Jimmie’s Fishing Hole has the following transactions related to its top-selling Shimano fishing reel for the month of June. Jimmie’s Fishing Hole uses a periodic inventory system.

Required:
1. Calculate ending inventory and cost of goods sold at June 30, using the specific identification method. The June 7 sale consists of fishing reels from beginning inventory, the June 15 sale consists of three fishing reels from beginning inventory and nine fishing reels from the June 12 purchase, and the June 27 sale consists of one fishing reel from beginning inventory and seven fishing reels from the June 24 purchase.

Jimmie’s Fishing Hole has the following transactions related to its top-selling Shimano fishing reel for the month of June. Jimmie’s Fishing Hole uses a periodic inventory system.

2. Using FIFO, calculate ending inventory and cost of goods sold at June 30.

Assignment: A complete analysis should include a summary of the case, a SWOT analysis, a financial analysis, identification of strategic issues and challenges, and a strategic plan. You must support your case analysis with at least 3 sources in addition to the textbook.

The case describes the business model of one of the world’s largest e-tailers, Amazon.com, Inc. (Amazon). Amazon had been at the forefront of innovation, adding and refining technology and changing the way customers shopped. It had a sustainable and innovative business model that intensely focused on its long-term growth opportunities as opposed to short-term profit margins. The case discusses the business model innovation at Amazon and how it evolved from just an online bookstore into one of the largest e-commerce platforms in the world where customers could find and discover anything they wanted to buy online in a more convenient way. The case outlines the four pillars of Amazon’s business model — low prices, wide selection, convenience, and customer service. Amazon attracted customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer service.In 2015, Seattle-based e-commerce giant Amazon.com, Inc.(Amazon) surprised investors by posting an unanticipated second quarterly profit in a row after struggling with profitability the previous year. In the third quarter ended September 30, 2015, Amazon’s revenues increased by 20% to US$23.2 billion, while net income was US $79 million, compared with a net loss of US$437 million in the corresponding quarter of the previous year. The revenue growth was attributed to the company’s rapidly growing cloud-computing business, higher sales in North America, and initiatives to attract more customers. On the back of these unexpected quarterly results, Amazon shares surged, making it the most valuable retailer in the world surpassing Wal-Mart Stores Inc as of July 2015. BUILDING AND EVOLVING THE BUSINESS MODEL Over the years, Amazon had disrupted the online retail industry and transformed itself from an e-commerce player to a powerful digital media platform focused on growth and innovation. It constantly reinvented its business model and found new ways to create value for its customers. According to analysts, Amazon’s business model was innovative because it combined the company’s online retail expertise with its ability to understand the needs of its customers. Amazon moved beyond books to foray into completely new product categories such as e-readers and enterprise cloud computing services. AMAZON’S GROWTH WHEEL In 2001, Bezos and his employees outlined a virtuous cycle called the “Amazon Flywheel”, which they believed powered their business. Bezos once invited well-known author and business consultant Jim Collins (Collins) to participate in Amazon’s executive retreat in 2001 to discuss the company’s future. As part of the discussions, Collins told Bezos and his executives that they had to decide what they were best at. Drawing on Collins’s concept of a flywheel, Bezos and his executives drew their own virtuous circle placing customer experience at the core of Amazon’s flywheel. Internally, it was referred to as Bezos’ napkin diagram as he drew it on a napkin... GROWTH NOW, PROFITS LATER Amazon generated revenues by selling millions of products to customers through its retail website and by charging third party sellers who sold products on Amazon’s website. It also served as a platform for independent publishers to publish books on Kindle with a 35% or 70% royalty option. In addition, Amazon generated revenue from its cloud business by providing web technology infrastructure to developers and enterprises. It followed a high fixed costs and low marginal costs business model. According to Eugene Wei, a former Amazon employee... RESOURCES AND PROCESSES THAT SUPPORT THE STRATEGY Amazon was one of the most innovative companies in the US. From the beginning, it had been at the forefront of innovation, adding and refining technology and changing the way customers shopped. On invention being a second nature at Amazon, Bezos said... CHALLENGES According to industry observers, Amazon over the years had disrupted other online retailers and brick-and-mortar stores and leveraged its e-commerce operations to become a retail Goliath. However, some critics felt that Amazon was too ambitious as it had been growing alarmingly and investing heavily. They felt that the strategy could backfire and that Amazon needed to be selective about the opportunities it pursued as it could not take customers and the competition for granted... THE ROAD AHEAD Going forward, the company planned to launch new digital products and service categories, build more fulfillment centers, power AWS, and expand the Kindle Fire Ecosystem. The company also planned to hire 100,000 people in North America for the holiday season.

*in r studio file

4. The director of admissions of a small college selected 120 students at random from the new freshman class in a study to determine whether a student’s grade point average (GPA) at the end of the freshman year (y) can be predicted from the ACT test score (x). Estimate the simple linear regression of, y = β0 + β1x + ε, using gpa.txt data and answer the following questions. (4 pts each)

(a) Report the least squares estimates of β0 and β1 and state the estimated regression function.

