Project #2: Analysis of Apple’s 2022 10-K

Carson Jones
Owen Gee
Casey Morris
1. Describe the format of the income statement (single-step, multi-step, hybrid) and identify why
you describe it that way.

The format of the income statement is multi-step. The income statement shows the subtotals
for gross profit, operating expenses, and non-operating expenses to show net income. It’s easier
to analyze the multi-step income statement because it provides an in-depth analysis of the
financial performance of Apple and how its activities differ from each other, while a single step
only shows the revenues and expenses. (See Reference 1).

2. What items are included as part of the company’s other comprehensive income? Does the
company report comprehensive income as a continuation of the income statement or as a
separate statement?

Apple’s Other Comprehensive Income Statement is made up of changes in foreign currency

translation, changes in unrealized gains/losses on derivative instruments, and changes in
unrealized gains/losses on marketable debt securities. This category is listed as its own income
statement titled the “Consolidated Statement of Comprehensive Income”. (See Reference 2).

3. Utilize the footnote addressing significant accounting policies to identify the method used to
depreciate PP&E.

Apple uses the straight-line method of depreciation to depreciate PP&E as well as to amortize
capitalized costs for internal software systems over time. (See Reference 3).

4. Think about the business model utilized by your selected company (how they sell their
products or services to customers). Utilize the footnote addressing significant accounting
policies to summarize how they recognize revenue and any specific issues related to revenue
recognition that they need to consider given their business model. Examples could include
selling on credit, receiving payments in advance, sales returns, gift cards, collectability
concerns, etc.

Required by GAAP Apple records revenue “at the amount to which it expects to be entitled
[when ownership is transferred]”. They also allocate revenue towards products or services with
Apple care, returns, price protections, and customer incentive programs based on historical
experience.

Apple also has bundles relating to products or individual services and they recognize revenue on
a straight-line basis over the estimated useful life. (See Reference 4)

5. Evaluate the trend in sales/revenue over the past three years. Calculate the year-over-year
percentage change in revenue. Discuss what you believe is driving the change in sales
considering what you know about the company, the industry, and the overall economic
conditions.

Apple's net income continues to grow year over year but saw a slightly higher year-over-year
change of 1.35% from 2020 to 2021 due to the workforce working from home and needing to
purchase laptops and other devices to continue work. Then from 2021 to 2022, the net sales
 were 1.06%, and the revenue was still increasing but not at the same rate as previous years.
Apple also launches a product every year that contributes to a constant year-over-year increase
in net sales, apple has released services such as an iCloud storage subscription, Apple TV
subscription, as well as other subscriptions.

6. Evaluate the trend in net income over the past three years.
a. Calculate profit margin (net income as a percent of revenue). Perform vertical analysis
on key items (calculating each item as a percentage of revenue) of the income
statement to help identify reasons for the change in profit margin rates between
years.

Vertical Analysis
(Item as a % of revenue) Sep. 24, 2022 Sep. 25, 2021 Sep. 26, 2020
Net Sales $394,328 $365,817 $274,515
Cost of Sales 56.7% 58.2% 61.8%
Gross Margin 43.3% 41.8% 38.2%
Research & Development 6.7% 6.0% 6.8%
Selling, general, & administrative 6.4% 6.0% 7.3%
Operating Income 30.3% 29.8% 24.1%

Income before taxes 30.2% 29.9% 24.4%

Provision for taxes 4.9% 4.0% 3.5%
Net Income 25.3% 25.9% 20.9%

(See Reference 1)

The total cost of sales as a percentage of revenue was the lowest in 2022, and had the
highest gross margin as a percentage of revenue in 2022. Operating income increased
throughout the years, and the year 2022 had the second-highest percentage of revenue.

b. Calculate the year-over-year percentage change in net income. Compare the

percentage change in revenue from question #5 to the percentage change in net
income.

Horizontal Analysis (% change YOY) 2021 to 2022 2020 to 2021

Net Sales 1.06% 1.35%
Cost of Sales 1.05% 1.26%
Gross Margin 1.12% 1.46%
Research and Development 1.20% 1.17%
Selling, general and administrative 1.14% 1.10%
Other income/(expense), net -1.29% 0.32%
Operating income 1.10% 1.64%
Income before provision for income taxes 1.09% 1.63%
Provision for income taxes 1.33% 1.50%
Net income 1.05% 1.65%

(See Reference 1)
 c. Analyze and discuss your findings.

