A company’s earnings report does not necessarily represent the amount of cash the business generates. Financial statements include non-cash items, which cannot accurately reflect the monetary health of an organization. This essay is going to analyze the financial statements of Apple Inc. (AAPL), which operates in the telecommunications industry (AAPL: Apple Inc. company profile). Even though the electronic technology sector is not cash-intensive, Apple Inc. still has to generate positive cash flow per share in order to operate successfully. A positive cash flow implies that AAPL’s cash inflows exceed cash outflows (Piontkevich & Shatkovskaya, 2020).
The outflows of cash refer to the amount of cash that a business spends on its operations, investments, and research (Piontkevich & Shatkovskaya, 2020). Such expenses usually include salaries, business purchases, lawsuit settlements, and taxes. Cash inflows refer to the net amount of cash that comes into AAPL’s possession, including payments and settlements (Piontkevich & Shatkovskaya, 2020). Cash flow management’s goal is to address both short- and long-term financial planning and make appropriate forecasts. Creating cash flow statements with all the operation, finance, and investment activities would also be a part of a specialized financial manager’s responsibilities.
Apple Inc. engages in the development of a variety of different products (iPhone, iPad, Mac, AirPods, etc.) and services. In 1976, Steve Jobs, Steve Wozniak, and Ronald Wayne founded the Apple Computer Company that specialized in the sale of some of the first computers (AAPL: Apple Inc. company profile). As of 2020, Tim Cook remains the CEO of Apple Inc. and continues to lead one of the world’s most valuable enterprises (AAPL: Apple Inc. company profile). Although Apple Inc. has faced multiple large-scale online controversies regarding its labor conditions and environmental practices, the company continues to have some of the most loyal customers (AAPL: Apple Inc. company profile). AAPL is one of the few global businesses that keep expanding the range of its services and products.
AAPL’s Cash Generation
Apple Inc.’s cash flow statements are open to the public in the form of annual financial reports. AAPL’s statement consists of three main parts, including the amount of cash the company generated by or used in operating, financing, and investing activities. As of 2019, Apple’s end cash balance is at 50 billion dollars (Apple Inc. (NASDAQ:AAPL: Cash flow statement).
The amount of cash generated by the business’ operations has decreased from 77.5 billion dollars in 2018 to 69.4 billion dollars in 2019 (Apple Inc. (NASDAQ:AAPL: Cash flow statement). Cash generated by investments has almost tripled since 2018, but the amount of cash used in financing activities has slowly decreased (Apple Inc. (NASDAQ:AAPL: Cash flow statement). According to AAPL’s reports, it is apparent that the company does not spend a lot on research and development (R&D), although the amount of cash allocated to R&D has increased over the years. As the smartphone market becomes more mature and demanding, Apple Inc. takes an effort to remain a global technological innovator.
FCF and Cash Flow Challenges
Apple’s cash flow model differs from many others by relying a lot on the continuous stream of free cash flow (FCF). FCF does not include capital expenditures and business operating costs (Piontkevich & Shatkovskaya, 2020). Apple Inc. keeps FCF high by not only bringing in cash from hardware sales but working with contract labor. The company uses other businesses’ resources to manufacture the products and focuses on investing in the machinery, instead of purchasing a lot of factories. AAPL can generate 59 billion dollars a year, which attracts investors (Chin, 2018). The ongoing FCF generation is challenged by the oversaturation of the electronics market (Chin, 2018).
According to Business Insider’s correspondent, the US tax rates stop Apple from bringing the majority of its cash assets to America, which leaves over 200 billion dollars of cash overseas (Chin, 2018). Keeping foreign cash offshore is more beneficial to Apple’s shareholders. AAPL faces a cash dilemma since the company fails to fund a share buyback and dividends since almost all the cash it generates is foreign. With the United States being the largest market for AAPL, repatriation taxes serve as a major challenge to the business’ cash flow management planning.
A large global company such as Apple Inc. uses a variety of procedures and managerial techniques to develop short- and long-term cash flow strategies. Short-term planning includes financial reporting via a record-keeping system. Mark Roe, a professor at Harvard Law School, argues that a number of big, established, and profitable companies fail to recognize they are taking a short-term approach to cash flow generation, instead of focusing on long-term planning (Roe, 2018).
Roe specializes in analyzing the stock market, which is why he has noticed a shareholder activism tendency related to large tech firms. By investing the excess cash in global financial accounts, instead of business operations, Apple puts itself at a disadvantage in the market famous for its innovations (Roe, 2018). Roe suggests that AAPL executives create a long-term financial strategy by starting to release unused cash to key shareholders. Taking a long-term approach requires managers to utilize a variety of techniques and practices in tax minimization and accounting automation.
In order to incorporate a long-term cash flow management approach, Apple executives need to focus on US tax minimization with the goal of funding share buybacks and dividends. Bringing cash to the United States is an effective financial strategy, according to Roe (2018), who argues that the cash not used in business operations should be distributed among shareholders. Possible deferral, splitting, and spreading of income are some of the tax minimization strategies that can be utilized by individuals and businesses. AAPL’s managerial team decided to use tax shelters to find legal ways of avoiding a 35% repartition tax (Holtzblatt et al., 2016).
Using Ireland as an offshore cash warehouse because of well-negotiated, small taxes has been deemed controversial by international media outlets after the legal claims made by the EU Commission (Holtzblatt et al., 2016). An effective cash flow strategy for Apple Inc. would involve extensive cooperation between the financial and PR departments to protect the business’ reputation and redirect its tax minimization efforts towards lobbying and income deferral. Amazon is an example of a perfect income deferral model (Holtzblatt et al., 2016). AAPL can implement the same strategies to engage customers in online purchases as well as minimize taxes.
A short-term cash flow approach involves detailed reporting and record keeping. Accounting automation is the process of collecting and interpreting transactional data by Artificial Intelligence (AI) software and robotic systems (Marshall & Lambert, 2018). Apple Inc. incorporates some elements of AI-based accounting, but it could benefit more from taking a fully automated approach to cash flow forecasting (long-term) and data collecting (short-term).
The advantages of automated cash flow accounting include cost-effectiveness, innovation, and adaptability (Marshall & Lambert, 2018). A system driven by Artificial Intelligence constantly learns and makes necessary changes to create an effective accounting system, which is crucial to the company’s operations. AAPL’s managers could utilize the benefits of large-scale accounting automation to develop probable financial scenarios and accurate cash flow statements that would affect decision-making and strategic planning.
Apple Inc. remains one of the largest global corporations in the electronics industry. According to the company’s annual financial statements, it does not only make profits but continues to generate positive cash flows. AAPL’s operating and investing activities bring in the majority of the cash, which results in billions of dollars generated every year. Free cash flow differentiates Apple Inc. from other big corporations (Piontkevich & Shatkovskaya, 2020). The business’ cash flow systems work effectively based on financial reports due to the utilization of contract manufacturers and tax shelters.
However, stock market activation (Roe, 2018) and media controversies require Apple Inc. to take a different approach to account and taxes. Tax minimization through lobbying can be effective in decreasing repartition taxes that do not allow the company to store its cash assets in the US. According to Roe (2018), releasing excess cash to shareholders could be beneficial to AAPL’s market stability long term. Deferral of income could be another focus of Apple’s cash flow management team in an effort to minimize taxes. As for accounting, the use of artificial intelligence and robotics in a large-scale automated accounting system would give AAPL a competitive advantage. Automation in financial forecasting and data interpretation would lead to the optimization of the company’s cash flow management processes.
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