(b) Plot the estimated regression function and the data. Does the estimated regression function appear to fit the data well?

gpa.txt

y x
3.897 21
3.885 14
3.778 28
2.540 22
3.028 21
3.865 31
2.962 32
3.961 27
0.500 29
3.178 26
3.310 24
3.538 30
3.083 24
3.013 24
3.245 33
2.963 27
3.522 25
3.013 31
2.947 25
2.118 20
2.563 24
3.357 21
3.731 28
3.925 27
3.556 28
3.101 26
2.420 28
2.579 22
3.871 26
3.060 21
3.927 25
2.375 16
2.929 28
3.375 26
2.857 22
3.072 24
3.381 21
3.290 30
3.549 27
3.646 26
2.978 26
2.654 30
2.540 24
2.250 26
2.069 29
2.617 24
2.183 31
2.000 15
2.952 19
3.806 18
2.871 27
3.352 16
3.305 27
2.952 26
3.547 24
3.691 30
3.160 21
2.194 20
3.323 30
3.936 29
2.922 25
2.716 23
3.370 25
3.606 23
2.642 30
2.452 21
2.655 24
3.714 32
1.806 18
3.516 23
3.039 20
2.966 23
2.482 18
2.700 18
3.920 29
2.834 20
3.222 23
3.084 26
4.000 28
3.511 34
3.323 20
3.072 20
2.079 26
3.875 32
3.208 25
2.920 27
3.345 27
3.956 29
3.808 19
2.506 21
3.886 24
2.183 27
3.429 25
3.024 18
3.750 29
3.833 24
3.113 27
2.875 21
2.747 19
2.311 18
1.841 25
1.583 18
2.879 20
3.591 32
2.914 24
3.716 35
2.800 25
3.621 28
3.792 28
2.867 25
3.419 22
3.600 30
2.394 20
2.286 20
1.486 31
3.885 20
3.800 29
3.914 28
1.860 16
2.948 28

Accounting for iPhone at Apple Inc

On October 21, 2008, Apple Inc. announced financial results for Q4 of FY 2008 ended September 27, 2008 (see Exhibit 1). Under the U.S. generally accepted accounting principles (GAAP), Apple reported quarterly revenue of $7.9 billion and net profit of $1.1 billion. For the first time, the Cupertino, California-based company included non-GAAP measures in its earnings announcement to supplement its U.S. GAAP financial results. Apple’s non-GAAP quarterly revenue and net profit were $11.7 billion and $2.4 billion, respectively. As Apple CEO Steve Jobs noted, “As you can see, the non-GAAP financial results are truly stunning.”1 He explained the change in a rare appearance on the company’s earnings conference call later that day: I would like to . . . talk about the non-GAAP financial results, because I think this is a pretty big deal. In addition to reporting an outstanding quarter, today we are also introducing non- GAAP financial results, which eliminate the impact of subscription accounting. Because by its nature subscription accounting spreads the impact of iPhone’s contribution to Apple’s overall sales, gross margin, and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company’s overall performance. As long as our iPhone business was small relative to our Mac and music businesses, this didn’t really matter much, but the past quarter, as you heard, our iPhone business has grown to about $4.6 billion, or 39% of Apple’s total business, clearly too big for Apple management or investors to ignore.2 Jobs also noted that in terms of non-GAAP mobile-phone revenue, in just 15 months Apple had become the world’s third-largest phone manufacturer behind Nokia and Samsung but ahead of Sony Ericsson, LG, Motorola, and RIM.

Company Background

Jobs and Steve Wozniak launched the personal computer revolution in the 1970s with the Apple II. In 1984, the Apple Macintosh, with its ease-of-use and brilliant design, redefined the personal computer. Shortly thereafter, Jobs left the company, returning in 1997. Under Jobs, Apple catalyzed the digital-media industry with the launch of its iPod portable musical player in October 2001, followed by the introduction of its iTunes online store in April 2003. In June 2007, the company entered the highly competitive mobile-phone market with its iPhone, the first smartphone (a combination of a phone and a mini-computer) with a touch-screen interface and the company’s new mobile operating system, iOS. Several months later, Apple released the iPod touch (an iPhone without the phone capability). Apple released its iPhone 3G in July 2008 along with its second-generation mobile operating system (iOS 2). Also in July 2008, Apple introduced its App Store, which offered iPhone and iPod touch users a wide variety of mobile applications ranging from games to social networking to productivity tools, mostly priced under $10. On July 14, 2008, Jobs noted, “The App Store is a grand slam, with a staggering 10 million applications downloaded in just three days. Developers have created some extraordinary applications, and the App Store can wirelessly deliver them to every iPhone and iPod touch user instantly.”3 Many of the applications took advantage of the more robust iOS 2. By October 2008, Apple was best known for its technical and design innovation, its “walled garden” approach (i.e., its mostly proprietary ecosystem of hardware, operating and application software, and peripherals), and its premium-priced products. i

