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How to obtain financial data and assess its validity

Apple is an innovative consumer electronics market leader. It has different range of digital products from such as the iPod, digital music distribution through its iTunes Music Store, also Macbook, PC’s and Apple TV’s. In the generations of smart phone market, Apple iPhone‘s 4 generations is the best and high market share holding product at fair price and excellent quality customer service. Apple is committed to delivering the best personal computing experience to its students, professors, creative professionals and consumers around the world through its high tech innovative hardware, software and Internet offerings everywhere to every customer in every possible way.

Financial data are the set of documents prepared by the business organisation at the end of the accounting period which includes the summary of the accounting data for that period and information. These data should be accurate and should be based on facts. There are two different sources of collecting financial data. They are:

Internal sources External resources:

The organisation’s accounting system Company House

Other managers Companies website

Suppliers Databases of financial information

Customers Libraries

Employees Research documents

Internal data are difficult to get from the Apple Inc. for the security issues. Whereas the customer receipts, data protection, supplier invoice are some of the internal information which are issued by the Apple Inc. Whatever information is exposed or published are the external information. Public Limited Companies publishes their financial statements in order to get more investment from the shareholders.

The financial data must be valid, truthful and based on the facts. Unreliable data can make the report loose its significance. In order to ensure that the financial data is validated, Apple should use process mapping to identify where possible errors or problems may occur in the system. The example of this is, if two senior managers (CEO & CFO) signatures are required to proceed with a payment, then this may cause delays and therefore, give a wrong figure of the amount of liquid money available.

Some of the possible factors that influence the reliability of financial data are:

Financial system redesign was suggested by Sekaly. He mentioned that to ensure reliability of financial data emphasis is on controls and central transaction processing: and the better to achieve this end is by inverting the triangle (i.e. delegating task to many heads so that the occurrences of frauds will be minimized). This will result in reduction f data entry errors and gives more time for the accountants to concentrate on decision and risk management.

Internal auditing is a self-governing, objective assurance and consulting activity designed to add value and improve the operations of the organization. It helps an organization to achieve its objectives by bringing a systematic, disciplined approach to assess and improve the effectiveness of risk management, control, and governance processes. Most of the organization has authority matrix. It may be formal and informal depending upon the kind of decision to be made and by whom. The role of the internal auditor is to assist the external auditors and let them go through the financial statements during the financial audit.

External auditor is appointed by the shareholders in order to verify that the financial statement is true and fair. Shareholders have invested in the company and they are concerned if the fund they spent in the company is being used in the right way. External auditor can have access to all kinds of reports of the company and are responsible to make sure that the management is doing their job in the right way. The published reports and data are very essential for the external auditors to conduct an independent audit. At the same time it only ensures that only certain rules and standards are adhered to it.

The word validity refers in here, who audit the auditor there are many institute which monitor the auditing system some of them are General Accepted Accounting Principles (GAAP), Institute for Public Sector Accounting Standards (IPSAS) international Federation of Accountants (IFAC). These lead the development of auditing.

Auditing Practices Board (APB)

It is part of the Financial Reporting Council practice in UK, in order to:

Establish high standards of auditing

Meet the developing need of users of financial information

Ensure public confidence in the auditing process

IFAC‘s board set the following standards:

International standards on auditing, assurance engagements and related services.

International standards on quality control.

International code of ethics.

International education standards.

International public sector standards.

Fig.1: The financial reporting

Limitations:

Internal auditors are the employees of the company. If something untrustworthy is going on in the company then the internal auditor has to take a decision. He either reports the misconduct or he tries to cover his back leaving the ethics far behind. He is restricted and commanded what to do and what not to do by the management team.

External auditor does not ensure that the information produced by the company is in a comparable format to others or check whether or not the rules have been followed in one of the many differing and acceptable ways. Their decision is based on random samples and they are not checking everything. Due to that absolute assurance is not given but rather a reasonable assurance is given.

(Robert R. Moeller, Brink's Modern Internal Auditing: A Common Body of Knowledge, 2009)

1.2 Applying different types of analytical tools and techniques to a range financial documents and formulate conclusions about performance levels and needs of stakeholders.

