Apple 2005 Annual Report Download - page 30

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high-quality sales and after-sales support experience is critical to attracting and retaining customers. To ensure a high-quality buying
experience for its products in which service and education are emphasized, the Company has expanded and improved its distribution
capabilities by opening its own retail stores in the U.S. and internationally. The Company had 124 stores open as of September 24, 2005.
The Company also staffs selected third-party stores with the Company’s own employees to improve the buying experience through reseller
channels. The Company has deployed Apple employees and contractors in reseller locations around the world including the U.S., Europe,
Japan, and Australia. The Company also sells to customers directly through its online stores around the world.
To improve access to the iPod product line, the Company has significantly expanded the number of distribution points where iPods are sold.
The iPod product line can be purchased in certain department stores, member-only warehouse stores, large retail chains, and specialty retail
stores, as well as through the channels listed above.
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 inventory purchase commitments, 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 hardware, software, peripherals, digital content, and service 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.
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