Phone Business Model

The original iPhone 8GB model had a U.S. retail price of $399 and was available through Apple and AT&T, the iPhone’s exclusive U.S. mobile carrier. In the U.S., mobile carriers typically provided subsidies to phone manufacturers, which lowered the purchase price of the new phone. In exchange, most consumers signed a two-year service contract with the carriers. Apple and AT&T agreed to a different arrangement, but did not disclose its specifics. AT&T did not subsidize the iPhone; instead, Apple signed a revenue-sharing agreement with AT&T that gave Apple a share of the subscribers’ monthly service fees. Needham & Co. analyst Charles Wolf believed that AT&T paid Apple $10 per month over a typical two-year contract.4 In addition, although Apple did not disclose how much it sold the iPhone for to AT&T, analysts believed that Apple made an estimated $120 in gross profit on every iPhone sold.5 At the iPhone’s launch, Apple announced it might periodically offer new software updates and upgrades free of charge to its iPhone customers. In contrast, Mac and iPod users did not receive free software features and upgrades. For example, users were charged $129 to upgrade to the new Mac operating system (Mac OS X Leopard) in October 2007, whereas Apple planned to provide newer versions of the iPhone operating system free of charge to all iPhone users. Apple’s chief financial officer Peter Oppenheimer explained, “Since iPhone customers will likely be our best advocates for the product, we want to get them many of these new features and applications at no additional charge as they become available.”6 In addition, Apple’s management knew that smartphone users were slow to update their software, and that few opted to buy upgrades. Therefore, the company believed it was necessary to offer new software features free of charge to increase user acceptance. In contrast, most other mobile software vendors reserved new software updates for new hardware (i.e., phone) releases.7 Apple, AT&T, third-party application developers, and users would all benefit from consumers’ use of the latest operating system and applications, giving Apple and its ecosystem a competitive advantage. AT&T would run a more effective and efficient mobile network; third-party software developers would have a stable hardware and software roadmap; Apple could delist applications from its App Store that weren’t written for its latest operating system; and all the while, iPhone users would benefit from an evolving and differentiated set of features and functionality. Many users ofcompeting mobile-phone platforms could not upgrade to newer operating systems and applications because of compatibility issues with their phones. When Apple launched the iPhone 3G in July 2008, it revamped its business model, bringing it more in line with industry practices. Apple gave up its share of the monthly service revenue in exchange for AT&T subsidizing the price of the iPhone 3G, which sold for $199 at retail. Again, the two parties chose not to disclose the specifics of their arrangement, but the subsidy was estimated at $300 per phone sold.8 Apple continued to differ from most other industry participants when it offered existing iPhone users upgrades to its second-generation operating system at no cost. By August 2008, a month after Apple introduced its App Store, Jobs noted that users downloaded more than 60 million programs for the iPhone, and Apple was averaging $1 million a day in application-software revenue. Apple received 30% of the App Store revenue from the sale of an iPhone application, and the developer received the remaining 70%.9 Jobs stated, “Phone differentiation used to be about radios and antennas and things like that. We think, going forward, the phone of the future will be differentiated by software.”10 Also in August 2008, the New York Times reported that T-Mobile would be the first carrier to launch mobile phones using Google’s Android mobile operating system; the phones were expected to hit shelves in late October 2008. On October 21, 2008, Google announced that Android was now “the first free, open source, and fully customizable mobile platform.”