A. Profitability ratios

1. Return on capital employed (ROCE):

It is a primary ratio indicating how well a business has generated profit from its long-term financing. Increase in ROCE is considered to be an improvement of business performance as it gives the improvement in margins/profits or more efficient use of assets.

2. Net profit ratio:

The net profit indicates how well the business has managed to control its indirect costs. Reasons: Changes in amount expenses or income

/profit

3. Gross profit ratio:

The gross profit margin looks at the performance of the business at the direct trading level (sales and COS)

Reasons: Changes in selling price, sales volume or cost of sales.

Gross Profit / Revenue*100%

4. Asset turnover:

It shows how efficiently management has utilized assets to generate revenue. The reason for this is Increase in sales revenue or increase in current liabilities.

B. Liquidity Ratios:

1. Current ratio:

It considers how well a business can cover the current liabilities with its current assets. It is generally accepted that the ideal ratio is 1:2.

Reasons: Changes in components of current assets and current liabilities.

2. Quick/ acid test ratio:

The quick ratio excludes inventory as it takes longer to turn into cash and therefore, places emphasis on the business’s ‘quick assets’ and whether or not these are sufficient to cover the liabilities.

The ideal ratio is considered to be 1:1.

Reasons: Changes in current assets and current liabilities’ components.

C. Efficiency Ratios:

1. Debtors collection period:

It is preferable to have a short credit period for receivables as this will aid a business’s cash flow.

Reasons: If the period is shorter than prior period it may indicate better credit control or potential settlement discounts being offered to collect cash more quickly.

2. Creditors collection period:

An increase in payables days could indicate that a business is having cash flow difficulties and therefore delaying payments using suppliers as a free source of finance.

Reasons: Changes in credit term granted or early settlement discounts.

3. Inventory turnover period:

It is the lower the number of days that inventory is held the better as holding inventory for long periods of time constrains cash flow and increases risk associated with holding inventory.

D. Investment Ratios:

1. Earnings per share:

It represents the profit available for distribution as dividends to ordinary shareholders. A high EPS helps to attract investment and build up confidence of share holders. The market value of share may increase.

FORMULAE

YEAR 1/2009

YEAR2/2008

ASSUMPTIONS

Profitability ratios

1. ROCE:

PBIT/Capital Employed*100

2. Net profit ratio:

Net Profit/ Revenue*100

3. Gross profit ratio: Gross Profit / Revenue*100

4. Asset turnover: Sales/Capital employed

B. Liquidity Ratios:

1. Current ratio: Current assets/Current liabilities

2.Quick/ acid test ratio: (Current asset-Closing stock)/Current liabilities

C. Efficiency Ratios:

1.Debtors collection period: Trade receivables/sales*365

2. Creditors collection period:

Trade payables/purchases*365

3. Inventory turnover period:

Inventory/cost of sales*365

D. Investment Ratios:

1. EPs: Profit after tax and preference dividend/Number of ordinary shares

7658/(53851-19282)

=22.15%

5704/36537*100

=15.61%

13140/36537*100

=35.96%

36537/34569

=1.06 times

36265/19282

=1.88:1

(36265-455)/19282

=1.86:1

3361/36537*365

=33.58 days

5601/23397*365

=87.38 days

455/23397*365

=7.10 days

=6.39

6275/(39572-14902)

=25.44%

4834/32479*100

=14.88%

11145/32479*100

=34.31%

32479/24670

=1.32 times

32311/14902

=2.29:1

(32311-509)/14902

=2.26:1

2422/32479*365

=27.22 days

5520/21334*365

=94.44 days

509/21334*365

=8.71 days

=5.48

PBIT=Operating income-statement of operations. Capital employed: Total asset- current liabilities- B/S

Net profit & revenue: Statement of operations

Gross profit & revenue: Statement of operations

Sales: Statement of operations

Capital employed: Total asset- current liabilities- B/S

Current asset & current liabilities: B/S

Current asset & current liabilities: B/S Closing stock: Current Asset-B/S

Trade receivables : Current Assets-B/S, Sales: Statement of operations

Trade payables : Current liabilities-B/S, Purchase: Cost of Sales( Statement of operations)

Inventory: Current Assets-B/S, Cost of Sales: Statement of operations

Statement of operations

Ratio analysis of the Apple Inc.

After doing extensive research on Apple Inc., the financial performance has been assessed using ratio analysis technique. The analysis has been conducted taking in to consideration five different areas namely: profitability ratio, efficiency ratio, short term liquidity ratio, long term liquidity ratio and shareholders investment ratio.

Profitability ratio:

According to ROCE, it can be argued that Apple is not getting value for money for each borrowing. By analyzing ROCE, they have sharp decline (12.93%) form 2008 to 2009. this shows that it has generated less money than the invested which means that the company’s economic condition is slightly going down. From the net profit perspective, there has been substantial increment from 2008 to 2009(i.e. 4.91%). This is reinforced by the grass profit margin increasing with similar % (4.81).This may be due to rise in expenses. Moreover the asset turnover has decreased by approx 19.7% from 2008 to 2009. This may indicate inconsistency in asset utilization. And also there is idol capacity.

Efficiency ratio:

Receivable collection period has been increased by approx. 6 days from 2008 to 2009. Similarly the payables collection period has decreased by approx.7 days. This may indicate inefficiency from management of Apple Inc. to convince its debtors to return their owed money on time and they are unable to take credit for long time. The total assets turnover ratio has been increased by approximately 1.6 days from 2008 to 2009. This may indicate that their inventory is moving faster than before. This may be due to the competitive price strategy followed by Apple in order to stay in the market which has increased the sales.

Short term liquidity ratio:

Based on the ratio calculation the liquidity position is has been improving. However it should be noted that an ideal current ratio is 2:1(for manufacturing company). Current ratio of Apple increased by approx. 42.42%, it can be argued that Apple Inc. is improving but not up to the standard. For every one pound of liability the company is able to pay 1.88 pounds of assets. It should be noted that the current ratio varies from industry to industry. Taking a closer look at the quick ratio it can be stated that the liquidity position has decreased by approx. 17.7%. But the ideal ratio is 0.8:1. Comparing this to the company it can be stated that the liquidity position has reduced than 2008 but is still better than the ideal ratio. The reason for may be because of the inventory is moving fast and the current asset has increased as well.

Shareholders investment ratio:

According to Apple Inc.’s EPs has been increased from 2008 to 2009 by 91 pence per share (16.61%). This has added the attractiveness of further equity capital and will attract the investors to invest in the company. This also shows that the company has a very good financial ability and is earning good profit margin. It may satisfy the shareholders and they may be interested in additional investment. It will raise the market value of the share and attract share holders to buy more shares.

1.4 Reviewing and questioning financial data:

Internal auditing is the system of internal check and control which should be done on regular basis and should be maintained. We must not attach undue weight to the fact that the check is done with the involvement of minimum two individual: auditor and management which gives a measure of check and control which would not exist if a person alone had to the audit. The presence of the management and the signature of both make it verified and more reliable. The audit must have a minimum acquaintance with the field, in order to evaluate the processes and their quality beyond the working procedures (the documented criteria). That kind of knowledge can give him the ability and the consideration to evaluate the situation while he identifies any nonconformities or faults. Within the ISO 19011 Standard there is a specification for the auditor's qualities required.

Ethics - credibility, integrity and honesty.

Open minded - willing to listen, learn and accept new ideas.

Diplomatic - polite with high manners to his colleagues - after all he is working with people and he is the representative of the top management.

Observer - owns the ability to recognize what he sees and understand without interrogating.

Perspective - owns the ability to evaluate situations beyond appearance and with a wide systematic view of things - has the ability to understand the organizational consequences of his evidence.

Versatile - owns the ability to mobilize from one situation to another without losing direction.

Persistence - must be persistence with his objectives and to not stray away.

Decisive - ready to make decision

Independent - must have his own opinion of things and to not be influenced by the environment.

 

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Under Creative Commons License: Attribution

External auditors help firms meet regulatory guidelines by examining financial statements, operating information, key business metrics and working capital methodologies periodically. They also appraise internal controls and guidelines and advise entities on improving business regulations and policies. They recommend corrective actions when deficiencies are prominent, and issue annual reports to firms' boards of directors, Shareholders and regulators.

