Apple 2005 Annual Report Download - page 31

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 the relevant program. 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.
Allowance for Doubtful Accounts
The Company distributes its products through third-party resellers and directly to certain education, consumer, and commercial customers. The
Company generally does not require collateral from its customers. However, when possible the Company does attempt to limit credit risk on
trade receivables with credit insurance for certain customers in Latin America, Europe, and Asia and by arranging with third-party financing
companies to provide flooring arrangements and other loan and lease programs to the Company’s direct customers. These credit-financing
arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume
any recourse or credit risk sharing related to any of these arrangements. However, considerable trade receivables that are not covered by
collateral, third-party flooring arrangements, or credit insurance are outstanding with the Company’s distribution and retail channel partners.
The allowance for doubtful accounts is based on management’s assessment of the collectibility of specific customer accounts and includes
consideration of the credit worthiness and financial condition of those specific customers. The Company records an allowance to reduce the
specific receivables to the amount that is reasonably believed to be collectible . The Company also records an allowance for all other trade
receivables based on multiple factors including historical experience with bad debts, the general economic environment, the financial condition
of the Company’s distribution channels, and the aging of such receivables. If there is a deterioration of a major customer’s financial condition,
if the Company becomes aware of additional information related to the credit worthiness of a major customer, or if future actual default rates
on trade receivables in general differ from those currently anticipated, the Company may have to adjust its allowance for doubtful accounts,
which would affect earnings in the period the adjustments are made.
Inventory Valuation and Inventory Purchase Commitments
The Company must order components for its products and build inventory in advance of product shipments. The Company records a write-
down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess
of anticipated demand or net realizable value. The Company performs a detailed review of inventory each fiscal quarter that considers multiple
factors including demand forecasts, product life cycle status, product development plans, current sales levels, and component cost trends. The
personal computer and consumer electronic industries are subject to a rapid and unpredictable pace of product and component obsolescence
and demand changes. If future demand or market conditions for the Company’s products are less favorable than forecasted or if unforeseen
technological changes negatively impact the utility of component inventory, the Company may be required to record additional write-downs
which would negatively affect gross margins in the period when the write-downs are recorded.
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