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Apple Case Study
Read the Note 1 and 2 in the Notes to Consolidated Financial Statements section of Apple’s most recent 10-K
with the fiscal year end in September, and answer the following discussion questions in the written report.
Hint: the location of these notes is right after the Financial Statements.
1) Refer to Apple’s revenue recognition footnote. In particular, when does the company recognize revenue for
the following types of sales? A) iTunes songs sold online. B) Mac-branded accessories such as headphones,
power adaptors in the Apple stores. What if the accessories are sold online? C) iPods sold to a third-party
reseller in India.
According to Note 2, Apple generally recognizes revenue when control of the products or services is
transferred to its customers and the customer now has the ability to use the product and accepts the risks and
rewards of ownership.
Therefore, when iTunes songs are sold online, Apple will recognize the revenue once the customer
downloads the song. Once the song is downloaded, the customer had now obtained control. Only the
commission revenue will be recorded for songs sold.
Revenues earned from Mac-branded accessories sold in Apple stores will be recognized when the customer
takes the merchandise with them. However, if the accessories are sold online, the revenue is recognized at the
time of delivering the product; once the product is delivered, control and responsibility has officially passed to
the customer.
Regarding iPods sold to a third-party reseller, revenue is recognized when the iPods are shipped to the
reseller. The reseller is considered to be the customer to Apple, and therefore assumes control and risk once
they purchase the iPods from Apple.
2) Refer to Apple’s revenue recognition footnote. Consider the sale of peripheral products obtained from other
companies, such as Logitech speakers. How would Apple determine the amount to record for such speakers
sold from the Apple stores? What if the speakers were drop-shipped from Logitech for an online Apple-store
order?
According to Note 2, “For the sale of third-party products where the Company obtains control of the product
before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to
customers.” Apple determines the amount to record for the sale of peripheral products in Apple stores by
adding the cost of acquiring the products with the markup charges for Apple’s overhead costs (labor expense,
marketing, etc.).
If the speakers were drop-shipped from Logitech for an online Apple-store order, Apple would do a similar
mark-up process as it would for in-store purchases. Just like an in-store purchase, Apple incurs costs such as
marketing the product and customer service, which would then be reflected in the amount that Apple records as
revenue.
Overall, for the sale of peripheral products by Apple, Apple records the cost incurred to purchase the
product, overhead costs to facilitate the sale, and any other additional costs. It also adjusts the sales figure for
vendor allowances and estimated returns and allowances.
If directly shipped from Logitech, the product belongs to Logitech; Apple doesn’t own the product. When the
customer places an order for a Logitech product and shipped from Logitech to the customer. Apple earns a
commission for displaying the product.
If Apple sells their products in the store Apple can record gross profit; drop-ship can be recorded as
commission.
3) Consider the following hypothetical sales scenario. A large community college buys and takes delivery of 50
iMac computers from a local Apple store. The invoiced price is $2,800 per unit and includes hardware,
software essential to the functionality of the hardware, third-party software including Microsoft Office for Mac
Apple Case Study
Read the Note 1 and 2 in the Notes to Consolidated Financial Statements section of Apple’s most recent 10-K
with the fiscal year end in September, and answer the following discussion questions in the written report.
Hint: the location of these notes is right after the Financial Statements.
1) Refer to Apple’s revenue recognition footnote. In particular, when does the company recognize revenue for
the following types of sales? A) iTunes songs sold online. B) Mac-branded accessories such as headphones,
power adaptors in the Apple stores. What if the accessories are sold online? C) iPods sold to a third-party
reseller in India.
According to Note 2, Apple generally recognizes revenue when control of the products or services is
transferred to its customers and the customer now has the ability to use the product and accepts the risks and
rewards of ownership.
Therefore, when iTunes songs are sold online, Apple will recognize the revenue once the customer
downloads the song. Once the song is downloaded, the customer had now obtained control. Only the
commission revenue will be recorded for songs sold.
Revenues earned from Mac-branded accessories sold in Apple stores will be recognized when the customer
takes the merchandise with them. However, if the accessories are sold online, the revenue is recognized at the
time of delivering the product; once the product is delivered, control and responsibility has officially passed to
the customer.
Regarding iPods sold to a third-party reseller, revenue is recognized when the iPods are shipped to the
reseller. The reseller is considered to be the customer to Apple, and therefore assumes control and risk once
they purchase the iPods from Apple.
2) Refer to Apple’s revenue recognition footnote. Consider the sale of peripheral products obtained from other
companies, such as Logitech speakers. How would Apple determine the amount to record for such speakers
sold from the Apple stores? What if the speakers were drop-shipped from Logitech for an online Apple-store
order?
According to Note 2, “For the sale of third-party products where the Company obtains control of the product
before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to
customers.” Apple determines the amount to record for the sale of peripheral products in Apple stores by
adding the cost of acquiring the products with the markup charges for Apple’s overhead costs (labor expense,
marketing, etc.).
If the speakers were drop-shipped from Logitech for an online Apple-store order, Apple would do a similar
mark-up process as it would for in-store purchases. Just like an in-store purchase, Apple incurs costs such as
marketing the product and customer service, which would then be reflected in the amount that Apple records as
revenue.
Overall, for the sale of peripheral products by Apple, Apple records the cost incurred to purchase the
product, overhead costs to facilitate the sale, and any other additional costs. It also adjusts the sales figure for
vendor allowances and estimated returns and allowances.
If directly shipped from Logitech, the product belongs to Logitech; Apple doesn’t own the product. When the
customer places an order for a Logitech product and shipped from Logitech to the customer. Apple earns a
commission for displaying the product.
If Apple sells their products in the store Apple can record gross profit; drop-ship can be recorded as
commission.
3) Consider the following hypothetical sales scenario. A large community college buys and takes delivery of 50
iMac computers from a local Apple store. The invoiced price is $2,800 per unit and includes hardware,
software essential to the functionality of the hardware, third-party software including Microsoft Office for Mac
