Apple Inc. designs, manufactures, and markets personal computers and related software. Apple also manufactures and distributes music players (iPod) and mobile phones (iPhone) along with related accessories and services, including online distribution of third-party music, videos, and applications. The following information was taken from a recent annual report of Apple:
Property, Plant, and Equipment (in millions):
Current Year Preceding Year Land and buildings$ 6,956 $ 4,863 Machinery, equipment, and internal-use software 37,038 29,639 Other fixed assets5,263 4,513 Accumulated depreciation and amortization (26,786) (18,391)
a. Compute the book value of the fixed assets for the current year and the preceding year and explain the differences, if any.
b. Would you normally expect Apple’s book value of fixed assets to increase or decrease during the year? Why?
Answer:
a. Property, Plant, and Equipment (in millions): Current Preceding Land and buildings......................................................... $ 6,956 $ 4,863 Machinery, equipment, and internal-use software............... 37,038 29,639 Other fixed assets ......................................................... 5,263 4,513 Total fixed assets............................................................ $49,257 $39,015 Less accumulated depreciation and amortization............... 26,786 18,391 Book value..................................................................... $22,471 $20,624 A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Apple purchased $10,242 million ($49,257 – $39,015) of additional fixed assets, which was offset by the additional depreciation expense of $8,395 million ($26,786 – $18,391) taken during the current year.
b. We would expect Apple’s book value of fixed assets to increase during the year as its sales increase. Although additional depreciation expense will reduce the book value, most companies, such as Apple, invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline.