Transcript DATA DISCLOSURES Chapter 5

DATA
DISCLOSURES
Chapter 5
CHAPTER 5 OBJECTIVES
Understand why the overall economic
and industry conditions matter to
financial statement analysis.
 Explain the state of the U.S. and
international economy for 1993—1998.
 Discuss the background, environment,
markets, and trends in the personal
computer (PC) industry.

CHAPTER 5 OBJECTIVES
(CONT.)
Describe the performance of Apple
Computer during the period analyzed.
 List some of Apple’s competitors.
 Define the new, or information,
economy and explain the role of the PC
industry in it.
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ECONOMIC CONDITIONS
Provide an overall context for industry
and corporate analysis
 U.S. Economy—prosperous during the
period examined.

Exhibit 5-1
Real Gross Domestic Product
1993-1998 (billions of 1993 dollars)
$7,600
$7,200
$6,800
$6,400
$6,000
1993
1994
1995
1996
1997
1998
Exhibit 5-2
Unemployment Rate (annual percentage)
1993-1998
10%
8%
6%
4%
2%
0%
1993
1994
1995
1996
1997
1998
Exhibit 5-3
Price Changes (annual percentage change)
1993-1998
4%
3%
2%
1%
0%
1993
1994
1995
1996
-1%
-2%
-3%
Consumer Prices
Wholesale Prices
1997
1998
Exhibit 5-4
Standard & Poor's 500 Index (annual
percentage growth)
1993-1998
1000%
900%
800%
700%
600%
500%
400%
1993
1994
1995
1996
1997
1998
ECONOMIC CONDITIONS
(CONT.)

Global economy
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Mixed results in 1997 and 1998
Healthy throughout the world from 1993 to 1996
Asian, Russian, and Latin American
economies declined in 1997 and 1998
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Thailand no longer pegs baht’s value to that of the
U.S. dollar
Set of a domino effect throughout Asia—known as
the Asian contagion
ECONOMIC CONDITIONS
(CONT.)

Western Europe
Remained healthy in 1997 and 1998
 Development of European Union
contributed to economic growth
 Countries become more pro business and
globally competitive

PERSONAL COMPUTER
INDUSTRY

Companies that design, manufacture,
and distribute PCs and related devices
to businesses and individuals
PERSONAL COMPUTER
INDUSTRY (CONT.)

Industry changes
Rapidly expanding sales—90 million units
shipped in 1998 (Exhibit 5-5)
 Declining prices—machine prices declined
by 50% from 1993 to 1998 (Exhibit 5-6)
 Product changes—Laptops and servers are
growing products, but desk-top machines
still dominate sales (Exhibit 5-7)

Exhibit 5-6
Annual Global Shipment of PCs (millions of units)
1993-1998
90
80
70
60
50
40
30
20
10
0
1993
1994
1995
1996
1997
1998
Exhibit 5-7
Average Wholesale Price of PCs (dollars)
1993-1998
$2,600
$2,400
$2,200
$2,000
$1,800
$1,600
$1,400
1993
1994
1995
1996
1997
1998
PERSONAL COMPUTER
INDUSTRY (CONT.)

Market share
Fragmented industry—top four companies
command only 36% of the market (Exhibit
5-8)
 Shift in market leaders from 1993 to 1998
(Exhibit 5-8)
 Apple Computer no longer a top-tier firm

PERSONAL COMPUTER
INDUSTRY (CONT.)

Geographical purchases
United States dominates with 38% of
purchases (Exhibit 5-9)
 Rapid growth in Western Europe (Exhibit 510)
 No growth in Asia in 1997 and 1998
(Exhibits 5-10 and 5-11)

Exhibit 5-11
Annual Percentage Change in Sales
1998
30%
25%
20%
15%
10%
5%
0%
Western Europe
-5%
United States
Latin America
Japan
Other Asian
PERSONAL COMPUTER
INDUSTRY (CONT.)

Mature markets—industry became
entrenched during the 1990’s as evidenced by
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Intense competition
Shrinking profit margins
Greater cost controls
Aggressive inventory management
Expanded products and services
Lack of product differentiation
Business consolidation
Revamped distribution networks
PERSONAL COMPUTER
COMPANIES

Apple Computer’s financial performance
Poor during the period examined
 Compound annual growth rates declined
from 1993 to 1998

PERSONAL COMPUTER
COMPANIES (CONT.)
Compaq, Dell, and Gateway selected as
benchmarks
 Four firms have similar financial
reporting policies (Exhibit 5-13)
 Industry comparability (similar
accounting methods)

PERSONAL COMPUTER
COMPANIES (CONT.)

Shift in fortunes
Compaq and Dell began to dominate sales
(Exhibit 5-14)
 Dell become the most profitable (Exhibit 515)
 All companies decreased inventory (Exhibit
5-16)
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ECONOMIC CHANGE
Shift in economy from an industrial to a
service base
 Differential between “old” economy and
“new” economy
 Information is a major component of
the new economy

ECONOMIC CHANGE (CONT.)
Disruptive technology—replaces
entrenched ways of doing things, such
as the PC
 PCs also increased productivity for old
economy firms
 Productivity of the computer industry
far surpassed that of the overall
economy (Exhibit 5-17)

Exhibit 5-17
National and Computer Industry Productivity
1993-1998
600%
500%
400%
300%
200%
100%
0%
1993
1994
1995
Computer Industry Real Output
1996
1997
National Real Output
1998