Balance Sheet
- Is there a difference in approach to valuation by US GAAP and IFRS? Discuss and note two or three specific differences.
One of the differences between US GAAP and IFRS is differences in the way inventory is valued. US GAAP allows companies to value inventory using last in first out (LIPO) method whereas IFRS only allows inventory valuation using first in first out (FIFO) method. Companies using (International Financial Reporting Standards) IFRS are prohibited from using LIPO method of inventory valuation and use FIFO method (Tribunella, 2009). In the United States of America for companies to obtain tax benefits they are must use LIFO inventory valuation method when preparing their annual reports. Another difference is that IFRS allows all research costs to be expenses but development costs that meet the criteria for intangible assets can be capitalized whereas according to US GAAP all research costs must be expensed when they are incurred through the income statement. Under IFRS the capitalized development costs are required to be amortized once they are available for use (King, 2008).
United States GAAP also differs with IFRS on definition of determining the fair value of assets. According to US GAAP accountants look at what they could sell the asset for in the market even if it was bought the previous day to determine its fair value (King, 2008). United States GAAP also allows fair value to be determined by obtaining the price of an asset from a theoretical market participant and using that as the fair value of the asset. International Financial Reporting Standards (IFRS) on the hand allow determination of the fair value of an asset from the price that can be obtained from the transaction involving the asset on the basis of a willing buyer and a willing seller. In other words, under IFRS the fair value of an asset is the price that the asset could be exchanged in an arm’s length transaction between knowledgeable, willing parties (Tribunella, 2009).
- Distinguish between an expense (expired cost) and an asset.
Liapis & Christodoulopoulou (2011) stated that assets are those elements of a company that enable a company to achieve its business operations and which may also achieve surplus value for the company under certain conditions. Assets are elements that can be classified as economic resources and which create value for the company when put in use. Expenses on the other hand are incurred to earn revenue. The amount of money incurred on different items in order to generate revenue is treated as expenses and is matched with the revenue earned to determine the capital gains made during the period (Liapis & Christodoulopoulou, 2011). The capital gains increase the value of the assets at the end of a trading period. Expenses represent the outflow of money or recording of liability in respect to a third party in exchange with something of more value to the company.
- Distinguish between current and long-term assets.
According to Shiner (2011) current assets are those economic resources that can be converted within a year to pay off current liabilities due in the year. These assets include stock, cash accounts receivable, debtors and prepayments. Long-term assets on the other hand are those assets that cannot be converted into cash in one financial year (Shiner, 2011). In a typical company balance sheet they are represented by plant and machinery, buildings, land etc. Long term assets are otherwise referred to as fixed assets or noncurrent assets in balance sheets and they cannot be converted into cash easily.
- Distinguish between current and long-term liabilities.
According to Shiner (2001) current liabilities are those liabilities that are to be settled in cash within one given financial year. Current liabilities are expected to be settled with the current assets or by creation of other current liabilities. They include trade payables, creditors and bills payable. Long term liabilities are financial obligations that are due in periods beyond a current financial year. They include bank term loans, debentures and bonds (Shiner, 2011).
- Review Apple’s balance sheet and provide two examples of each of the above categories.
According to Apple Inc financial statement as at September 2012, the company’s current assets totaled US Dollars 57,653 million. They were made up of cash and equivalents, restrictable cash, marketable securities, receivable, inventories, prepaid expenses, current deferred income taxes and other current liabilities. Long term assets otherwise referred to as noncurrent assets totaled US Dollars 118,411 millions. These assets were made up of Net Fixed Assets, Intangibles, Cost in Excess and other noncurrent assets (http://www.hotstocked.com/companies/a/apple-inc-AAPL-balance-sheet-51437.html).
The same annual report indicated that the current liabilities of the company totaled US Dollars 38542 million. These current liabilities were made up of Accounts Payable, Accrued Expenses, Accrued Liabilities, Deferred revenues, Current Deferred Income Taxes and Other Current Liabilities. The long term liabilities which were referred to as noncurrent liabilities totaled US Dollars 19,312 million. These were made up of Deferred Income Tax and other noncurrent liabilities (http://www.hotstocked.com/companies/a/apple-inc-AAPL-balance-sheet-51437.html).
- Discuss retained earnings and how income or loss and dividends affect this account. Review Apple’s retained earnings account and explain how it changes between the two past years.