iPhone Revenue Recognition

Software-enabled hardware devices (also known as “bundled components”), such as Apple’s iPhone, Macs, and iPods, fell under the software revenue recognition rules pursuant to American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2, Software Revenue Recognition. When Apple first introduced the iPhone in 2007, the company announced it would use the “subscription method of accounting” under SOP No. 97-2 to book revenue for its new iPhone. Oppenheimer explained: Since we will be periodically providing new software features to iPhone customers free of charge, we will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight line basis over 24 months. So while the cash from iPhone sales will be collected at the time of sale, we will be recording deferred revenue and costs of goods sold on our balance sheet, and amortizing both of them into our earnings on a straight line basis over 24 months. We will continue to expense our iPhone engineering, sales, and marketing costs as we incur them. This accounting policy will have no impact on cash flow or the economics of our business.12 In contrast, Apple generally recognized revenue and cost of sales for its other software-enabled hardware products such as Macs and iPods at the time of sale (i.e., immediate revenue recognition) under SOP No. 97-2. This was because the company did not provide new features or software applications for those products free of charge. (See Exhibit 2 for the FY 2008 financial statement note relating to Apple’s revenue recognition policies under GAAP.) Apple’s decision to use subscription accounting for the iPhone came soon after the company faced consumer backlash over a $5 upgrade fee (later reduced to $1.99) it charged new MacBook buyers.13 In 2006, Apple sold its latest MacBook with a wireless chip that would allow users to access the new and better Wi-Fi 802.11n technology once it became available and the chip was activated withsoftware. Apple did not tell MacBook buyers about the chip’s existence, and it also recognized all revenue at the time the MacBooks sold. Thus, the chip and its activation software were an unspecified, future upgrade that did not have an established, objective, separate value (which would have allowed it to be accounted for separately) at the time of the MacBook sale. To comply with GAAP, Apple faced two options: 1) restate its financials to recognize the MacBook revenue under subscription accounting, or 2) charge users for the upgrade. The company chose the latter option. Technology companies such as Apple were increasingly facing the issue of how to account for bundled components as the software and hardware in these products became more integrated and integral to the products’ function. This placed U.S. technology companies on unequal footing with their overseas competitors because International Financial Reporting Standards (IFRS) allowed companies to use a more subjective measure—cost plus margin—when an objective and separate value could not be established for a future deliverable such as a free software upgrade. Consequently, an overseas company could report more than a fraction of its revenue when it sold a bundled component with the promise of a future deliverable such as a free upgrade. Company management could estimate the cost and the margin of the upgrade and defer just that portion of the bundled component’s sale until the upgrade was delivered.Subscription Accounting The software and magazine publishing industries were well known for their use of subscription accounting. Magazine publishers reported the cash received for a subscription at the time that the subscription was purchased, but recorded the revenue only as each issue was delivered. The remaining balance was deferred into a liability account called unearned (or deferred) revenue. For example, if a year’s subscription of a monthly magazine cost $12, then the magazine publisher would recognize $1 per month in revenue for 12 months as the unearned revenue account decreased by $1 per month. Under subscription accounting, Apple recognized the associated revenue and cost of goods sold for the iPhone on a straight-line basis over the product’s estimated 24-month economic life (the typical length of a mobile phone service contract). When Apple announced its quarterly results from iPhone sales, its reported revenues (and other related metrics) reflected only an eighth of the revenue from iPhone sales during that quarter. This resulted in a deferral of the remaining revenue and cost of sales relating to iPhones units sold, although the company received and reported the cash in the quarter of the sale. Each quarter, Apple also reported a share of iPhone sales (both the revenue and the associated cost of goods sold) for iPhones sold in previous quarters. (See Exhibit 3 for an illustration of iPhone subscription accounting.) As long as the number of iPhone sales increased each quarter, the deferral balance increased. Costs incurred for engineering, sales, marketing, and warranty were expensed as incurred. Reactions In July 2008, iPhone users validated Apple’s decision to offer free upgrades when they quickly adopted the free iOS 2. Apple never intended to give iPod touch users upgrades at no charge, and its users expressed confusion and dissatisfaction with their $9.95 upgrade fee for the same software.15 At the same time, Apple’s use of subscription accounting drew mixed reviews from the business community. A Business Finance article praised Apple’s “smoother revenue curve” that resulted from its use of subscription accounting, saying, “Apple shows how a mature, astute organization can use revenue accounting rules to its benefit.”16 However, an Apple 2.0 Fortune Tech post stated:More than seven months have passed [since Apple’s use of subscription accounting began] and nobody—not the analysts, not the investors, and certainly not Wall Street—has quite wrapped their mind around what this bookkeeping oddity means for Apple's bottom line. That’s in part because it’s complicated, and in part because Apple hasn’t provided all the data you would need to fully assess its impact. But those so-called deferred earnings are adding up, and some professional Apple watchers are starting to realize that their impact could be substantial .... And to the dismay of Apple shareholders, the fact that these deferred earnings are piling up seems to have gone right over the heads of the institutional investors who have driven Apple shares down nearly 75 points since December.17

Non-GAAP Supplements

By the fourth quarter of 2008, Apple’s management believed the impact of subscription accounting on its financials was too big for the company to ignore. Apple released select Q4 of FY 2008 non-GAAP financial results as supplements that gave Apple watchers their first look at its revenue numbers without the use of subscription accounting. Research suggested that companies issued non-GAAP supplementary disclosures to communicate adjusted accounting numbers that better predicted future performance, but also for opportunistic reasons.18 On average, investors appeared to weight non-GAAP numbers more heavily compared to GAAP numbers when they formed their expectations for future earnings, assuming they found the non-GAAP numbers informative and credible. Not surprisingly, research also showed that companies tended to emphasize measures that portrayed the most favorable performance.19 In 2003, the Securities and Exchange Commission (SEC) issued new non-GAAP disclosure rules to address concerns about the lack of oversight on these disclosures. The SEC’s Regulation G required companies that disclosed non-GAAP financial measures to use the most comparable GAAP measures when preparing their non-GAAP disclosures, in addition to providing a reconciliation of the GAAP and non-GAAP results.20 Recent studies indicated that since the passage of Regulation G, firms were less likely to provide non-GAAP earnings that excluded expenses of a recurring nature.21 In describing Apple’s non-GAAP financials, Jobs noted that iPhone non-GAAP sales were a staggering $4.6 billion, 39% of Apple’s total revenue in the fourth quarter of 2008. See Table A. Q42008 GAAP Non-Gaap % increase Total Sales 7.9 11.7 48% Total Income 1.1 2.4 115% Iphone Sales 0.8 4.6 475% Iphone as % of Sales 10% 39% Apple cautioned that its non-GAAP calculations did not adjust for the estimated costs associated with its plan to provide new features and software upgrades to iPhone buyers free of charge. It also warned investors that these figures were not prepared under a comprehensive set of rules or principles, since no standards existed for making these calculations. (See Exhibit 5 for Apple’s cautions on use of its non-GAAP supplements.) Apple also announced iPhone Q4 of FY 2008 GAAP sales that just missed Wall Street’s estimates, but total income that easily beat analysts’ estimates.22 Apple’s guidance for the first quarter of FY 2009 was well below Wall Street’s forecast. Apple’s stock closed down for the day.
Conclusion

