Apple 2012 Annual Report Download - page 27

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the markets where it competes, these markets are highly competitive and subject to aggressive pricing. To remain
competitive, the Company believes that continual investment in research and development and marketing and
advertising is critical to the development and sale of innovative products and technologies. The Company’s
research and development spending is focused on investing in new hardware and software products, and in
further developing its existing products, including iPhone, iPad, Mac, and iPod hardware; iOS and OS X
operating systems; and a variety of application software and online services.
The Company uses a variety of direct and indirect distribution channels, such as its retail stores, online stores,
and direct sales force, and third-party cellular network carriers, wholesalers, retailers, and value-added resellers.
The Company believes that sales of its innovative and differentiated products are enhanced by knowledgeable
salespersons who can convey the value of the hardware and software integration, and demonstrate the unique
solutions that are available on its products. The Company further believes providing direct contact with its
targeted customers is an effective way to demonstrate the advantages of its products over those of its competitors
and providing a high-quality sales and after-sales support experience is critical to attracting new and retaining
existing customers. To ensure a high-quality buying experience for its products in which service and education
are emphasized, the Company continues to expand and improve its distribution capabilities by expanding the
number of its own retail stores worldwide. Additionally, the Company has invested in programs to enhance
reseller sales by placing high quality Apple fixtures, merchandising materials and other resources within selected
third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus
on the Apple platform by providing a high level of integration and support services, and product expertise.
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 the Notes to Consolidated Financial Statements in Part II, Item 8 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, valuation and impairment of marketable securities, 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, digital content and applications,
peripherals, and service and support contracts. 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 retains a portion of the
risk of loss on these sales during transit. The Company recognizes revenue from the sale of hardware products,
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