Apple 2002 Annual Report Download - page 46

accounted for its employee stock options granted and employee stock purchase plan purchases subsequent to September 29, 1995, under the
fair value method of that statement. The fair values for these options and stock purchases were estimated at the date of grant and beginning of
the period, respectively, using a Black-Scholes option pricing model. For purposes of pro forma disclosures, the estimated fair value of the
options and shares are amortized to pro forma net income over the options' vesting period and the shares' plan period.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected life of
options and the Company's expected stock price volatility. Because the Company's employee stock options and employee stock purchase plan
shares have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable measure of the fair value of the
Company's employee stock options and employee stock purchase plan shares.
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For purposes of the pro forma disclosures pursuant to SFAS No. 123 provided in the Company's annual reports through 2002, the expected
volatility assumptions used by the Company have been based solely on historical volatility rates of the Company's common stock. The
Company has made no adjustments to its expected volatility assumptions based on current market conditions, current market trends, or
expected volatility implicit in market traded options on the Company's stock. The Company will continue to monitor the propriety of this
approach to developing its expected volatility assumption and could determine for future periods that adjustments to historical volatility and/or
use of a methodology that is based on the expected volatility implicit in market traded options on the Company's common stock are more
appropriate based on the facts and circumstances existing in future periods.
Earnings Per Common Share
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of
shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to
common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the
number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been
issued. The dilutive effect of outstanding options is reflected in diluted earnings per share by application of the treasury stock method. The
dilutive effect of convertible securities is reflected using the if-converted method. Dilutive potential shares of common stock related to stock
options were excluded from the calculation of diluted loss per common share for fiscal 2001 because their effect would have been antidilutive.
Stock Split
On June 21, 2000, the Company affected a two-for-one stock split in the form of a Common Stock dividend to shareholders of record as of
May 19, 2000. All per share data and numbers of Common shares have been retroactively adjusted to reflect the stock split.
Comprehensive Income
Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to
revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but
are excluded from net income. The Company's other comprehensive income is comprised of foreign currency translation adjustments from
those subsidiaries not using the U.S. dollar as their functional currency, from unrealized gains and losses on marketable securities categorized
as available-for-sale, and from net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges.
Segment Information
The Company reports segment information based on the "management" approach. The management approach designates the internal reporting
used by management for making decisions and assessing performance as the source of the Company's reportable segments. Information about
the Company's products, major customers, and geographic areas on a company-wide basis is also disclosed.
Note 2—Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair value
due to the short maturities of those instruments.
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Cash, Cash Equivalents and Short-Term Investments