The immediate analyst reaction to Apple’s Q4 of FY 2008 financial results and conservative Q1 of FY 2009 guidance was largely positive, although Maynard Um of UBS downgraded his rating from “Buy” to “Neutral” and cut his share price target to $115 (from $125), citing “potential macro- economic issues impacting Mac sales.”23 In contrast, Shebly Seyrafi of Calyon Securities raised his rating from “Add” to “Buy” and increased his price target to $150 (from $130), noting that Apple’s earnings per share (EPS) would have more than doubled had it not been for the company’s use of subscription accounting for iPhone sales.24 Reaction to Apple’s decision to provide non-GAAP supplements was more mixed. Proponents of Apple’s use of non-GAAP supplements argued that these results were more consistent with Apple’s $24.5 billion in cash and short-term investments. Under GAAP, they pointed out, the iPhone’s strong shipments in Q4 of FY 2008 were not fully reflected in Apple’s results. They also contended that valuations using non-GAAP measures were better indicators of the company’s true financial performance.25n contrast, GAAP proponents asserted that the Street penalized technology companies reporting non-GAAP results. They argued that Apple’s management clearly believed future, free software upgrades were critical to an iPhone buyer’s initial purchase decision and necessitated Apple’s use of subscription accounting. Further, they argued that non-GAAP supplements gave the iPhone too much weight, pointing to the fact that Apple’s quarterly numbers became more sensitive to iPhone unit sales, which were more volatile and difficult for analysts to predict. Perhaps most importantly, they maintained that investors knew to use cash revenue numbers for valuations and ratios, and that changing to non-GAAP measures should have no impact on the economic value of Apple shares.26 Apple announced that it would continue to provide non-GAAP supplements during earnings releases. Only time would reveal their effects, if any, on Apple’s share pricing.

Questions

1. What was Apple Inc.’s business model for its iPhone in 2008? What was their strategy to make money and penetrate the market?

2. What is subscription accounting? How is it different from the standard revenue recognition methods used to account for sale of electronic products? Why Apple used subscription accounting for its phones, and not for its other products?

3. How did the use of subscription accounting affect key financial ratios of Apple Inc.? Which ratios were likely to be most affected?

4. What were the reasons behind introduction of Non-GAAP financial measures by Apple Inc. in 2008? What was the reaction of investment community?

Note: Revision of key revenue recognition methods will be helpful for your analysis. Information on industry analysis from Chapter 2 might help you answer question 1.

