2. Which method best reflects the economic reality?
I believe both GAAP and Non-GAAP accurately reflect Apples economic reality. Each method just simply presents Apples financial data in a different way. Under GAAP, revenue from iPhone is deferred and is recognized on a straight line basis over a 24 month period. This type of subscription accounting is required because Apple chose to give future, free software upgrades with the iPhone. GAAP requires this to prevent companies from trying to over-inflate revenues by increasing sales with the promise of a free incentive in the future then not delivering on the promise.
Under GAAP, the huge increase in iPhone sales is represented in the deferred revenue accounts and the cash from operating activities on the statement of cash flows. Apples non-GAAP statements recognize revenue from iPhone sales immediately, instead of in a deferred account, and is represented by the increase in revenue and net profit. To investors, the non-GAAP statements are more impressive because of the large increase in revenue and net profit. However, the truth of the matter is that both methods present the same information but in different accounts and at different times.