Statement of Purpose
In the analysis of financial statements to reveal information on the financial performance of organisations, the degree to which an organisation reflects and integrates financial management principles in its business is crucial. The paper presents three financial principles namely time value for money, cash flows are the sources of value, and market prices reflect information using Apple Inc as a case company.
The overall idea behind investments rests on the idea of earning more money from a certain amount of money held by an organisation in the present. In addition, in an endeavour to make decisions on new shareholding, careful scrutiny of the cash flows of the company where the shareholding is sort is crucial. Consequently, concerning the principle of market prices reflecting information, it is impossible for any inventors to outperform the forces of the market simply by utilising information largely accessible by all inventors. In a bid to give a detailed picture of the above principles, a literature review of the significance of the three principles identified in the purpose statement is conducted as a research methodology to lay the foundations for scrutinising the applicability of the principles in Apple Inc. Much of the information in the analysis section is drawn from the author’s experience while working at the company.
Importance of the findings
The findings of this research are crucial since they will form the paradigms on which apple Inc. may base its business operations, in general, to realise more success in the future. Apart from benefiting Apple Inc. in the improvement of its business practices, the findings will be crucial for other organisations that operate in a similar line of business as Apple Inc.
There is still room for Apple Inc. to perform better in terms of making its financial position stronger. Firstly, the company needs to cease tying its financial resources in the form of stocks or material goods. It needs to implement strategies that will ensure that money is always accessible to make purchases whenever required. The company can further strategies on how it can come up with its own sustainable components to produce its own products, a case that once implemented will help significantly in terms of reducing holding money in the form of finished stocks.
The paper considers three principles that include a subscription to the idea that money has a time value, there is a risk-return trade-off, cash flows are sources of value, and market prices reflect the organisations financial information. The first three principles are analysed in this paper within the context of the business of Apple Inc. The principle of the time value of money refers to the value a certain amount of money has when the time domain is incorporated while comparing its worthiness both in present and in the future. This principle is found vital in finance theory when making an investment decision since money is capable of earning interest.
On the other hand, it is arguable that every profit-oriented organisation seeks to maximise profits in order to confer more benefit to its shareholders. However, reported figures of profits may be at times misleading. This is because profit is not always a precise indicator of the manner in which a company performs financially. The principle of cash flows are the sources of value becomes essential in such a situation. It helps shareholders to make financial decisions based on the reports on the organisations cash in and cash outflows. In the analysis of Apple Inc., the principle that market prices reflect the organisations information is also considered. According to this principle, the most efficient financial markets are the ones, which portray all the available information about an organisation. Apart from discussing these principles, this paper also proposes efficiency improvements in these practices regarding one or more business problems of Apple Inc.
Time value for money
Money is an incredible resource required by all organisations for them to execute their businesses. Investments in both short-term and long-term assets require a commitment of money by an organisation. Making such decisions requires an incredible possession of financial skills because money is essentially scarce in supply. Consequently, making decisions on how to spend money at the present time is critical especially by noting that the principle of time value for money implies, “money available at the present time is worth more than the same amount in the future due to its potential earning capacity” (Waller & Finke, 2008, p.117).
In this context, it is arguable that an investment decision is largely based on the ability of the committed money in the investment to give higher returns compared to when that money is kept in an account that gives a constant interest rate on a compounded basis. Davidson (2005) contends with this line of argument by further asserting, “provided money can earn interest, any amount of money is worth more the sooner it is received” (p.37). For instance, one can illustrate this argument by supposing that an individual is given an opportunity to choose to receive a dollar today in the form of payment or in some future time.
Based on the principle of time value for money, the best option is to choose to receive the money today “because of the many ways that that money may be invested” (Pilbeam, 2005, p.98). Certainly, based on this illustration, a dollar in the present time is more valuable than the same dollar in the time to come. From the same point of argument, as raised in the above illustration, Schaefer (2007) considers a case where an individual is requested to choose between receiving $ 100, 000 today and the same amount after three years (Para.9). One person decides to receive the amount now and keeps it in a saving account as one of the simplest ways of making the money grow. If the bank gives 5% compound interest and the person does not touch the interest for a period of three years, a total amount (A) of P (1+1/r) n is expected.
In this case, P is the original amount or the principle, r is the interest rate, and n is the span of time in which the money remains in the account. For the case illustrated by Schaefer (2007), “A= P (1+r/100) n = 100,000 (1+5/100)3 = 100000× 1.053 = 115762.50” (Para.10). On the other hand, in case the other person chooses to receive the 100000 after three years, his original amount will not have changed. Indeed, the money might possess less utility or buying capacity due to market dynamics such as inflation (Pilbeam, 2005, p.41). The total amount A is also the future value of money while P is the present value of money.
