Financial Position Of Apple And Samsung Essay

Questions:

1.Write a report analysing the Financial Performance and Financial Position of two similar Companies in the same Industry.
2.Discuss various valuation techniques according to the IASB Conceptual Framework for Financial Reporting and specific International reporting standards including fair value valuation technique.

Answers:

Financial Analysis and Performance

Company overview:

The current report is based on the analysis of the financial position of the electronic companies operating in the same industry namely Apple and Samsung. Apple is an American Multinational technology company having its headquarter in Cupertino, California that which designs, develops and sells consumer electronics devices. Apple is generally known for its smartphones and tablet computer that witnesses significant growth in revenue and momentum for the company.

Samsung on the other hand, is a rival company to Apple based in South Korea having its headquarter in Suwon. It is world’s largest producer of mobile phones and smartphone with estimated revenue of 1.87 trillion in 2016. The present report would present the financial performance of the companies through ratios and an additional assessment would be performed on the statement of cash flow to provide an overview of the selected companies.

Ratio Analysis:

Liquidity Ratios:

Liquidity ratio represents the ratio amid the total assets and the liabilities of a bank or other institutions (Deegan 2013). Under the liquidity ratios, current ratio is computed for Apple which stands 1.35 for the year ended 2016. Samsung on the other hand reported current ratio of 2.59 for the year ended 2016 which is relatively higher than Apple. A higher current ratio of Samsung can be attributed to the higher amount of cash and cash equivalent representing a situation where Samsung has the better liquidity position than Apple.


The quick ratio reported by Apple stood 1.05 whereas Samsung reported a quick ratio of 2.06 for the year ended 2016. A higher quick ratio for Samsung can be attributed to the lower amount of current liabilities in respect of the cash and cash equivalent while Apple reported a relatively higher current liability that ultimate lead to a lower quick ratio reported by the company. A higher quick ratio for Samsung represents the company’s is better able to meet its short term obligations in comparison to Apple. Under the profitability ratio Debt-to-Worth ratio has been computed for both Samsung and Apple for the financial year of 2016. The Debt-to-Worth ratio for Apple stood 1.51 for the financial year of 2016 while Samsung reported a relatively lower debt-to-worth ratio of 0.41 for the same period.

As evident from the analysis a higher debt to worth ratio for Apple is primarily due to the higher amount of total liabilities reported by the company while Samsung reported a higher net worth in respect of its total liabilities. A higher debt to worth ratio for Apple represents that Apple might not be able to derive sufficient amount of cash to meet its debt obligations whereas a lower debt-to-worth ratio of Samsung indicates the company is not taking the advantage of the higher profit that financial leverage might bring upon (Williams 2014).

Profitability Ratios:

Profitability ratio are those class of ratios that represents the financial metrics that is used by the business to assess the ability of the company to generate earnings in comparison to the expenses (Weil, Schipper and Francis 2013). Under the profitability ratio the gross margin ratio is computed for both Samsung and Apple for the year 2016. The gross profit margin for Apple stood 39.08 for the year ended 2016 while Samsung reported a marginally higher gross profit margin of 40.42 for the year 2016. The industry wide downward pressure resulted Apple in reporting a lower gross margin ratio than its counterpart Samsung.

While Samsung enjoyed a higher gross margin ratio is primarily due to the increase in the revenue reported by the company for the year 2016. The net margin ratio on the other hand for Apple stood 28.46 while Samsung reported a relatively lower net margin of 15.21. The return on equity for Apple reported in 2016 stood 35.62 while the return on equity for Samsung stood 12.19 for the year 2016. The higher return on equity for Apple is primarily attributed to the company’s ability of generating profit from the shareholder’s equity. The return on Equity of Apple reported represents better use of investment funds than Samsung to generate growth since investors have usually expressed greater interest in the shares of Apple that resulted in higher return on equity.

Efficiency Ratios:

The efficiency is generally used to understand how better the company is making the use of the assets and liabilities internally (Edwards 2013). The sales to asset ratio, return on Assets and Return on Investment is computed for both Apple and Samsung. The sales to assets ratio for Apple stood 57.45% for the year ended 2016 while Samsung reported relatively higher sales to asset ratio of 77%. The return on asset on the other hand, for Apple stood 0.16 while Samsung reported a marginally lower return on asset of 0.11 for the financial year of 2016.


The higher return on asset for Apple is primarily attributed to the return generated on all the assets of the firm irrespective of the financing structure (Henderson et al. 2015). The return on Investment for Apple stood 0.48 while Samsung reported a return on investment of 0.16 for the financial year of 2016. An assertion can be bought forward by stating that Apple generates higher return on investment that its cost for the company to raise the capital that is needed for the investment which results in the generation of excess returns than its counter parts.

Capital Structure Ratio:

Under the capital structure ratio, the debt ratio for apple stood 0.60 while Samsung reported a debt to 0.29. Samsung uses the debt ratio as the indicator of appropriate capital structure. The lower debt ratio for Samsung is primarily due to the higher total assets with lower proportion of total liabilities while Apple reported a higher debt ratio due to the fact that the company reported a relatively higher total liability than its assets (Pratt 2016). The debt to total asset ratio has been computed where Apple reported a higher debt to total asset of 0.24 while Samsung reported a relatively higher debt to total asset ratio of 0.47.

Investment Ratios:

Under the investment ratios debt to equity ratio has been computed for Apple, that stood 1.51 while Samsung reported a debt to equity ratio of 0.41. The EPS for Apple reported for the year 2016 stood 8.31 while Samsung reported a relatively higher Earnings per share of 13.16. The price to earnings ratio for Apple stood 20.54 while Samsung reported a relatively lower P/E ratio of 1.25 for the year 2016. A higher P/E of Apple is primarily due to the willingness of the investors to pay for the one dollar of earnings and greater demand by the investors for a company shares.