External audit Requirements are:

Risk Assessment:

Internal controls Testing:

Analytical Procedures:

Tests of Details:

[Whenever a product has to be ordered the list has to be made and forwarded to the purchase department. The purchase department finds the suitable supplier and orders it. The suppliers supply the good with the invoice. The invoice is sent to the purchase department and one remains with them.

……. Has the right to ask any of the authority who is involved in dealing with the order.

Mention the checks. Physical check…………………

External auditors start from a scratch. They check the requisition and check it against the invoice. They check it against the delivery note and having confirmed that the order has been delivered to the company they go back to the supplier. Sometimes some fake suppliers are created to a disguise. Auditor then checks the day to day suppliers list and can catch the dodgy stuff going on.

To avoid this situation to occur the companies generally involve lots of people and delegate them with the tasks which are broken down to smaller parts]

Need to be modified

2.1 Identifying how a budget can be produced taking into account financial constraints and achievement of targets, legal requirements and accounting conventions:

Budget is the forecast of the revenue and expenses over a specified future period of time. We forecast a figure and compare it with the actual figure and get the variance. The manager deals with the variance either it is positive or negative.

When a plan is expressed quantitatively, it is known as budget. The process of converting plans to budget is called budgeting. Budgeting is formal for large organizations and is informal for small organisation. Apple has a formal budgeting process as it is a huge business unit. (Frank wood, Business Accounting 2: 2008)

Budget can be prepared for a person, family, community, business, government, country, multi national organisation or anything else that makes and spends money.

Budgeting is very essential and has lots of advantages:

Helps Businesses to plan for future

Set targets to meet

To Control the expenditure

Helps to understand how the business is likely to perform in the future

Reflects a system of responsibility accounting accuracy

Monitor and control performance of business

Keeps the team motivated to hit the targets

Form of communication between top level management and the operating level

Steps in preparing budget keeping are:

1. Responsibility refers to senior management

2. Communicates the budget procedure to relevant manager in the involvement of accountant

3. Recognized key boundary factor

4. Prepare budget within a routine

5. Drafting budget by covering all areas

6. Review and co-ordinate the budget

7. Preparing the master Budget

8. Communicates to all stake holder

9. Monitoring and controlling of budget

Preparation Process of budget:

Generally budget process start from sales because it determines:

Demand -→ production -→ purchase → cost and so on.

Sales budget: Sales or revenue is also an important factor in the budgeting process as the sales determines how much can be spent on the production of the material, raw materials and how much profit can be made. Without having good margin hand, budgeting is not possible.

Production budget: Apple forecast Production budget according to the market demand and sales. It depends upon what needs to be produced and when and is determined by the market labor availability. So, for Apple the quantity of production depends upon the number of units to be sold and upon the number of units in the ending and opening inventories

Materials budget: The materials budget shows the quantity and cost of purchasing material for planned production and inventories.

Administration budget: this part discusses about the expenses which is not related to product and services. Some examples are: human resource, legal and finance, selling and distribution and administration department and so on.

While preparing the corporate budget, pricing strategy also plays a major role. Apple cannot fix its own price for its products as it has its competitors with similar products and competitive pricing.

Similarly Tax, Law and regulations, Income, Direct and indirect cost, debtors, creditors, short-term funding are the major budget constraints.

2.2 Analysing the budget outcomes against organizational objectives and identifying alternatives:

Apple’s budgetary control and variance analysis:

The objective of budgeting is to provide a basis against which actual performance can be measured and effective action should take place after the result is reviewed.

By identifying the progress from the former position, Apple is informed about the effects of the actions taken and will have clear understanding of the effect of that in the future action. The budget process is worthwhile only if the budget is realistic. When we talk about the budget planning and control comes itself. Apple being the well managed organisation, it makes the comparison of actual performance and the budgeted targets and uses it as the basis for deciding the appropriate future actions.

