Apple’s Trend Analysis
Trend analysis is used to assess an organization’s financial data over time. The purpose of this study is to compute and assess the quantity and percentage change from one period to the next. When comparing several years, trend analysis takes the most recent year as the base year to compare all subsequent years. The composition of the balance sheet and income statement is broken down into each line as a proportion of the total amounts in a common-size analysis. The income statement line will be divided into percentages of total revenue (Heisinger & Hoyle, n.d.).
The Most Important 3 Line Items In Evaluating A Company For The Balance Sheet And For The Income Statement
Based on my research, I found out that the most important 3 line items in evaluating a company’s balance sheet are:
- Total Assets: all assets should be classified as current or non-current. If an asset may be turned into cash within a year, it is termed current. Current assets like as cash, inventory, and net receivables are significant because they provide flexibility and solvency (Ross, 2022). Therefore, we can see the company performance by looking at its assets, especially the cash.
- Total Liabilities: liabilities, like assets, can be current or non-current. Current liabilities are debts that must be paid within a year. Fundamental investors want organizations with fewer liabilities than assets, especially when cash flow is considered. Companies that owe more money than they bring in frequently fail (Ross, 2022).
- Total Equity: equity is equal to assets minus liabilities and indicates the amount of money that the company’s shareholders have a right to. Under the equity portion, investors should pay close attention to retained earnings and paid-in capital (Ross, 2022). This item is important because under the equity section, paid-in capital reflects the initial investment amount paid by shareholders for their ownership stake.
As for the income statement, the most important lines are:
- Total Revenue: this is important because from this line we can know the earnings generated by the company through the sale of products or services, as well as other activities linked to the core operation of the company’s business (Accounting Guide, 2020).
- Operating Expense: we can know the money or cost that a corporation invests in order to produce revenue from this line.
- Net Income: Net income, also known as net profit, is the profit earned by a corporation after subtracting all costs and expenses, including interest and tax charges. The third major component of the income statement is net income, which indicates the net outcome of the company’s performance throughout the accounting period (Accounting Guide, 2020).
What do you observe in the linear trends (i.e., are values increasing or decreasing)?
According to Heisinger & Hoyle (n.d.), a common approach to observing the trends for several years is to establish the oldest year as the base year and compute future years as a percentage of the base year. Trend percentage = (Current year ÷ Base year)*100%. Using this formula as guidance, we can calculate the trends in 2021 as:
Net income = ($94,680,000/$59,531,000)*100% = 159.04% (increase 59.04% compare to the base year)
Operating expense = ($43,887,000/$30,941,000)*100% = 141.84% (increase 41.84% compare to the base year)
As for the balance sheet the trends in 2021 is:
Total assets = ($351,002,000/$365,725,000)*100% = 95.97% (decrease 4.03% compare to the base year)
Total liabilities = ($287,912,000/$258,578,000)*100% = 111.34% (increase 11.34% compare to the base year)
Total equity = ($63,090,000/$107,147,000)*100% = 58.88% (decrease 41.12% compare to the base year)
What are the trends on a common-size basis?
Line items on a common-size financial statement are shown as a percentage of a single selected or common figure (Furhmann, 2022). Total assets are a common figure for a common-size balance sheet examination. According to the accounting equation, this also equals total liabilities and shareholders’ equity, hence the two terms can be used interchangeably in the analysis (Furhmann, 2022). Hence on Apple Inc’s balance sheet, we can see that the total assets in 2019, 2020, and 2021 are decreasing compare to 2018. According to Furhmann (2022), total top-line sales is a standard statistic for an income statement. This is the same approach that is used to calculate a company’s margins. A net profit margin, for example, is just net income divided by sales, which is also a common size analysis. Hence, the net income in 2019 decreased but then increased gradually in 2020 and 2021.
What would be your next steps in completing a thorough analysis of the trends?
The next step will be conducting the Profitability Ratios analysis (Gross margin, Profit margin, Return on assets, Return on common shareholders’ equity, and Earnings per share), Short-Term Liquidity Ratios (Current, Quick, Receivables’ turnover, and Inventory turnover ratios), Long-Term Solvency Ratios (Debt to assets, Debt to equity, and Times interest earned), Market Valuation (Market capitalization and Price-earnings ratio) since analyzing the trends in common basis is just only early analysis of Apple Inc.’s fiscal performance before a sensible judgment and decision on its financial situation can be formed. (Heisinger & Hoyle, 2012).
References
Accounting Guide. (2020, October 27). Income statement. Accountinguide. Retrieved July 29, 2022, from https://accountinguide.com/income-statement/
Furhmann, R. (2022, June 21). The common size analysis of financial statements. Investopedia. Retrieved July 31, 2022, from https://www.investopedia.com/articles/investing/111413/commonsize-analysis-financial-statements.asp
Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html
Ross, S. (2022, January 20). The main focus points when analyzing a balance sheet. Investopedia. Retrieved July 29, 2022, from https://www.investopedia.com/ask/answers/050615/what-items-balance-sheet-are-most-important-fundamental-analysis.asp
Note:
This article is written based on University of The People Managerial Accounting (BUS 5110) written assignment by Fristy Tania in August 2022
