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Technology Stocks : Apple Inc. -- Ignore unavailable to you. Want to Upgrade?

To: rhet0ric who wrote (14184)	5/31/1998 8:21:00 PM
From: Jonathan Bird	Read Replies (1) \| Respond to of 213177

I guess that doesn't exactly qualify me to analyze Apple's books. You are probably a happier and more well adjusted person having not learned this stuff. It doesn't go down easy and can cause emotional scars. Judging from others' posts, the upshot seems to be the same, though: Apple is doing well, and without resorting to accounting tricks. To all, There are valid concerns and misinterpretation coming from both sides That is for certain. The accounting tricks concern seems to be that: 1 Apple could make a computer and expense it in Q1, then sell it in Q2 and show an inflated Q2 profit based on Q1's work. or 2. Apple could sell a computer on credit(receivables) in Q1 and then get the cash for it in Q2, and therefore showing an inflated profit in Q2 based on Q1 sales. Neither of these can occur because of two fundamental principals of accrual basis accounting. The first is called the Revenue Recognition Principal. It is: The idea that revenues should be recorded when (1) the earnings process is substantially complete and (2) and exchange has taken place. This means that the sales revenue for a computer is calculated at the point it actually leaves Apple hands and goes into the possession of the purchaser, not matter when it was manufactured or actually paid for by the purchaser. The second fundamental is called the Matching Principal. This principal says: All costs and expenses incurred in generating revenues must be recognized in the same reporting period as the related revenues. What this means is: 1. When Apple produces a computer in Q1 and sells it in Q2 then it will be expensed and revenues earned in Q2. The Q1 income statement will not be affected at all even though Apple actually paid to have this computer made in Q1. or 2. When Apple sells a computer in Q1 on credit(receivables) and then gets paid in Q2 it will have no effect on the Q2 income statement. All of the profit for that sale will have been on the Q1 income statement. The other concern seems to be that Apple's Assets have been reduced. The given explanation is that this is OK, because the Liabilities have also been reduced, and Equity has still increased. The problem is that approximately half of the reduction in Assets and Liabilities is attributable to the decrease in Sales Revenues. That is always bad. The other half is due to greater efficiency. For the short term at least, that is always good. (I say short term because dropping R&D for the sake of efficiency is not always the long term right move) The greater efficiency is the major contributor to Apples profits and therefore increased equity. The concern of the rest of the world, which is not adequately represented on the Apple message board IMO, is that there is a finite limit to the growth of profits due to increased efficiency. The theoretical limit is of course that you cannot have greater profits then you have sales revenue. The practical limit, at least in the computer business, is you cant even come close. This is like an earnings growth cap. Not an earnings cap mind you, but an earnings growth cap. Apple could very well continue to be profitable and just not grow. Therefore, what the rest of the world is now looking for before they give Apple a higher valuation(call it a P/E ratio if you want) is growth in revenues which will raise the earnings growth cap. This is the hard part, and Apple's next challenge. Some people here are saying 'yes' they will grow revenues, other are going to say 'no' they wont. What they are really saying is that they believe(or hope) that this or that is likely based on what they are observing. Anyone who talks about this issue in a right or wrong sense is delusional. The truth of the argument will only exist after the fact. Jon Bird