Cash flow statement analysis:

The statement of cash flow analysis provides information regarding the company’s cash receipts and cash payments in an accounting period (Marshall 2016). Apple produced $65.824 million of cash from the operating activities and the company required to re-invest 12.734 million in the property plant and equipment during the period of 2016 as free cash flow stood 20,484 for the year 2016. Capital expenditure absorbed around 12% of the operating cash flow which represented that apple is a profitable venture with small reinvestment needs. Samsung generated cash from its operating of 47,385,644.

The net cash used in the investing activity for Samsung stood 29,658,675 with major portion of the cash was used in the purchase of the property, plant and equipment. The cash and cash equivalent at the end of the reporting period stood 32,111,442 KRW for Samsung. Apple produces large sum of money from its operations however slowing down of sales in the main market could be a cause of concern for Apple. The bottom line that can be carried from the analysis is that Apple looks strong enough to produce cash massive cash flow distributions in the long run and this bodes well for those that have invested in the stock of apple in the coming years (Macve 2015).

Historical cost versus Fair value:

Introduction:

International Accounting Standards Board implemented the project of fair value measurement to its agenda on September as the element of its combined effort with the Financial Accounting Standard Board to establish a common site of the high quality international accounting standards (Hoskin, Fizzell and Cherry 2014). As per the IFRS 13, the purpose of using the valuation techniques is to assess the value at which an orderly transaction to dispose the asset or to transfer the liability would arise amid the market participants on the date of measurement under the present market conditions.


The standard denotes that there three types of valuation techniques namely the market approach, the cost approach and the income approach (Hoyle, Schaefer and Doupnik 2015). Such valuation techniques are in compliance with the going concern assumption and used in respect of the fair value measurement of the entities or the specialized assets and liabilities.

Discussion:

According to the IFRS 13 “market approach” as the technique of valuation represents the price and other necessary information that is generated by the transactions from the market comprising of the identical or the comparable assess of the business (Kaya 2014). Under the market approach of valuation techniques, the value is determined in respect of the comparable transactions. The valuation techniques under the market approach represents the use of multiple market generated from the set of comparable matrix pricing.

A market multiple illustrates the value of the business or other assets in respect of the financial, operating and physical metric (Magnan, Wang and Shi 2016). The IASB lay down certain specific guidance for making the use of the valuation techniques inside the market approach. Valuation multiple can be computed either for the holders of equity or for the debt holders.

IFRS 13 on other hand defines “cost approach” as another valuation technique which assist in reflecting the amount that would be needed presently to replace the service capacity of the asset (Zack 2013). In respect of the Cost Approach, the fair value represents the cost to acquire or construct a substitute asset of the comparability utility which is adjusted for obsolesce including the physical wear and economic obsolescence. The cost approach of valuation helps in estimating the fair value by making use of the fair value in terms of the economic principle which the purchaser would pay for an asset not greater than the cost to get the asset of equal utility.

On implementing the cost approach an important considerations need to be undertaken such as availability of comprehensive cost data, functional and economic obsolescence from inflation and loss of profit during reproduction (Christensen and Nikolaev 2013). One of the example of valuation technique that is based on the cost approach is Depreciated Replacement Cost method. Under this method it represents that a potential purchaser would be prepared to pay for the subject asset if it were new on the date of valuation. In such a situation adjustment for depreciation should be made in respect of cost of alternative asset.


IFRS 13 states the income approach in the form of valuation techniques which can convert the future amounts to the single amount. The fair value measurement is determined based on the value demonstrated by the present market expectations regarding those future amounts (Jack 2015). The valuation technique that is associated with the income approach is reliant on the projected future income and profit or cash flows. Under the income approach an income stream which is probably to remain constant is capitalized under the single multiplier.

The IFRS 13 Fair Value Measurement necessitates that a commercial firm use the techniques of valuation which is consistent with the one or more of the above stated valuation techniques (Amel, Barth and Landsman 2014). It must be considered that not all the approach can be applied to all the types of assets and liabilities. However, on assessing the fair value of the asset or liability, IFRS 13 needs an organization to use the valuation techniques which is appropriate in the circumstances for which appropriate data is available.

Conclusion:

IFRS 13 Fair Value Measurement provides the framework for assessing the fair value of the companies that are reporting the financial statements based on the IFRS. Presently, the standard offers the reliable description of the fair value which lay down numerous types of valuation techniques to measure the fair value. This necessitates entities to disclose their inputs of valuation to increase the comparability in the measurement of fair value

Reference List:

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Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.

Marshall, D., 2016. Accounting: What the numbers mean. McGraw-Hill Higher Education.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Kaya, C.T., 2014. Fair Value Accounting Under FAS 157 and IFRS 13: Evidence from Borsa, Istanbul. GSTF Business Review (GBR), 3(2), p.7.

Zack, G.M., 2013. Fair Value Accounting. Financial Statement Fraud: Strategies for Detection and Investigation, pp.117-128.

Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.

Jack, L., 2015. Book Review: Fair value accounting in historical perspective. Accounting Review, 90(2), pp.825-828.

Amel-Zadeh, A., Barth, M.E. and Landsman, W.R., 2014. Does fair value accounting contribute to procyclical leverage(No. 3073).

Magnan, M., Wang, H. and Shi, Y., 2016. Fair value accounting and the cost of debt. Working paper (Concordia University, Montreal)

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