According to Bhardwaj (2011) retained earnings are represented by the part of net profit that is left after dividends are paid off to shareholders of a company. Retained earnings are recorded in the balance sheet as part of the shareholders funds. They therefore increase the stake or claim that shareholders have on company assets. When a company makes profits at the end of a given financial year it can declare all net profits as dividends and pay off all the money to its shareholders or it can pay a fraction of that as dividends and retain the rest as retained earnings. When a company makes losses, the losses are recorded in the balance sheet as retained earnings and they reduce the shareholders funds (Bhardwaj, 2011). If a company keeps on making losses each year it will eventually erode the share capital and when all the share capital is completely eroded the company will be fully owned by its creditors. The main creditors can decide to put the company into receivership to recover their money.
According to Apple Inc’s balance sheets for 2012, 2010 and 2009 the company’s shareholders funds increased from US Dollars 47,791 million in 2009 and US Dollars 76,615 million in 2010 to US Dollars 118,210 million in 2012. This shows that the company reported profits during the years 2010 and 2012 which resulted in positive retained earnings which increased shareholders’ funds accordingly (http://www.hotstocked.com/companies/a/apple-inc-AAPL-balance-sheet-51437.html).
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- Comment on at least three differences between Apple’s and Samsung’s balance sheets.
One of the notable differences between Apple Inc and Samsung balance sheets is that their financial years end in different times of the year. Apple’s financial year ends in 9th September of each year whereas Samsung’s financial year ends in 31st December of each year and 31st March of each year. The other difference is that Apple’s balance sheet includes results of the single entity whereas Samsung’s balance sheet is consolidated to include the financial results of other subsidiary companies that Samsung has controlling interests in. Samsung’s shareholders funds are divided into equity attributed to owners of the parent company and that which is owned by other non controlling interests whereas Apple’s shareholders funds are not divided. Samsung’s balance sheet shows the various elements that make up the shareholders funds whereas Apple only shows common shareholders’ equity only in its balance sheet (http://www.hotstocked.com/companies/a/apple-inc-AAPL-balance-sheet-51437.html; https://www.samsung.com/us/aboutsamsung/ir/financialinformation/auditedfinancialstatements/downloads/consolidated/2012_con_all.pdf).
- Does Apple or Samsung have more debt?
Apple had total liabilities as at 9th September, 2012 of US Dollars 57, 854 million made up of total current liabilities of US Dollars 38,542 million and long term liabilities of US Dollars 19,312 million. Samsung on the other hand as at 31ST March, 2012 had total liabilities of US Dollars 48,031 million made up of total current liabilities of US Dollars 39,712 million and Long term liabilities of US Dollars 8,319 million. From the foregoing it is clear that Apple Inc has more debt than Samsung (http://www.hotstocked.com/companies/a/apple-inc-AAPL-balance-sheet-51437.html; https://www.samsung.com/us/aboutsamsung/ir/financialinformation/auditedfinancialstatements/downloads/consolidated/2012_con_all.pdf).
- Which of the two companies is the bigger one? Explain your reasoning.
From the foregoing it is evident that Apple Inc is bigger than Samsung due to the fact that Apple has more assets than Samsung in that Samsung has total assets of US D 160, 157 million whereas Apple has total assets of US Dollars 118,210 million. Apples net worth which is given by deducting Total liabilities of US Dollars 57,854 million from total assets of US Dollars 176,064 million is US Dollars 118, 210 which is larger than Samsung’s net worth of US Dollars 105, 507 which is arrived at by deducting total liabilities of US Dollars 54, 650 million from US Dollars 160, 157 million. It’s therefore clear than Apple is a much larger company than Samsung (http://www.hotstocked.com/companies/a/apple-inc-AAPL-balance-sheet-51437.html; https://www.samsung.com/us/aboutsamsung/ir/financialinformation/auditedfinancialstatements/downloads/consolidated/2012_con_all.pdf).
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References
Bhardwaj, S. (2011, Jun 20). Buy stocks of the company that utilise retained earnings efficiently
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Liapis, K. J., & Christodoulopoulou, E. P. (2011). How GAAP and accounting treatments influence property management. Journal of Property Investment & Finance, 29(3), 251-279. doi:http://dx.doi.org/10.1108/14635781111138082
King, A. M. (2008). GAAP vs IFRS: WILL THE REAL FAIR VALUE PLEASE STAND UP? Financial Executive, 24(10), 14-14,16. Retrieved from
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Shiner, L. (2011). FINANCIAL PLANNING GUIDE FOR 2011. Custom Retailer, 10(1), 12.
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Tribunella, H. (2009). Twenty questions on international financial reporting standards. The CPA
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http://www.hotstocked.com/companies/a/apple-inc-AAPL-balance-sheet-51437.html
