company bought for $356 million • October 2011: C3, third mapping company Apple bought

    7. NEA & EPAT • Deferred Revenue • Arises in normal course of business so considered an Net Enterprise Liability in the NEA calculation • No interest expense nor income listed • Just issued long-term debt • Up from $0 over past two years • Therefore excluded in calculations of EPAT

    8. NEA & EPAT (continued) • Financial Currency Translation • Assumed to include as an enterprise activity because such a global company • Used to translate assets & liabilities of non-U.S. dollar functional currency subsidiaries • Derivative Financial Instruments • Used to partially offset business exposure to “foreign currency and interest rate risk” • Related to activities to reduce market, interest rate, currency exchange, & commodity price risks so treat as enterprise • Changes in Unrealized Gains/Losses on Marketable Securities • Not the result of enterprise operating activities so excluded from EPAT