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Apple and Samsung Companies’ Financial Accounting Case Study

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Updated: Aug 2nd, 2021

Financial Accounting: Income Statement And Balance Sheet

Why is revenue recognition a significant issue?

The issues of revenue recognition are significant in accounting. Shareholders expect a company’s management to make decisions that generate high revenue growth. Therefore, the company’s earnings are an important indicator of financial performance and rewards for the management.

How do we determine when revenues are recorded for accounting purposes?

A company’s revenue should be determined only when the reward and risks of ownership are transferred to the buyer, and the amount of consideration can be measured. Revenue is measured at fair or market value of the consideration after it has met prescribed conditions, depending on the nature of work performed by the company (Taub, 2013).

What is the difference between a product and period expense?

Product costs (direct costs) are related to the manufacturing process. These include material, labor, and overhead costs. Period costs (indirect costs) refer to administration and general expenses. These are not directly related to the manufacturing process of the business.

How does the matching concept relate to accounting for revenues and inventory?

The matching concept is a practice whereby expenses are recognized in the same period in which the revenue is recognized. It helps in the attempt to avoid misstating a company’s earnings for a particular period. If the matching concept is not used, the result can be understating or overstating the profits for a particular year.

Is there a difference in approach to valuation by US GAAP and IFRS?

There is a difference between the conceptual-based approach of US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). US GAAP is based on rule-based concepts. As a different approach, IFRS is based on the principles of accounting.

  • Intangible assets are recognized at fair value under US GAAP. On the other hand, according to IFRS accounting standards, intangibles are recognized only if future economic benefits can be reliably measured.
  • In the case of the consolidation of financial statements, a risk-and-reward model is used in US GAAP. On the other hand, IFRS uses a control model.
  • In US GAAP, extraordinary items are presented below the net income. In contrast, these items are not segregated in the income statement in IFRS (Taub, 2013).

Financial statements for Apple and Samsung

The consolidated financial reports of Apple Inc. (Apple) are prepared under the conventions of US GAAP. However, the company also prepares statutory financial statements in many other countries, where they are prepared in accordance with the rules of IFRS. These filings are first prepared using the local GAAP, and then the results are adjusted to indicate the differences between figures prepared under GAAP and IFRS. The audit of Apple Inc. is conducted in accordance with the Statements on Auditing Standards (SAS’s), as issued by the American Institute of CPAs (AICPA).

In contrast, the consolidated financial statements for Samsung are prepared in accordance with the Korean IFRS. The audit of Samsung Inc. is conducted in accordance with International Auditing Standards (IAS).

In 2015, the sales of Apple Inc. were $233.7 million, compared to $82.795 million in 2014 (See Appendix I) (Annual Report: Apple Inc., 2015). The primary reason for the increase in the company’s revenue was the launch of the iPhone 6, which resulted in higher demand for the company’s products, significantly increasing sales. On the other hand, revenue for Samsung declined in 2015, down to $177.3 million, compared to $182.2 million in 2014 (Annual Report: Samsung Electronics Inc., 2015). Although Samsung management highlighted a significant increase in the demand for S6 Smartphones and the Galaxy Note 5, the launch of the iPhone 6 by Apple significantly affected the figures forecast by Samsung, and the company’s sales eventually declined (Edwards, 2015).

The cost of sales of Apple Inc. also showed an increase of approximately $28 million in 2015 (Annual Report: Apple Inc, 2015). The gross profit margin of the company increased from 38.5% to 40%, indicating a higher profit margin earned from the sales of the iPhone 6. This also demonstrated the effectiveness of cost reduction strategies on the company’s part. Samsung also increased its gross profit margin, from 37.7% in 2014 to 38.43% in 2015. Although the sales of Samsung’s products declined in 2015, its gross profit remained almost the same in both years, a fact that pointed to the company’s efficient cost management.

