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Subject:  Smoothing earnings and Apple's tax rate Date:  8/10/2002  3:49 PM
Author:  Plato90s Number:  75324 of 205799

As the Worldcom fraud case expands, the main motivation (besides greed) and justification for the CFO's actions were simple - smooth the earnings to hit company projections, at any cost. This was done by improperly expensing operational costs as capital expenditures.

Microsoft has been caught doing the reverse, using "cookie jar" accounting. Rather than recognizing profits as they are taken in, Microsoft stashes the cash away so they can boost earnings in other quarters when real profits aren't up to the expected level.

In both cases, the goal is to artificially smooth out earnings to meet pre-determined projections. Apple did the same in the past quarter, using its income tax rate to artificially boost earnings to the revised estimates handed out in mid-June.

For the first 2 quarters of FY2002, Apple recognized an overall income tax rate of 28%, significantly lower than the official US tax rate. This is the explanation on page 30 of the 10-Q for Q2 '02 (emphasis added).

The Company's effective tax rate for the first six months of 2002 was approximately 28% as compared to 30% for the first six months of 2001. The Company's effective rate in both periods differs from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes will be provided because such earnings will be indefinitely reinvested outside the U.S and the reversal of a portion of the previously established valuation allowance for tax loss and credit carryforwards. The lower tax rate in 2002 versus 2001 is due primarily to a relative increase in foreign earnings on which the Company does not