Budget variances are caused because of:

Errors in the Arithmetic in the Budget figures

Errors in the Arithmetic of actual results

Reality is wrong

Difference between Budget Assumptions and Actual Outcome

The process of comparison of actual performance as compared to the budgeted targets is done in the following four steps:

Flexing the budget

Analysing the variances

Identifying the causes

Taking appropriate action

3.1 Identifying criteria by which proposals are judged:

Apple being a huge market leader basically focuses on the two most important aspects of their business: finance and cost. The beginning, growth and existence of the business depend on them. The most important factor during the analysis of proposal is the reduction of sales prices in order to stimulate a sizable increase in sales volume in the context of Apple. To complete this analysis the finance manager needed the information about operating expenses that is reported in internal profit report. After analyzing the changes in variable operating expenses, it is discovered that contribution margin (profit before fixed operating expenses are deducted) would actually decrease if the sales price reduction were implemented. Furthermore the sizable increase in sales volume raises the possibility that fixed operating expenses might have to be increased to accommodate such a large jump in sales volume.

Best of the best proposals may be presented but still not be able to agree to it because of other priorities within the organisation. One technique is to categorize projects which is a method used by one public sector organisation. The projects related to statutory requirements, and specific legislation involved has to be given the first priority. Second category has or health and safety projects.

No matter how good your proposal is, if there are too many projects of the above mentioned category, a good proposal may not go ahead. But this does not mean that it should not be presented for consideration at a later edge. Our feedback therefore should give a wider, organisational view of the proposal covering other proposals that are ongoing and which have impacted on this.

Criteria too judge the proposals:

An acceptable level of risk

The largest benefits(financial and non-financial)

The lower costs

The best cost-benefit ratio.

The decision to acquire non-current assets for the company is called the investment decision. The analysis is based on cash flow. Investment decision assumes that:

The capital expenditure takes place NOW and each year’s costs and revenues arise at the END of the year.

There are two types of Decision situations, i.e. Single investment and Mutually exclusive investments. Decision is made with the want to be the best acceptable decision and the best investment.

3.2 Analysing the viability of a proposal for expenditure:

Any business organisation needs to appraise its investment proposal whether the investment is worth doing? Will it cover its cost? Will it generate savings? and Will it able to generate profit on the original investment? A project is viable when it generates more revenue than expenditure incurred in the proposal with required rate of returns on capital employed of the project. There are various techniques in order to analyse the investment decision and the financial viability of the project (keeping strategic objectives of the organization in view. As other business Apple needs to evaluate its investment decision through these techniques so this study recommends these methods to analysis to evaluating investment proposal.

Three of the main tools are discussed below:

Break even analysis

Break even analysis is a technique widely used by the management accountants and production. It is based on fixed cost and variable cost and is compared with sale revenue to determine volume of sale, production cost at which the company makes neither profit nor loss. It helps in determining the optimal level of output, determine the minimum cost for the given level of production and find the selling price which would prove most profitable to the firm. It specifies the lowest amount of business activity necessary to prevent loss.

Fig: Break even analysis

In the figure, fixed cost does not vary work the level of activity and Variable cost varies directly with the level of activity.

The following formula is used to calculate the BEP.

BEP = TFC (SPU-VCPU)

Where,

BEP = Break even point

TFC = Total fixed cost

SPU = Selling price per unit

VCPU = Variable cost per unit

Most of the businesses use the BEP analysis in order to analyse the viability of the investment project though it has some limitations.

Limitations of Break-even analysis:

Does not recognize profit or loss

Does not show how much profit can be made

Profit volume ratio: check in the slide

Payback period method

This method tells the organization how quickly it generates cash flow to pay back their investment made. To use payback to make investment decision the company sets a decision criterion i.e. Maximum acceptable payback time-period

Advantages:

Simple to understand

Quick to calculate

Focus is on speed of return

Good when investment funds are scarce

Thought to select less risky investment

Disadvantages:

ignores timing of cash flow

ignores the post payback cash flow (cash flow after payback period)

Information needed to calculate Payback period are:

-Capital invested

-Cash flow (cash flow in +out)

Limitations of Payback period:

It does not take the consideration of discount rate.

