Assess APPLE INC. quality of earnings.
Required:
a. Use the eight techniques outlined in the Flowing. Use as many of the techniques as you can, recognizing that you may not have sufficient information to do all of them (such as technique #5), or that some of them may not apply to your company. Try to comment on each technique.
b. Assess the correlation between accounting income and economic income for your company; that is, based on the results of your analysis in part a, discus how well you believe the accounting income of your company reflects the true economic income.
1. Compare the accounting principles employed by the company with those generally used in the industry and by the competition. Do the principles used by the company in ate earnings?
2. Review recent changes in accounting principles and changes in estimates to determine if they in ate earnings.
3. Determine whether discretionary expenditures, such as advertising, have been postponed by comparing them to those of previous periods.
4. Attempt to assess whether some expenses, such as warranty expense, are not reflected on the income statement.
5. Determine the replacement cost of inventories and other assets. Assess whether the company generates sufficient cash flow to replace its assets.
6. Review the notes to financial statements to determine whether loss contingencies exist that might reduce future earnings and cashflows.
7. Review the relationship between sales and receivables to determine whether receivables are increasing more rapidly than sales.
8. Review the management discussion and analysis section of the annual report and the auditor's opinion to determine management'sopinion of the company's future and to identify any major accounting issues.