Question

Prepare for Week 2 Individual Assignment: Financial Reporting Problem, Apple Inc. Discuss with your collaborative group how to develop a summary of findings and recommendations for the Financial Reporting Problem, Apple Inc. Write a 175-word individual response. (No discussion has been started.)

Answer 1

Financial reporting problem

• Identify issues relating to the valuation of accounts receivable, including timing of recognition and estimation of uncollectible accounts. GAAP requires that accounts receivable be carried on the balance sheet at net realizable value. NRV is the gross accounts receivable less the allowances for uncollectible accounts, returns and allowances and discounts.
• Identify issues in inventory valuation, including which goods to include, what costs to include and which cost assumptions to use. All goods available for sale and still owned by the company are included in inventory. This would include goods out on consignment, goods in transit shipped FOB destination as well as goods owned on hand.
• Identify and compare cost flow assumptions used in accounting for inventories. The cost flow assumptions used for inventory valuation are FIFO (first in, first out) LIFO (last in first out) and average cost (weighted average for a periodic inventory and moving average for a perpetual inventory). FIFO values the ending inventory at the newest costs and the cost of goods sold at the oldest costs. LIFO values the ending inventory at the oldest costs and cost of goods sold at the newest costs.
• Analyze the effects of inventory errors. An error in the end of the period inventory will affect the cost of sales for the period, net income for the period, ending retained earnings for the period, beginning inventory for the next period, cost of sales for the next period and the net income for the next period. The cost of sales and net income errors in the next period would be in the opposite direction from those in the first period. The retained earnings at the end of the next period would be correct.
• Fair value method, Equity method and consolidated method for equity securities. The fair value method is applicable for available-for-sale securities. The equity method is used by the investor when ownership of 20% or more of the issuer’s voting stock is considered sufficient to influence the issuer’s operations. Here, the owner’s original investment is recorded at cost in the investment account. The investor records its percentage share of the investee’s periodic net income as an increase in the investment account and as a credit to equity is earnings account. When the investor receives a cash dividend from the investee, cash is increased and the investment account is decreased the amount of the dividend.
• Accounting for impairment of long term assets. The determination of impairment of a long term asset involves two steps. The first is recoverability test where the carrying value of the asset is compared with the expected undiscounted cash flows from the asset use and disposal. If the carrying value exceeds the expected cash flows an impairment loss calculation is required. The impairment loss is the amount by which the carrying value exceeds the fair value of the assets. The fair value of the asset would be the net proceeds from selling the asset in an orderly market.
• Defining off balance sheet financing and identifying different types of borrowing. Off balance sheet financing is a form of financing whereby liabilities are kept off the organization’s balance sheet. It is often used to keep the organization’s debt to equity ratio and equity multiplier ratios low to avoid debt covenant violations.