Financial Shenanigans Apple Inc

Inventory and Depreciation Valuation

Apple must order components for its products and build inventory in advance of product shipments. They record a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. They perform a detailed review of inventory each fiscal quarter that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels, and component cost trends. The industries in which they compete are subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. If future demand or market conditions for Apple's products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of component inventory, they may be required to record additional write-downs, which would negatively affect its results of operations in the period when the write-downs were recorded.

Apple records accruals for estimated cancellation fees related to component orders that have been cancelled or are expected to be cancelled. Consistent with industry practice, they acquire components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. These commitments typically cover their requirements for periods ranging from 30 to 150 days. If there is an abrupt and substantial decline in demand for one or more of their products or an unanticipated change in technological requirements for any of their products, they may be required to record additional accruals for cancellation fees that would negatively affect its results of operations in the period when the cancellation fees are identified and recorded.

Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building, up to five years for equipment, and the shorter of lease terms or ten years for leasehold improvements. Apple capitalizes eligible costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to the internal-use software are amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years.

Changes In Accounting Methods

In September 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements ("new accounting principles"). The new accounting principles permitted prospective or retrospective adoption, and the Company elected retrospective adoption during the first quarter of 2010.

Under the historical accounting principles, they were required to account for sales of both iPhone and Apple TV using subscription accounting because they indicated it might from time-to-time provide future unspecified software upgrades and features for those products free of charge. Under subscription accounting, revenue and associated product cost of sales for iPhone and Apple TV were deferred at the time of sale and recognized on a straight-line basis over each product's estimated economic life. This resulted in the deferral of significant amounts of revenue and cost of sales related to iPhone and Apple TV.

The new accounting principles affect their accounting for all past and current sales of iPhone, iPad, Apple TV and for sales of iPod touch beginning in June 2010. The new accounting principles require Apple Inc. to account for the sale of these devices as two deliverables. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale, and the second deliverable is the right included with the purchase of these devices to receive on a when-and-if-available basis, future unspecified software upgrades and features relating to the product's essential software. The new accounting principles result in the recognition of a substantial portion of the revenue and all product costs from the sale of these devices at the time of their sale. Additionally, they are required to estimate a standalone selling price for the unspecified software upgrade rights included with the sale of these devices and recognizes that amount ratably over the 24-month estimated life of the related hardware device.

Off-Balance Sheet Financing

Apple Inc. has not entered into any transactions with unconsolidated entities in which they have financial guarantees,