Accounting for iPhone at Apple Inc On October 21, 2008, Apple Inc. announced financial results for Q4 of FY 2008 ended September 27, 2008 (see Exhibit 1). Under the U.S. generally accepted accounting principles (GAAP), Apple reported quarterly revenue of $7.9 billion and net profit of $1.1 billion. For the first time, the Cupertino, California-based company included non-GAAP measures in its earnings announcement to supplement its U.S. GAAP financial results. Apple’s non-GAAP quarterly revenue and net profit were $11.7 billion and $2.4 billion, respectively. As Apple CEO Steve Jobs noted, “As you can see, the non-GAAP financial results are truly stunning.”1 He explained the change in a rare appearance on the company’s earnings conference call later that day: I would like to . . . talk about the non-GAAP financial results, because I think this is a pretty big deal. In addition to reporting an outstanding quarter, today we are also introducing non- GAAP financial results, which eliminate the impact of subscription accounting. Because by its nature subscription accounting spreads the impact of iPhone’s contribution to Apple’s overall sales, gross margin, and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company’s overall performance. As long as our iPhone business was small relative to our Mac and music businesses, this didn’t really matter much, but the past quarter, as you heard, our iPhone business has grown to about $4.6 billion, or 39% of Apple’s total business, clearly too big for Apple management or investors to ignore.2 Jobs also noted that in terms of non-GAAP mobile-phone revenue, in just 15 months Apple had become the world’s third-largest phone manufacturer behind Nokia and Samsung but ahead of Sony Ericsson, LG, Motorola, and RIM. Company Background Jobs and Steve Wozniak launched the personal computer revolution in the 1970s with the Apple II. In 1984, the Apple Macintosh, with its ease-of-use and brilliant design, redefined the personal computer. Shortly thereafter, Jobs left the company, returning in 1997. Under Jobs, Apple catalyzed the digital-media industry with the launch of its iPod portable musical player in October 2001, followed by the introduction of its iTunes online store in April 2003. In June 2007, the company entered the highly competitive mobile-phone market with its iPhone, the first smartphone (a combination of a phone and a mini-computer) with a touch-screen interface and the company’s new mobile operating system, iOS. Several months later, Apple released the iPod touch (an iPhone without the phone capability). Apple released its iPhone 3G in July 2008 along with its second-generation mobile operating system (iOS 2). Also in July 2008, Apple introduced its App Store, which offered iPhone and iPod touch users a wide variety of mobile applications ranging from games to social networking to productivity tools, mostly priced under $10. On July 14, 2008, Jobs noted, “The App Store is a grand slam, with a staggering 10 million applications downloaded in just three days. Developers have created some extraordinary applications, and the App Store can wirelessly deliver them to every iPhone and iPod touch user instantly.”3 Many of the applications took advantage of the more robust iOS 2. By October 2008, Apple was best known for its technical and design innovation, its “walled garden” approach (i.e., its mostly proprietary ecosystem of hardware, operating and application software, and peripherals), and its premium-priced products. iPhone Business Model The original iPhone 8GB model had a U.S. retail price of $399 and was available through Apple and AT&T, the iPhone’s exclusive U.S. mobile carrier. In the U.S., mobile carriers typically provided subsidies to phone manufacturers, which lowered the purchase price of the new phone. In exchange, most consumers signed a two-year service contract with the carriers. Apple and AT&T agreed to a different arrangement, but did not disclose its specifics. AT&T did not subsidize the iPhone; instead, Apple signed a revenue-sharing agreement with AT&T that gave Apple a share of the subscribers’ monthly service fees. Needham & Co. analyst Charles Wolf believed that AT&T paid Apple $10 per month over a typical two-year contract.4 In addition, although Apple did not disclose how much it sold the iPhone for to AT&T, analysts believed that Apple made an estimated $120 in gross profit on every iPhone sold.5 At the iPhone’s launch, Apple announced it might periodically offer new software updates and upgrades free of charge to its iPhone customers. In contrast, Mac and iPod users did not receive free software features and upgrades. For example, users were charged $129 to upgrade to the new Mac operating system (Mac OS X Leopard) in October 2007, whereas Apple planned to provide newer versions of the iPhone operating system free of charge to all iPhone users. Apple’s chief financial officer Peter Oppenheimer explained, “Since iPhone customers will likely be our best advocates for the product, we want to get them many of these new features and applications at no additional charge as they become available.”6 In addition, Apple’s management knew that smartphone users were slow to update their software, and that few opted to buy upgrades. Therefore, the company believed it was necessary to offer new software features free of charge to increase user acceptance. In contrast, most other mobile software vendors reserved new software updates for new hardware (i.e., phone) releases.7 Apple, AT&T, third-party application developers, and users would all benefit from consumers’ use of the latest operating system and applications, giving Apple and its ecosystem a competitive advantage. AT&T would run a more effective and efficient mobile network; third-party software developers would have a stable hardware and software roadmap; Apple could delist applications from its App Store that weren’t written for its latest operating system; and all the while, iPhone users would benefit from an evolving and differentiated set of features and functionality. Many users ofcompeting mobile-phone platforms could not upgrade to newer operating systems and applications because of compatibility issues with their phones. When Apple launched the iPhone 3G in July 2008, it revamped its business model, bringing it more in line with industry practices. Apple gave up its share of the monthly service revenue in exchange for AT&T subsidizing the price of the iPhone 3G, which sold for $199 at retail. Again, the two parties chose not to disclose the specifics of their arrangement, but the subsidy was estimated at $300 per phone sold.8 Apple continued to differ from most other industry participants when it offered existing iPhone users upgrades to its second-generation operating system at no cost. By August 2008, a month after Apple introduced its App Store, Jobs noted that users downloaded more than 60 million programs for the iPhone, and Apple was averaging $1 million a day in application-software revenue. Apple received 30% of the App Store revenue from the sale of an iPhone application, and the developer received the remaining 70%.9 Jobs stated, “Phone differentiation used to be about radios and antennas and things like that. We think, going forward, the phone of the future will be differentiated by software.”10 Also in August 2008, the New York Times reported that T-Mobile would be the first carrier to launch mobile phones using Google’s Android mobile operating system; the phones were expected to hit shelves in late October 2008. On October 21, 2008, Google announced that Android was now “the first free, open source, and fully customizable mobile platform.” iPhone Revenue Recognition Software-enabled hardware devices (also known as “bundled components”), such as Apple’s iPhone, Macs, and iPods, fell under the software revenue recognition rules pursuant to American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2, Software Revenue Recognition. When Apple first introduced the iPhone in 2007, the company announced it would use the “subscription method of accounting” under SOP No. 97-2 to book revenue for its new iPhone. Oppenheimer explained: Since we will be periodically providing new software features to iPhone customers free of charge, we will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight line basis over 24 months. So while the cash from iPhone sales will be collected at the time of sale, we will be recording deferred revenue and costs of goods sold on our balance sheet, and amortizing both of them into our earnings on a straight line basis over 24 months. We will continue to expense our iPhone engineering, sales, and marketing costs as we incur them. This accounting policy will have no impact on cash flow or the economics of our business.12 In contrast, Apple generally recognized revenue and cost of sales for its other software-enabled hardware products such as Macs and iPods at the time of sale (i.e., immediate revenue recognition) under SOP No. 97-2. This was because the company did not provide new features or software applications for those products free of charge. (See Exhibit 2 for the FY 2008 financial statement note relating to Apple’s revenue recognition policies under GAAP.) Apple’s decision to use subscription accounting for the iPhone came soon after the company faced consumer backlash over a $5 upgrade fee (later reduced to $1.99) it charged new MacBook buyers.13 In 2006, Apple sold its latest MacBook with a wireless chip that would allow users to access the new and better Wi-Fi 802.11n technology once it became available and the chip was activated withsoftware. Apple did not tell MacBook buyers about the chip’s existence, and it also recognized all revenue at the time the MacBooks sold. Thus, the chip and its activation