Apple 2012 Annual Report Download - page 29

of tax, in the Company’s Consolidated Balance Sheets. Changes in the fair value of available-for-sale securities
impact the Company’s net income only when such securities are sold or an other-than-temporary impairment is
recognized. Realized gains and losses on the sale of securities are determined by specific identification of each
security’s cost basis. The Company regularly reviews its investment portfolio to determine if any security is
other-than-temporarily impaired, which would require the Company to record an impairment charge in the period
any such determination is made. In making this judgment, the Company evaluates, among other things, the
duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer
and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be required to
sell, the security before recovery of the its amortized cost basis. The Company’s assessment on whether a
security is other-than-temporarily impaired could change in the future due to new developments or changes in
assumptions related to any particular security.
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 industries in which the Company competes 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 adversely
affect its results of operations in the period when the write-downs were recorded.
The Company records accruals for estimated cancellation fees related to component orders that have been
cancelled or are expected to be cancelled. Consistent with industry practice, the Company acquires components
through a combination of purchase orders, supplier contracts, and open orders based on projected demand
information. These commitments typically cover the Company’s requirements for periods up to 150 days. If there
is an abrupt and substantial decline in demand for one or more of the Company’s products or an unanticipated
change in technological requirements for any of the Company’s products, the Company may be required to
record additional accruals for cancellation fees that would adversely affect its results of operations in the period
when the cancellation fees are identified and recorded.
Warranty Costs
The Company provides for the estimated cost of hardware and software warranties at the time the related revenue
is recognized based on historical and projected warranty claim rates, historical and projected cost-per-claim, and
knowledge of specific product failures that are outside of the Company’s typical experience. Each quarter, the
Company reevaluates its estimates to assess the adequacy of its recorded warranty liabilities considering the size
of the installed base of products subject to warranty protection and adjusts the amounts as necessary. If actual
product failure rates or repair costs differ from estimates, revisions to the estimated warranty liabilities would be
required and could materially affect the Company’s results of operations.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of operations.
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets
and liabilities are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income
in effect for the years in which those tax assets are expected to be realized or settled. The Company records a
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