Cash flows is the sources of value
According to Ronald and Grable, inadequate possession of the knowledge of cash flows as sources of value may make shareholders be deceived that the profit reported by companies after being taxed is the amount that a particular company can afford to pay its shareholders as dividends and or distribute in terms of shares (2010, p.59). Arguably, therefore, companies deserve to have adequate cash flows to enable them to remain in businesses coupled with conducting payments of dividends. This way, the anticipations of shareholders may be realistic. In the same line of argument, Colombo and Matteo (2006) posit, “survival of a business depends not only on profits but also perhaps more on its ability to pay debts when they are due” (p.9).
In case the company in question possesses low cash flows, it becomes incapacitated to pay the debts even though it could be having large pools of assets and or recording high annual profits after taxation. Some of the payments that companies need to conduct on a regular basis include “profit and loss’ items such as material purchases, wages, interest, and taxation, etc, but also capital payments for new fixed assets and the repayment of loan capital when this falls due reasons such as on the redemption of debentures” (Colombo & Matteo, 2006, p.103). This argument implies that cash flows are valuable tools for parameters that provide subtle information about an organisation’s financial situation and value.
Cash flows are deployed to calculate various parameters that are used in the “determination of a project rate of return or value” (Colombo & Matteo, 2006, p.219). Cash transactions within a planned undertaking serve as stimulation parameters for fiscal frameworks among them being “interior rates of return coupled with the preset rate of return” (Davidson, 2005, p.53)among others. Cash flows can also act as essential tools for settling challenges of business liquidity. In this dimension, it is of paramount importance to note that the fact that a company may be highly profitable does not imply that it is liquid. Therefore, it is possible for a company to fail simply because it has a shortage of cash amid being incredibly profitable.
The principle of cash flows is the source of value that maintains that cash flows can be deployed in the process of rating of the financial gain quality that is yielded by an organisation especially where accumulation accountancy is applied. In this perspective, “when net income is composed of large non-cash items, it is considered as low quality” (Colombo & Matteo, 2006, p.89).
Another essential area where cash flows act as the source of value is in the evaluation of financial product risks. This includes the determination of requirements for re-investment and default risk evaluations while not negating the matching of cash requirements with the financial products. In situations where “accrual accounting fails to portray realities of the economy, cash flows act as a source of value since it serves as an alternative methodology for measuring the profits of a business” (Davidson, 2005, p.54).
Market prices reflect information
From the contexts of the principle of market prices reflecting information, it is arguable that a company’s financial statements function as essential means of availing information often utilised by inventors to analyse future anticipations of the company, its future prospects, and hence market prices. Some of the information that is reflected by market prices includes market efficiencies. According to Iftekhar and Hunter (2004), there are three levels of these efficiencies, which are “weak-form efficiency, semi-strong efficiency, and strong-form efficiency” (p.29). Securities’ price is an example of weak-form efficiencies. To this end, Iftekhar and Hunter (2004) reckon, “prices of securities instantly and fully reflect all information of the past prices” (p.31). The implication here is that movements in prices in the future are not ideally predictable from past prices of securities. Therefore, the prices on stocks in the future are largely not possible to forecast from past stock performance data.
At the level of semi-string efficiency, the prices of assets are argued as reflecting all the information that is available to the public. Consequently, with regard to Fao Corporate Document Repository (2010), only those inventors who are well armed with extra information about an organisation possess market merits (Para.3). Therefore, in case of occurrence of abnormalities in the market, they are recognised at a fast pace. Hence, adjustment of the stock market takes place. Lastly, “the strong-form efficiency level maintains that prices of the assets completely portray inside and public information” (Iftekhar & Hunter, 2004, p.39).
Therefore, the people who have an advantage in the market are the people who are capable of predicting the dynamics of the stock market. This holds because no data is available to base the grounds for investors to make decisions and or avail an extra value. Consistent with these three forms of efficiencies, in his efficient market hypothesis, Fama argues, “in any given time, the prices on the market already reflect all known information, and also change fast to reflect new information” (Iftekhar & Hunter, 2004, p.40). However, in case such a thing happens, it must be by luck.
Analysis of Apple Inc.
Apple Inc. was established in California in 1977. The company, coupled with its subsidiaries, collectively called apple, engages in design and manufacturing coupled with the marketing of a variety of products. According to the United States Securities and Exchange Commission (2010), these products include “personal computers, mobile communication and media devices, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications” (p.11).
