Tag Archives: principles of auditing





Apple Inc. Verses Microsoft Inc Financial analysis – 2014 & 2015

  1. Will Apple be able to meet its obligations as they become due? How does Apples liquidity compare with that of Microsoft? 

Liquidity ratios are used to measure a company’s ability to pay off its short-term debt obligations. This is achieved by comparing a company’s most liquid assets (or, those that can be easily converted to cash), and its short-term liabilities.

  CURRENT RATIO   QUICK RATIO
  APPLE MICROSOFT   APPLE MICROSOFT
2014 1.08 2.5 0.67:1 0.6777:1
2015 1.11 2.5 0.725:1 0.53:1

 

A current ratio below 1 suggests that the company is unable to pay off its obligations if they came due at that point. This situation does not necessarily mean that it will go bankrupt. On the other hand, a current ratio (over 3) does not necessarily indicate that a company is in a state of financial well-being either. This depends on how its assets are allocated. A high cash ratio could also indicate that company is not using its current assets efficiently, is not securing financing well or is not managing its working capital well. Using Current ration Apple will be able to meet its short term obligations.


The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. This ratio measures the dollar amount of liquid assets equivalent for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company’s liquidity position. As per this ratio both companies do not show strength however as discussed under current ratio this should not raise an alarm. Apples liquidity seems to be becoming stronger as compared to Microsoft which is diminishing.

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  1. What is the capital structure of Apple (i.e., what percentage of the total assets of the company are financed through liabilities and what percentage through stockholders’ equity)?

A capital structure is a mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.
As at 2015 41% of Apples assets were financed by shareholders equity while 59% was funded through liabilities.

  1. 3. Is the capital structure of Microsoft significantly different from that of Apple?  Explain your answer.

As per the above, Applesuse of shareholders equity to total assets has been on a downward trend. That of Microsoft has also been on the same path but not drastic as that of Apple. To drive deeper into this lets see how their debt to income ratios look like.


DTI is a measure that compares an individual’s/business debt payment to its overall income. A low debt-to-income ratio demonstrates a good balance between debt and income. Conversely, a high DTI can signal that an individual/business has too much debt for the amount of income he or she has.

DEBT-INCOME RATIO
  APPLE MICROSOFT
2014 1.08 0.92
2015 1.43 1.2

DTI ratio also paints the same picture as shown by the above percentages. Both companies seem to have borrowed a lot as they move to 2015. This has led to decrease in shareholders equity in both. Both companies have a similar capital structur

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Outsourcing and Migrating from GAAP to IFRS

Outsourcing

Outsourcing is the practice of using other companies to reduce your costs and transfer portions or the whole job to another supplier rather than doing it yourself. When used properly, outsourcing can be a good cost-cutting strategy. It is sometimes cheaper and more affordable to purchase a product from a company than having to produce it yourself. This is because the company producing it has acquired the important economies of scale in production.

Outsourcing comes with both pros and cons. The major disadvantage of outsourcing especially when outsourcing payroll is data confidentiality. A small leak by an employee of the outsourcing company could lead to court battles, negative reputation to your business. Some key corporate secret, salary, will be shared with a third party. This if not well handled could result in a disaster.

Outsourcing payroll could be cheaper to handle it internally. Most corporates which offer these services could be expensive since they use very complicated software that is expensive to acquire. Another complication of outsourcing payroll is that you could be using the same company with your competitors. This would lead to a conflict of interest. You could have a competitor requiring the information of your staffs and get it because the company does not want to lose business to the competitor. Dealing with employee complaints on salary-related issues would also be a concern. A staff that has been under or over paid will have to go through their supervisor who then lodges a complaint with the personnel department, then to the outsourced company. This would take time, which is not good especially considering that we are dealing with salaries, which is a very emotional issue. Staff currently handling the payroll function might have to be let go. This portrays an image of a possibly a struggling company.

 

To fully outsource a several payroll issues need to be addressed. If not well dealt with the whole process could be flawed with complaints and other issues. One of the issues to be dealt with is the choice of company. Competitive bidding needs to be done. The best company not only in pricing but also in controls and efficiency is to be chosen for the job.

Data confidentiality needs to be well addressed. The company given the contracts needs to demonstrate without reasonable doubt that its able to keep the company`s information securely. Performance agreements need to be signed in consultation with the legal team. Information should not be stored in transferable discs, e.g. Flash disk, CDs, etc. Consequences of a proven leak need to be agreed on at the beginning.

The process flows of how the transfer will need to be laid out. A direct injection plan or a piloting plan needs to be agreed on. This will ensure an easy transition from the previous system to the new system.

