Apple 2009 Annual Report Download - page 40

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Table of Contents
The Company’
s iPods are sold through a significant number of distribution points to provide broad access. iPods can be purchased in certain
department stores, member-
only warehouse stores, large retail chains and specialty retail stores, as well as through the channels for Mac
distribution listed above.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”)
and
the Company’s discussion and analysis of its financial condition and operating results 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, “
Summary
of Significant Accounting Policies” of Notes to Consolidated Financial Statements in 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, valuation of marketable
securities, allowance for doubtful accounts, inventory valuation and inventory purchase commitments, warranty costs, income taxes, and legal
and other contingencies. Management considers these policies critical because they are both important to the portrayal of the Company’
s
financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. 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, third
-
party digital content and applications, peripherals, and service
and support contracts. The Company recognizes revenue for software products (operating system software and applications software), or any
product that is considered to be software-
related, in accordance with industry specific accounting guidance for software and software related
transactions (e.g., Mac computers, iPhones and iPod portable digital music and video players). For products that are not software or software-
related, (e.g., third-
party digital content sold on the iTunes Store and certain Mac, iPhone and iPod supplies and accessories), the Company
recognizes revenue pursuant to various revenue-related GAAP as described below.
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 recognition of revenue until the
customer receives the product because the Company 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 and all other criteria for revenue recognition have been met.
For both iPhone and Apple TV, the Company has indicated it may from time-to-
time provide future unspecified features and additional software
products free of charge to customers. Accordingly, iPhone handsets and Apple TV sales are accounted for under subscription accounting in
accordance with GAAP. As such, the revenue and associated cost of sales are deferred at the time of sale, and are both recognized on a straight-
line basis over the currently estimated 24-month economic lives of these products, with any loss recognized at the time of sale. If the Company’
s
estimated economic life of a product accounted for under subscription accounting changes, the
37