Apple 1997 Annual Report Download - page 38

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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, creative, 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
PROVISIONS FOR INVENTORY WRITE-DOWNS AND RELATED ACCRUALS
The Company's provisions for inventory write-downs, as well as accruals for the cost to cancel excess component orders, 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 provisions for
inventory write-downs, as well as its accruals for the cost to cancel excess component orders, will be materially different from the actual
amounts or results. These differences could result in materially higher than expected inventory provisions and related costs, which could have a
materially adverse effect on the Company's consolidated 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 consolidated results
of operations and financial condition in the near term.
DEFERRED TAX ASSETS
Realization of approximately $85 million of the total deferred tax assets representing tax loss and credit carryforwards 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 forecasted U.S. taxable income, including income that may be generated as a result of certain tax planning strategies, will
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