Apple 1996 Annual Report Download - page 32

Notes to Consolidated Financial Statements
Nature of Operations
Apple Computer (the "Company") designs, manufactures, and markets microprocessor-based personal computers and related personal
computing products for sale primarily to education, home, business, and government customers.
Basis of Presentation
The consolidated financial statements include the accounts of Apple Computer, Inc. and its subsidiaries (the Company). Intercompany accounts
and transactions have been eliminated. The Company's fiscal year-end is the last Friday in September.
Accounting Estimates
General
The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Significant Accounting Estimates
Reserves Against Inventories
The Company's reserves against inventories are based on the Company's best estimates of product sales prices and customer demand patterns,
and/or its plans to transition its products. However, the Company participates in a highly competitive industry that is characterized by
aggressive pricing practices, downward pressures on gross margins, frequent introductions of new products, short product life cycles, rapid
technological advances, continual improvement in product price/performance characteristics, and price sensitivity and changing demand
patterns on the part of consumers. As a result of the industry's ever-changing and dynamic nature, it is at least reasonably possible that the
estimates used by the Company to determine its reserves against inventories will be materially different from the actual amounts or results.
These differences could result in materially higher than expected inventory reserve costs, which could have a materially adverse effect on the
Company's results of operations and financial condition in the near term.
Warranty and Related Accruals
The Company's warranty and related accruals are based on the Company's best estimates of product failure rates and unit costs to repair.
However, the Company is continually releasing new and ever-more complex and technologically advanced products. As a result, it is at least
reasonably possible that product could be released with certain unknown quality and/or design problems. Such an occurrence could result in
materially higher than expected warranty and related costs, which could have a materially adverse effect on the Company's results of operations
and financial condition in the near term.
Deferred Tax Assets
Realization of approximately $85 million of the total deferred tax assets is dependent on the Company's ability to generate approximately $245
million of future U.S. taxable income. Management believes that it is more likely than not that the asset will be realized based on forecasted
U.S. income. However, there can be no assurance that the Company will meet its expectations of future U.S. income. As a result, the amount of
the deferred tax assets considered realizable could be reduced in the near and long term if estimates of future taxable U.S. income are reduced.
Such an occurrence could materially adversely affect the Company's results of operations and financial condition. The Company will continue
to evaluate the realizability of the deferred tax assets quarterly by assessing the need for a valuation allowance.
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