Apple saw a decrease in the cost of sales as a percentage of revenue in 2022, which
explains why the gross margin in that year was the highest compared to previous years.

Apple saw a significant increase in other operating expenses going from having other
operating revenue of 258M in 2021 to having a loss of (334M) in 2022. When looking at
the press release for the 10k for 2022 they do not talk about the non-operating
expenses but rather focus on the good news of that year.

7. Compute your company’s current ratio and debt-to-equity ratio for both years presented on
the balance sheet. Analyze and discuss what these ratios tell you about the company.

Current Ratio = CA/CL

Debt to Equity Ratio = Total Liabilities/Total SE

Apple Ratios September 24, 2022 September 25, 2021 Change

Current Ratio 0.88 1.07 Decrease

Debt to Equity Ratio 5.96 4.56 Increase

The above table shows the current ratio and debt-to-equity ratio for Apple.

Current Ratio
The current ratio measures Apple’s ability to pay off current debts. At the end of the period in
2021, Apple had a current ratio of 1.07. This means that for every $1 in current liabilities Apple
owes, they have $1.07 in assets to pay for it. In 2022, this ratio dropped to 0.88, showing that
Apple’s ability to pay off its current debts went down during the period. We found that this
decrease in Apple’s current ratio from 2021 to 2022 was a result of a large increase in current
liabilities paired with a relatively small increase in current assets. The increase in current
liabilities during 2022 was a result of large increases in the “accounts payable” account and
“other current liabilities”. For current assets during the year, a large decrease in cash was
balanced out by notable increases in “vendor non-trade receivables” and “other current assets”.
Essentially, Apple’s current ratio decreasing from 2021 to 2022 can be described as an overall
decrease in the company’s liquidity and therefore a decrease in the ability to pay off its current
debts.

Debt to Equity Ratio

The debt-to-equity ratio measures Apple’s total liabilities against its total stockholders’ equity, or
in more simple terms, the amount of debt a company has compared to how much equity it has.
This ratio shows whether the company is using more debt financing (contributed capital) or
equity financing (through earned capital) to fund its operations. Apple’s debt-to-equity ratio in
2021 was 4.56, meaning that for every $1 in Stockholders equity on the balance sheet, Apple has
 $4.56 in debt financing. In 2022, this ratio increased to 5.96. This increase in the ratio was
because of an increase in Apple’s total liabilities and a decrease in total Stockholders equity in
2022. We credited the increase in total liabilities to the large increase in current liabilities during
the period. The decrease in Apple’s total Stockholders’ equity resulted from big losses in
“Retained earnings/(Accumulated deficit)” and “Accumulated other comprehensive
income/(loss)”. Apple’s retained earnings decreased in 2022 because they bought back Treasury
stock and issued dividends to stockholders. Apple’s increase in Debt-to-Equity ratio over the
period means that Apple increased the percentage of its operating expenses funded by debt
financing vs equity financing. This means that during 2022, Apple became more financially
leveraged, making the company slightly riskier due to the increase in debts used to fund
operations. (See Reference 5 & 6).

8. Select a competitor and calculate the current ratio and profit margin for the competitor’s
most recent year. Compare to your calculations for your company. Analyze and discuss.

Competitor: Samsung

Current Ratio 2022 (CA/CL) 2.78

Profit Margin 2022 (Net Income / Net Sales) 0.19

Apple

Current Ratio 2022 (CA/CL) 0.88

Profit Margin 2022 (Net Income / Net Sales) 0.22

Samsung has a significantly higher current ratio than Apple. For every $1 in current debt, Samsung has
$2.78 in current assets to pay it off, while Apple only has $0.88 in current assets with which to pay off
that same $1 debt. In 2022 Samsung had a much higher liquidity than Apple, meaning that they can
much more easily pay off their current debts.

Apple has a slightly better profit margin than Samsung. For Apple, every $1 made in sales contributed
$0.22 to the net income for the year. For Samsung, every $1 made in sales only contributed $0.19 to Net
Income for 2022.

Despite Apple being more tied up in short-term debts, Apple was more profitable than Samsung in 2022.
 References
Reference 1 – Consolidated Statements of Operations
Reference 2 – Consolidated Statements of Comprehensive Income

Reference 3 – Note 1: Accounting Policies (Property, Plant, & Equipment)

Reference 4 – Note 1: Accounting Policies (Revenue Recognition)

Reference 5 – Consolidated Balance Sheets
Reference 6 – Consolidated Statements of Shareholders’ Equity