Payback does not consider capital invested, it only checks time

It also ignores the post payback cash flow (cash flow after payback period)

Net present value method

This is the measure of economic profit. The difference between the present value of cash inflows and the present value of cash outflows is NPV. NPV is used in capital budgeting to analyze the profitability of a project/ proposal or investment. 

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.  

It is calculated by the formula:

Here, NPV calculates the present value of an allowance for a future value based on periodic, constant payments and a constant interest rate. The present value is the total amount that a series of future payments is worth now.

Limitations of NPV:

Loan and debenture: whenever an investor wants to invest they invest in loan and debenture both with different interest and debenture rates. All the money is combined. Then, that combined fund will have difficulty in calculating the actual value as their interest rates are different.

Discount rate is being calculated in the right way or not.

(Howard Cooke, Corporate Occupiers' Handbook, 2007)

LO 3.3 Identifying the strengths and weaknesses and giving feedback on the proposal

Managers can invest a lot of effort in putting forward a well-thought-thorough financial proposal. So it seems fair that those managers assessing the financial proposal give quality feedback on the reasons for its success or otherwise. Feedback should be given on successful and unsuccessful proposals in order that everyone can learn from both. Feedback is necessary on the implementation in relation to the plan.

On the basis of above analytical tools some proposals can be selected and some are discarded but both have to be reasonable reason shown, it called feed back. Constructive feedback is given on the basis of strength and weakness of the proposal. Manager also needs to give where the weakness is and if it revised then can it overcome or not. To give constructive feedback it should have strength and weakness.

Company may bring proposal in light on the basis of proposal analysis tools i.e. Break even analysis talks about neither profit nor loss situation, Net present value method talks about investment return in less cost. Here I’m going to discuss brief about the Payback method which may effective tools to choose the proposal for Apple Inc. The payback period is the time it will take for the original investment to pay for itself through its cash inflow. This is trusted method as it focus essentially on action referring how quickly the incremental benefits that accumulate to Apple Inc. from investment project pay back the initial investment. To use payback period to make investment decision Apple Inc. may sets a decision criteria maximum acceptable payback time-period. If the investment projects are mutually excusive Apple Inc. may prefer the project which has lower period to recover its original investment.

Although, pay back period method has some weaknesses i.e. it only tells about the time taken in recovering the cash invested. It does not consider time value of money and does not evaluate the cash flow after pay back period.

3.4 Evaluating the impact of the proposal on the strategic objectives of the organisation:

Q.6.3 What are strategic objectives? How a financial proposal can affect the strategic objectives of the organisation?

Strategic objectives of company

A project is viable when it produces more revenue than the expenses incurred on the project including required rate of return on capital employed on the project.

Book References:

Robert R. Moeller. (2009). . In: Brink's Modern Internal Auditing: A Common Body of Knowledge. 7th ed. Canada: John Wiley & sons. 276-279.

Frank wood & Alan Sangster (2008). Business Accounting 2. Prentice Printing Hall: Financial Times. .

Henry B. Fernald. (July, 1943). Internal auditing. The Accounting Review. 18 (Vol. 18), . 228-234 .

John A. Tracy (2002). The fast forward MBA in finance. 2nd ed. Canada: John Wiley & sons. 36.

Howard Cooke, Simon Woodhead (2007). Corporate Occupiers' Handbook. UK: . .

Online Resources:

https://www.orderannualreports.com/getpdf.asp?session_ID=E9F84F486F97404B&virtual=V0010232746 (last assessed 10/01/2011)

http://investing.businessweek.com/research/stocks/earnings/earnings.asp?ticker=AAPL:US (last assessed on 14/01/2011)

http://ycharts.com/companies/AAPL/eps (last assessed on 14/01/2011)

http://tech.fortune.cnn.com/2008/04/01/analyst-apples-us-consumer-market-share-now-21-percent/ (last assessed 14/01/2011)

http://www.investopedia.com/terms/n/npv.asp (last assessed on 03/01/2011)

http://www.ehow.com/list_6556119_external-audit-requirements.html (last assessed on 15/01/2011)

http://pdfcast.org/pdf/the-role-of-financial-accounting-information-in-strengthening-corporate-control-mechanisms-to-alleviate-corporate-corruption (Last assessed on 17/01/11)


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