Apple 2004 Annual Report Download - page 28

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Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the
Company's discussion and analysis of its financial condition and results of operations require the Company's management to make judgments,
assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1 of the Notes
to Consolidated Financial Statements of this Form 10-K describes the significant accounting policies and methods used in the preparation of the
Company's consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it
believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results may differ from these estimates and such differences may be material.
Management believes the Company's critical accounting policies and estimates are those related to revenue recognition, allowance for doubtful
accounts, inventory valuation and exposures related to inventory purchase commitments, valuation of long-lived assets including acquired
intangibles, warranty costs, and income taxes. Management believes these policies to be critical because they are both important to the portrayal
of the Company's financial condition and results, and they require management to make judgments and estimates about matters that are
inherently uncertain. The Company's senior management has reviewed these critical accounting policies and related disclosures with the Audit
and Finance Committee of the Company's Board of Directors.
Revenue Recognition
Net sales consist primarily of revenue from the sale of products (i.e., hardware, software, and peripherals), and extended warranty and support
contracts. The Company recognizes revenue pursuant to applicable accounting standards, including Statement of Position (SOP) No. 97-2,
Software Revenue Recognition , as amended, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped, and title and risk of loss have
been transferred. For most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to
individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer
receives the product because the Company legally retains a portion of the risk of loss on these sales during transit. If at the outset of an
arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and
subsequently recognized as amounts become due and payable.
The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs,
including reseller and end-user rebates, and other sales programs and volume-based incentives. The estimated cost of these programs is accrued
as a reduction to revenue in the period the Company has sold the product and committed to a plan. The Company also records reductions to
revenue for expected future product returns based on the Company's historical experience. Future market conditions and product transitions may
require the Company to increase customer incentive programs and incur incremental price protection obligations that could result in additional
reductions to revenue at the time such programs are offered. Additionally, certain customer incentive programs require management to estimate
the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of
particular incentive programs. If a greater than estimated proportion of customers redeem such incentives, the Company would be required to
record additional reductions to revenue, which could have a material adverse impact on the Company's results of operations.
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