2. Suppose a customer buys an iPhone from Apple for $500 on January 1, 2010. The cost of the iPhone to Apple is $350. Assume that the customer is entitled to upgrades over the next two years. Use the following financial statement effects template (FSET) to illustrate the financial statement impacts for Apple of the customer's iPhone purchase on the date of the initial purchase and at the end of each of the two years following the initial purchase under generally accepted accounting principles (GAAP).
GAAP | Assets | = | Liabilities | + | Owners' Equity | | Revenues | Expenses | Net Income | January 1, 2010: | | | | | | | | | | Deliver iPhone to the customer | +500 (Cash) | | +500 (Deferred Revenue) | | | | | | |
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As a result, both Asset and Liability will go down. Owner’s Equity and Retained Earnings will go up. 3. In your opinion, which set of numbers best reflects the economics of the iPhone? As the CFO of Apple, which method would you use if you were given a choice to adopt either method? Explain your answer. * In my opinion, the GAAP’s set of numbers best reflect the economics of the iPhone, because it takes the future expenses of free software updates into account. * If I were the CFO of Apple, I would choose to adopt the GAAP method given that it is beneficial for the corporation to report their revenues in a conservative view. Because the amount of revenues reserved for future releases would correspond to expenses incurred in a later time (the costs incurred when give software updates and upgrades) in the first place. * More importantly, those revenues could serve as a cushion to absorb losses in economic downturns or during infrequent emergencies. It will contribute a more stable and less volatile stock price to the company. It is, therefore, a better reporting strategy for the corporation in the long run. * In addition, although the accounting methods chosen for iPhone’s revenue recognition would influence some ratings of Apple’s stock, there is never a consistent comment on this change. Thus, focusing on how to increase sales might be a more reliable way than trying to