 Migrating from GAAP to IFRS

            IFRS is a principle based system while GAAP is a rule-based system. A principle-based system is favorable to businesses as it is flexible when compared with a rule-based system that is rigid. IFRS also offers more disclosures due to its flexibility. More disclosures are important to readers of financial analysis reports. Getting International Standards approval requires you to implement IFRS. ISO certification is crucial for businesses as it increases their credibility.



IFRS recognizes loss immediately unlike what happens with GAAP. Loss being reported immediately is advantageous to not the investors but also lenders and other stakeholders like suppliers. The sooner they can get this information the better.  This reveals the transparency that is in IFRS and not in GAAP. Contracting between companies and their management becomes easy, this also ensures effective corporate governance.

The convergence of IFRS has also made it easy to compare financial statements in many parts of the world. In the EU for example many companies adopted IFRS the same year it was introduced. With this kind of adoption businesses need to all now ensure they are on IFRS. The key reason for the preparation of key financial reports is for comparison purposes. It doesn’t make any sense to prepare statements that only you can compare with yourself.

Do you know that debt has some advantages?

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Users of IFRS need to understand the methodology used to generate reports. Under GAAP emphasis is on literature provided. Documentation is the key issue. IFRS is more flexible and even where documentation does not tally facts pattern are analyzed, and a decision is made. To implement IFRS is short and precise. It takes a minimum of one year to be fully setup. To use IFRS we would use direct key as the implementation plan.

 

References

Du, N., Alford, R. M., & Smith, P. L. (2016). Do GAAP And IFRS Differ In Collectiblity Judgments Related To Revenue Recognition?. Journal of Applied Business Research (JABR), 32(6), 1675-1686.

Giloz-Ran, E., Gavious, I., & Lev, B. (2014). The Positive Externalities of IFRS: Enhanced R&D Disclosure.

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Producer and Consumer Surplus with Price Floors

 

Suppose that the Gondwanaland Chairman of Production who sets the governmental price floor for gosum berries in an effort to assist the gosum berry producers to have a higher income, set the price floor at $70 per barrel. These berries are a food staple of the Gondwanalandians and contributes directly to their health and long life (average lifespan of 150+ active years).

In that particular year the amount of gosum berries produced at the $70 price floor was 700 barrels per month. To support the price of gosum berries, the Chairman of Production’s Office had to purchase 400 barrels per month.  The accompanying diagram shows supply and demand curves illustrating the market for Gondwanaland gosum berries.

 

  1. In the absence of a price floor, the maximum price that a few of the consumers are willing to pay up to $100 per barrel of gosum berries. The market equilibrium (E) price is $50 per barrel. How much consumer surplus is created, when there is no price floor? Show your calculations.

Consumer surplus is defined as the area below the demand curve but above the market price(Sun, Delucchi, Lin & Ogden,  2014) In our case the consumer surplus is represented by the area between price of $50 and $100 against quantity of 500.

Consumer surplus        = ½ (50*500)

= 50,000

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  1. How much producer surplus when there is no price floor?

Producer surplus is the area below the price curve but above the supply curve. (Sun, Delucchi, Lin & Ogden, 2014)

Producer surplus         = ½ (50*500)

=50,000

  1. What is the total surplus when there is no price floor? Show your calculations.

 

Total surplus    = 50,000 +50,000

= 100,000

 

  1. d) After the price floor is instituted, the legal minimum price that can be charged by suppliers is $70 per barrel. The maximum price that a few of the consumers are still willing to pay is $100 per barrel of gosum berries. With the price floor at $70 per barrel, consumers buy 300 barrels of gosum berries per month. How much consumer surplus is created with the price floor?

Consumer surplus after the price floor            = ½ (30*300)

= 4,500

How much producer surplus is created with the price floor? Show your calculations.

Producer surplus after price floor       = ½ (70*700)

= 24,500

  1. e) The Chairman of Production’s Office buys any barrels of gosum berries that the producers are not able to sell. With the price floor, the producers sell 300 barrels per month to consumers, but the producers, at this high price floor, produce 700 barrels per month. How much money does the Chairman of Production’s Office spend on buying up surplus gosum berries? Show your calculations.

= 700 barrels  – 300 barrels

= 400 barrels

= 400*70

= 28,000

 

  1. f) The Emperor of Gondwanaland must collect taxes from the people to pay for the purchases of surplus gosum berries by the Chairman of Production’s Office. As a result, total surplus (producer plus consumer) is reduced by the amount the Chairman of Production’s Office spent on buying surplus gosum berries. Using your answers for parts d, e, and f, what is the total surplus when there is a price floor? Show your calculations.

Total surplus    = 24500 + 4500

= 29000

  1. g) How does this compare to the total surplus without a price floor from part c?

The price floor has reduced the total surplus in the market.

 

References

Sun, Y., Delucchi, M. A., Lin, C. Y. C., & Ogden, J. M. (2014). The producer surplus associated with gasoline fuel use in the United States. Working paper, University of California at Davis.

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