Apple Inc., under the leadership of Steve Jobs, has been a huge success over the past few years, with new products such as iPhone and iPad received enthusiastically by consumers. The firm's stock price increased from $91 at the beginning of 2009 to $350 by midyear 2011. The income statement and balance sheet for the first quarter of 2011 are shown below. The firm has a statutory tax rate of37 percent.

a. Reformulate the statements for the 2011 fiscal quarter in a way that shows how Apple adds value through its business. The long-term marketable securities are debt securities. "Other income and expenses" on the income statement is largely income on financial assets.

b. You will observe that Apple holds a large amount of "cash" on its balance sheet, invested largely in government and corporate bonds and commercial paper. It earned an average of only 0.75 percent (on an annual basis, before tax) on this cash during the quarter. With the free cash flow for the full fiscal year ending September 2011 projected to be $14.6 billion, the figure could become much higher. Apple pays no dividends. What could be Apple's thinking in holding so much cash?

c. Why does Apple have no financing debt?

d. You will notice in your reformulation that Apple has negative net operating assets. What do you infer from this? Calculate residual income from operations for the quarter (using a rough guess of the required return) to provide some insights.

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APPLE, INC. Condensed Consolidated Statements of Operations (Unaudited) (in millions, except share amounts which are reflected in thousands and per share amounts) Three Months Ended Six Months Ended March 26, March 27, March 26, March 27, 2011 2010 2011 2010 $24,667 $13,499 $51,408 $29,182 Net sales Cóst of sales 14,449 30,892 17,146 7,874 12,036 Gross margin 10,218 5,625 20,516 Operating expenses: Research and development Selling, general and administrative Total operating expenses Operating income Other income and expense Income before provision for income taxes 581 426 1,156 824 1,763 1,220 3,659 2,508 2,344 1,646 4,815 15,701 3,332 7,874 3,979 8,704 26 50 162 83 8,787 7,900 4,029 15,863 Provision for income taxes 1,913 955 3,872 2,335 $ 3,074 $ 6,452 $ 5,987 $ 11,991 Net income Earnings per common share: $ 6.49 $ 13.02 $ 7.12 $ 7.00 Basic $4 3.39 Diluted $ 12.83 6.40 3.33 Shares used in computing earnings per share: 921,245 Basic 923, 196 907,548 905,545 922,878 934,549 Diluted 935,944 921,331 APPLE, INC. Condensed Consolidated Balance Sheets (Unaudited) (in millions except share amounts) March 26, 2011 September 25, 2010 Current assets: Assets Cash and cash equivalents $15,978 $11,261 Short-term marketable securities 13,256 14,359 Accounts receivable, less allowances of $57 and $55, respectively 5,798 5,510 Inventories 930 1,051 Deferred tax assets 1,683 1,636 Vendor non-trade receivables 5,297 4,414 Other current assets 4,055 3,447 Total current assets 46,997 41,678 Long-term marketable securities Property, plant and equipment, net 36,533 25,391 6,241 4,768 Goodwill 741 741 Acquired intangible assets, net 507 342 3,885 $ 94,904 Other assets 2,263 Total assets $ 75,183 Liabilities and Shareholders Equity Current liabilities: Accounts payable Accrued expenses $ 13,714 $ 12,015 7,022 5,723 Deferred revenue 3,591 2,984 Total current liabilities 24,327 20,722 Deferred revenue-noncurrent 1,230 1,139 Other noncurrent liabilities 7,870 5,531 Total liabilities 33,427 27,392 Commitments and contingencies Shareholders' equity Common stock, no par value; 1,800,000,000 shares authorized; 924,674,079 and 915,970,050 shares issued and outstanding, respectively Retained earnings 12,326 10,668 49,025 37,169 Accumulated other comprehensive income (loss) Total shareholders' equity Total liabilities and shareholders' equity (46) 47,791 $ 75,183 126 61,477 $ 94,904