These products are run by brand names such as iPhones, Mac apple TV, Ipad, iPod, and X-serve among others. The company also designs and manufactures professional computer software applications with iOS and OS X as some of its operating systems for its gadgets. The company stocks a variety of ITunes through which consumers can access and purchase support offerings. Additionally, according to the United States Securities and Exchange Commission (2010), “the company sells its products worldwide through its retail stores, online stores, and direct sales force and third-party cellular network carriers, wholesalers, retailers, and value-added resellers” (p.11). The target markets of the company include education sectors, enterprises, SMBs, creative professionals, and even government institutions across the globe. The financial year of Apple Inc. is after 52 weeks or at times 53 weeks during every last Saturday of every September.
Analysis of the three financial principles as they relate to business practices of Apple Inc.
In the context of the principle of the market price being an indicator of all information, the volatility of stock prices in the Apple company subjects the operation of this principle into a compromise. For Apple, price volatility is produced by a myriad of factors among them being instances where anticipated financial results vary from the actual results and change of competition dynamics coupled with global fluctuations in economic situations. Indeed, the entire sector of stock markets has been experiencing fluctuation in prices.
Consequently, this makes it impossible for the sector including apple Inc. to deploy stock market prices as a true revelation of the information of the organisation. Arguably, therefore, no investor seeking to invest in the stocks of Apple Inc. may arrive at any investment decision based on the information of the market price of the stocks on the company since instances of market fluctuations either in the positive direction or in the negative direction are largely unpredictable.
The general idea of time value for money is cardinal to the business of the Apple company. This argument is reinforced by the fact that any investment decision adopted by the company involves measures to increase the future return of the owners’ investments. In the quest to achieve this noble role, the company adopts innovative business strategies besides developing new products to attract an increment of the future value of the company’s monetary resources. Some of the strategies to increase the future value of monetary resources are exemplified by endeavours such as the technological sophistication of its products to match with the competitors’ innovations. This helps in enabling the company to retain its market share. Arguably, the more the company is competitive, the more it attracts profitability. On the other hand, profitability implies that the present value of its money increases in the future upon selling its products.
In Apple Inc., cash flows are measures of the value of the company. For example, in all its products, the company prepares cash flows reflecting expenses and incomes associated with each product as the basis of making production decisions. This implies that the company is keen on the returns of each product as a measure to ensure that the company has enough money flowing into and out of it so that it is capable of remaining in operation. In this context, cash flows are used in Apple Inc. as a measure of levels of liquidity of the company.
The Apple Company appreciates that it is critical to put in place mechanisms for ensuring that it does not tie its monetary resources in the form of stocks or material to its processes. This ensures that, at any time, enough amounts of cash are available for making new purchases, which are used in the production of value-adding products. However, according to the United States Securities and Exchange Commission, “the company must order components for its products besides building an inventory in advance for product shipments” (2010, p.30). To improve the availability of cash to conduct its business, it is critical that the company produces and or orders its components for producing its products on a produce with order basis. This can incredibly aid in reducing holding money in the form of finished stocks and or material and component stocks.
Money resources constitute one of the essential resources that are available to an organisation to aid it in executing the tasks for which it is established. In the paper, it was argued that financial principles such as money have a time value, cash flows are the sources of value, and market prices reflect the organisation’s financial information may help an organisation to make subtle investment decisions that would truncate into the improvement of an organisation’s financial position. In the paper, the applicability of these financial principles has been analysed in the context of Apple Inc.
Colombo, E., & Matteo, L. (2006). Financial Market Imperfections and Corporate. New York: Springer.
Davidson, P. (2005). Financial markets, money and the real world. New York: Edward Elgar Publishing.
Fao Corporate Document Repository (2010). Basic finance for marketers. Web.
Iftekhar, H., & Hunter, W. (2004). Bank and financial market efficiency. New York: Emerald Group.
Pilbeam, K. (2005). Finance and Financial Markets. New Jersey: Palgrave Macmillan.
Ronald, A., & Grable, J. (2010). Financial numeracy, net worth, and financial management skills: client characteristics that differ based on financial risk tolerance. Journal of financial service professionals, 3(1), 57-65.
Schaefer, C. (2007). 3 Investment Principles Every Young Person Should Know: #1 Time Value of Money. Web.
United States’ Securities and Exchange Commission (2010). Apple Inc: Form 10-k for the fiscal year ended September 25, 2010. Washington D.C.: United States’ Securities and Exchange Commission.
Waller, T., & Finke, M. (2008). The Concept of Risk Tolerance in financial planning. Journal of Finance management, 7(4), 112-123.