software were an unspecified, future upgrade that did not have an established, objective, separate value (which would have allowed it to be accounted for separately) at the time of the MacBook sale. To comply with GAAP, Apple faced two options: 1) restate its financials to recognize the MacBook revenue under subscription accounting, or 2) charge users for the upgrade. The company chose the latter option. Technology companies such as Apple were increasingly facing the issue of how to account for bundled components as the software and hardware in these products became more integrated and integral to the products’ function. This placed U.S. technology companies on unequal footing with their overseas competitors because International Financial Reporting Standards (IFRS) allowed companies to use a more subjective measure—cost plus margin—when an objective and separate value could not be established for a future deliverable such as a free software upgrade. Consequently, an overseas company could report more than a fraction of its revenue when it sold a bundled component with the promise of a future deliverable such as a free upgrade. Company management could estimate the cost and the margin of the upgrade and defer just that portion of the bundled component’s sale until the upgrade was delivered.Subscription Accounting The software and magazine publishing industries were well known for their use of subscription accounting. Magazine publishers reported the cash received for a subscription at the time that the subscription was purchased, but recorded the revenue only as each issue was delivered. The remaining balance was deferred into a liability account called unearned (or deferred) revenue. For example, if a year’s subscription of a monthly magazine cost $12, then the magazine publisher would recognize $1 per month in revenue for 12 months as the unearned revenue account decreased by $1 per month. Under subscription accounting, Apple recognized the associated revenue and cost of goods sold for the iPhone on a straight-line basis over the product’s estimated 24-month economic life (the typical length of a mobile phone service contract). When Apple announced its quarterly results from iPhone sales, its reported revenues (and other related metrics) reflected only an eighth of the revenue from iPhone sales during that quarter. This resulted in a deferral of the remaining revenue and cost of sales relating to iPhones units sold, although the company received and reported the cash in the quarter of the sale. Each quarter, Apple also reported a share of iPhone sales (both the revenue and the associated cost of goods sold) for iPhones sold in previous quarters. (See Exhibit 3 for an illustration of iPhone subscription accounting.) As long as the number of iPhone sales increased each quarter, the deferral balance increased. Costs incurred for engineering, sales, marketing, and warranty were expensed as incurred. Reactions In July 2008, iPhone users validated Apple’s decision to offer free upgrades when they quickly adopted the free iOS 2. Apple never intended to give iPod touch users upgrades at no charge, and its users expressed confusion and dissatisfaction with their $9.95 upgrade fee for the same software.15 At the same time, Apple’s use of subscription accounting drew mixed reviews from the business community. A Business Finance article praised Apple’s “smoother revenue curve” that resulted from its use of subscription accounting, saying, “Apple shows how a mature, astute organization can use revenue accounting rules to its benefit.”16 However, an Apple 2.0 Fortune Tech post stated:More than seven months have passed [since Apple’s use of subscription accounting began] and nobody—not the analysts, not the investors, and certainly not Wall Street—has quite wrapped their mind around what this bookkeeping oddity means for Apple's bottom line. That’s in part because it’s complicated, and in part because Apple hasn’t provided all the data you would need to fully assess its impact. But those so-called deferred earnings are adding up, and some professional Apple watchers are starting to realize that their impact could be substantial .... And to the dismay of Apple shareholders, the fact that these deferred earnings are piling up seems to have gone right over the heads of the institutional investors who have driven Apple shares down nearly 75 points since December.17 Non-GAAP Supplements By the fourth quarter of 2008, Apple’s management believed the impact of subscription accounting on its financials was too big for the company to ignore. Apple released select Q4 of FY 2008 non-GAAP financial results as supplements that gave Apple watchers their first look at its revenue numbers without the use of subscription accounting. Research suggested that companies issued non-GAAP supplementary disclosures to communicate adjusted accounting numbers that better predicted future performance, but also for opportunistic reasons.18 On average, investors appeared to weight non-GAAP numbers more heavily compared to GAAP numbers when they formed their expectations for future earnings, assuming they found the non-GAAP numbers informative and credible. Not surprisingly, research also showed that companies tended to emphasize measures that portrayed the most favorable performance.19 In 2003, the Securities and Exchange Commission (SEC) issued new non-GAAP disclosure rules to address concerns about the lack of oversight on these disclosures. The SEC’s Regulation G required companies that disclosed non-GAAP financial measures to use the most comparable GAAP measures when preparing their non-GAAP disclosures, in addition to providing a reconciliation of the GAAP and non-GAAP results.20 Recent studies indicated that since the passage of Regulation G, firms were less likely to provide non-GAAP earnings that excluded expenses of a recurring nature.21 In describing Apple’s non-GAAP financials, Jobs noted that iPhone non-GAAP sales were a staggering $4.6 billion, 39% of Apple’s total revenue in the fourth quarter of 2008. See Table A. Q42008 GAAP Non-Gaap % increase Total Sales 7.9 11.7 48% Total Income 1.1 2.4 115% Iphone Sales 0.8 4.6 475% Iphone as % of Sales 10% 39% Apple cautioned that its non-GAAP calculations did not adjust for the estimated costs associated with its plan to provide new features and software upgrades to iPhone buyers free of charge. It also warned investors that these figures were not prepared under a comprehensive set of rules or principles, since no standards existed for making these calculations. (See Exhibit 5 for Apple’s cautions on use of its non-GAAP supplements.) Apple also announced iPhone Q4 of FY 2008 GAAP sales that just missed Wall Street’s estimates, but total income that easily beat analysts’ estimates.22 Apple’s guidance for the first quarter of FY 2009 was well below Wall Street’s forecast. Apple’s stock closed down for the day. Conclusion The immediate analyst reaction to Apple’s Q4 of FY 2008 financial results and conservative Q1 of FY 2009 guidance was largely positive, although Maynard Um of UBS downgraded his rating from “Buy” to “Neutral” and cut his share price target to $115 (from $125), citing “potential macro- economic issues impacting Mac sales.”23 In contrast, Shebly Seyrafi of Calyon Securities raised his rating from “Add” to “Buy” and increased his price target to $150 (from $130), noting that Apple’s earnings per share (EPS) would have more than doubled had it not been for the company’s use of subscription accounting for iPhone sales.24 Reaction to Apple’s decision to provide non-GAAP supplements was more mixed. Proponents of Apple’s use of non-GAAP supplements argued that these results were more consistent with Apple’s $24.5 billion in cash and short-term investments. Under GAAP, they pointed out, the iPhone’s strong shipments in Q4 of FY 2008 were not fully reflected in Apple’s results. They also contended that valuations using non-GAAP measures were better indicators of the company’s true financial performance.25n contrast, GAAP proponents asserted that the Street penalized technology companies reporting non-GAAP results. They argued that Apple’s management clearly believed future, free software upgrades were critical to an iPhone buyer’s initial purchase decision and necessitated Apple’s use of subscription accounting. Further, they argued that non-GAAP supplements gave the iPhone too much weight, pointing to the fact that Apple’s quarterly numbers became more sensitive to iPhone unit sales, which were more volatile and difficult for analysts to predict. Perhaps most importantly, they maintained that investors knew to use cash revenue numbers for valuations and ratios, and that changing to non-GAAP measures should have no impact on the economic value of Apple shares.26 Apple announced that it would continue to provide non-GAAP supplements during earnings releases. Only time would reveal their effects, if any, on Apple’s share pricing. Questions 1. What was Apple Inc.’s business model for its iPhone in 2008? What was their strategy to make money and penetrate the market? 2. What is subscription accounting? How is it different from the standard revenue recognition methods used to account for sale of electronic products? Why Apple used subscription accounting for its phones, and not for its other products? 3. How did the use of subscription accounting affect key financial ratios of Apple Inc.? Which ratios were likely to be most affected? 4. What were the reasons behind introduction of Non-GAAP financial measures by Apple Inc. in 2008? What was the reaction of investment community? Note: Revision of key revenue recognition methods will be helpful for your analysis. Information on industry analysis from Chapter 2 might help you answer question 1.

