REVENUE RECOGNITION Harvard Case Solution & Analysis

Revenue Recognition Case Study Help

The new “iPhone Upgrade Program” could yield a significant impact on Apple’s revenue recognition policy. iPhone price remained unchanged and attracted more customers. This program provided an opportunity for the buyers to use new iPhone every year, consistently. New iPhone 6s and 6s Plus enabled the customers to run Multi-carries SIM on any wireless network. As an Apple investor, I would first evaluate the profitability of the new “iPhone Upgrade Program” and the percentage of sales increased due to this procedure. Would this program yield attractive returns for the investors or not? Is the program able to attract more customers and could it help to increase Apple’s profitability?

Apple devices entail long term life benefits, if they are used properly. This program also provides an opportunity to Apple to increase its used product market. This market will also helpthe company to increase its revenues. Financial performance of an organization could be evaluated with the help of profitability and liquidity ratios(Ohlson, 1980). The financial ratios analysis has been performed in order to gain an insight about the effectiveness of this new “iPhone Upgrade Program” as compared to the previous accounting approach. The analysis represents that the number of unit sales will increase, but because of the small amount of revenues recognition out of total amount, would lead it to yield lower profits overall. In addition to this, all the ratios represent a decreasing trend as compared to theprevious accounting recording system, except for gross profit margin and profit margin ratios. However, an increase in the working capital could be seen in the analysis, with an inclusion of the current ratio, whichmeans that company’s liquidity position would become strong if it  followsiPhone Upgrade Program.(See appendix 4).

Question: 4

Financial performance of an organization could be evaluated with the help of profitability and liquidity ratios (Ohlson, 1980). The “iPhone Upgrade Program” would require a complete accounting process that could predict an exact resale or trade in option values. This procedureentails some complexities in terms of proper revenue recognition and allocation of price in the account of right to return asset. Furthermore, it helps Apple to directly approach its customers through its iCloud.com and online retail store in the U.S(Jonas Heese, Krishna G. Palepu, H. David Sherman, Monica Baraldi, 2017). Additionally, this approach will boost iPhone’s used phone market, along with the requirement of a heavy investment for renewing the old handsets. The cost for renewing the phone is unknown, and it entails a trade in guarantee to pay the remaining balance on behalf of its customers to the citizen bank, including the payment of  interest rates.

This approach is very expensive to manage, because it will require theestablishment of more service departments, along with some additional training sessionsfor employees for this new program operations. In addition to this, the “iPhone Upgrade Program”, iPhone 6s payment at time of the sale will be divided into two accounts, half of the payment will be allocated to the revenues account and the other half will be defined in a new liability account- Guarantee liability for trade in option. The analysis represents that the number of unit sales will increase, but because of the small amount of revenues recognition out of total amount, it will yield lower overall profits. The analysis represents that the number of unit sales will increase, but because of the small amount of revenues recognition out of total amount will yield low overall profits. The success of this new program entails under these aforementioned points, which should be kept approachable and updated.

Conclusion

In its first business year, iPhone had made sales of 2 million iPhones and had made the subsequent sales in next year of up to 7 million. In 2016’s first fiscal quarter, a significant decline of 13% in the Apple’s revenues was witnessed, which had decreased it net worth to the level of $50.6 billion. Apple CEO, Tim Cook, was worried about this declining trend of revenues. To cope up with this situation, Cook introduced a new innovative idea, which he named as: “iPhone Upgrade Program”. This program provided an opportunity for the buyers to use new iPhone every year consistently. It provided an easy 12-months installments of up to $32.4 and $44.92 for iPhone 6s Plus and 6s and the AppleCare+ service, respectively. The new “iPhone Upgrade Program” had many complexities in the procedure of identification of revenue recognition. It entailed more added features, such as: customer subscription for Apple Care+ along with customer right of trade in. The analysis represents that the new upgradation program will affect the income statement and balance sheet significantly.

Appendices

Appendix: 1 (Price Breakdown)

BREAKDOWN OF IPHONE 6s AND 6s Prices
iPhone Price694
AppleCare+ service129
Total823
Standalone price778

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