Apple 2011 Annual Report Download - page 54

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Financial Instruments
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’
s
marketable debt and equity securities have been classified and accounted for as available-for-
sale. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. The Company classifies its
marketable debt securities as either short-term or long-term based on each instrument’
s underlying contractual maturity date. Marketable debt
securities with maturities of 12 months or less are classified as short-
term and marketable debt securities with maturities greater than 12 months
are classified as long-term. The Company classifies its marketable equity securities, including mutual funds, as either short-term or long-
term
based on the nature of each security and its availability for use in current operations. The Company’
s marketable debt and equity securities are
carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders’
equity. The cost of securities
sold is based upon the specific identification method.
Derivative Financial Instruments
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the
effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income
(“AOCI”) in shareholders’
equity and reclassified into income in the same period or periods during which the hedged transaction affects
earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in current income. To receive hedge
accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For
options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in
income. For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair
value hedges, both the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the
hedged risk are recognized in earnings in the current period. The Company had no fair value hedges in 2011, 2010 and 2009. The net gain or loss
on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net
investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. For forward exchange contracts
designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its
definition of effectiveness. Accordingly, any gains or losses related to this component are recognized in current income. Derivatives that do not
qualify as hedges must be adjusted to fair value through current income.
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical
experience, the age of the accounts receivable balances, credit quality of the Company’
s customers, current economic conditions, and other
factors that may affect customers’ ability to pay.
Inventories
Inventories are stated at the lower of cost, computed using the first-in, first-
out method, or market. If the cost of the inventories exceeds their
market value, provisions are made currently for the difference between the cost and the market value. The Company’
s inventories consist
primarily of components and finished goods for all periods presented.
52