How do financial markets and related institutions contribute to the overall economic health of the economy? Imagine a CFO who believes her job is to focus exclusively on company-level issues and assumes the markets run smoothly and will provide the company with capital as it is needed, assuming it has a good justification for the capital. Is this an advisable strategy? Why or why not?

in order for a strategic alliance to be successful seven attributes have been identified as important for the companies to both have. The first is that both firms entering the alliance must have well defined strategic goals. Each must have a strong focus for a specific outcome. How do the other factors contribute to successful strategic alliances?

**Botany Related Question**

What happens during the light-dependent and light-independent reactions of photosynthesis?

What roles do water, light, carbon dioxide, and chlorophyll play in photosynthesis?

How does glycolysis contribute toward aerobic respiration, anaerobic respiration and fermentation?

How do temperature, water, and oxygen affect respiration?

explain the concept of a food web and what happens if one species disappears; explain what factors contribute to changes in the size of populations; explain what biodiversity is and why it changes (either at the geologic time scale or human-caused changes); explain what potential changes will occur to the climate engine with increased greenhouse gases in the atmosphere;

1. Explain the behaviours that may facilitate the progression of HIV to the advanced stage.

2. Examine the effects of HIV and AIDS on the living standards of the people of Ghana.

3. (a) State and explain any two (2) Ghanaian values and how they contribute to the prevention of
HIV and AIDS.
(b) Examine the impact of negative peer pressure on the behaviour of an adolescent.