An analysis of selling and administrative expenses showed that expenses for Apple Inc. increased in 2015 to $14.329, compared to $11.9 million in 2014. This trend was due to the increase in operational activities and marketing expenses related to the launch of the new iPhone models. By contrast, the selling and administrative expenses for Samsung declined in 2015, to $44.8 million, from $46.762 million in 2014, indicating a decline in its operational activities and also representing a decrease in the company’s revenue (Annual Report: Samsung Electronics Inc., 2015).

Although Samsung’s revenue was less than that of Apple, its selling and administration expenses were significantly higher than Apple’s. This fact suggests a certain amount of inefficiency in the area of managing its expenses and other related costs. The impact could also be seen in the net profit reported by Samsung (2015: $16.8 million), which was considerably less than Apple’s net profit (2015: 53.3 million).

In 2015, the debts of Apple and Samsung were $16.8 million and $22.24 million respectively (See Appendix II). Although the revenue of Apple was higher than that of its rival company, its receivables were still less than Samsung’s, which indicated its better receivables collection policies. Moreover, the reason for the high amount of receivables on Samsung’s part could be that the company offered a longer credit period to its customers to motivate them to purchase its products. Apple’s inventory level was also lower than that of Samsung, indicating that Apple effectively sold out its inventories in fewer days, and was able to forecast sales more accurately than Samsung.

The accounts payable of Apple were $35.4 million, compared to $5.4 million for Samsung in 2015. It was in the area of working capital that Samsung led its rival. This showed that Samsung paid its creditors in fewer days than Apple, and it managed its working capital better in terms of its current liabilities.

Cash and cash equivalents for both companies were similar, with Apple’s cash reserves being a bit higher than Samsung’s. However, given the revenue of both companies, the cash reserve percentage for Samsung was better than for Apple, and showed better working capital management for the former company.

Although Apple’s net income was $53 million in 2015, its retained earnings reserves increased by $5 million in 2015, from $87 million at the start of the year. The primary reason for this slight increase in the company’s retained earnings was the amount of funds allocated by the company to its share repurchase program. The company repurchased its common stocks in the amount of $36 million. The company paid a cash dividend of $11.6 million in 2015. Samsung also paid a dividend of $2.71 million in 2015.

The overall analysis of the selected companies concluded that both are leading brands in the smartphone market. Apple Inc. is the market leader, and had a better position than Samsung, in terms of profits, revenues, and market goodwill. Although both companies are producing new smartphones to attract their customers, Apple has been more successful in increasing its market share faster than Samsung.

References

Annual Report: Apple Inc. (2015). California: Apple Inc.

Annual Report: Samsung Electronics Inc. (2015). Suwon: Samsung Electronics Inc..

Edwards, J. (2015). . Web.

Taub, S. A. (2013). Revenue Recognition Guide (2014). Illinois: CCH Incorporated.

Appendix I

Apple Samsung
2015 2014 % Change 2015 2014 % Change
$ in Million $ in Million
Revenue $233.72 $182.80 28% $177.30 $182.27 -3%
Finance expense $733 $384 91% $8.80 $6.44 37%
Cost of Sales $140.09 $112.26 25% $109.15 $113.39 -4%
Selling and administrative expenses $14.33 $11.99 19% $44.87 $46.76 -4%
Net income $53.30 $39.51 35% $16.80 $20.60 -18%

Table 1: Comparison of Apple and Samsung.

Appendix II

Apple Samsung
2015 2014 % Change 2015 2014 % Change
$ in Million $ in Million
Debtors $16.80 $17.40 -3% $22.24 $21.83 2%
Inventory $2.30 $2.10 10% $16.63 $15.31 9%
PPE $22.40 $20.62 9% $76.40 $71.40 7%
Creditors $35.40 $30.20 17% $5.40 $6.90 -22%
Cash $21.20 $13.84 53% $20 $14.88 34%

Table 2: Comparison of Financial Items.

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