Analysis of Microsoft's Accounting Policy

2832 Words Sep 30th, 2012 12 Pages
| Case Study: Analysis of Microsoft’s Accounting Policies


Microsoft’s business

As the most widely recognized company in the world, Microsoft dominated the home computer operating system market with MS-DOS and Microsoft Windows, a graphical extension for MS-DOS in 1980s.The company was founded by Bill Gates and Paul Allen and went public on March 13th, 1986 with the price of $25.75 per share. Since going public, the company’s performance kept being outstanding. Microsoft not only had a high level growth of revenue and operating income, but also achieved this growth in really short period. The net income of Microsoft always grew more than 15% compared to the same quarter in prior years. Thus, the stock price of the
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The first milestone is when the technological feasibility, whether the software can be produced to meet its design specification, is established, and the second milestone is when the software product is available for general release to customers. All developmental costs incurred should be expensed before meeting the first milestone, capitalized between the first milestone and the second, and amortized when second milestone is reached.

Microsoft argues that the time between the two milestones is usually too short for the company to capitalize on any significant amount of costs, therefore Microsoft’s policy is to expense all research and development costs as they incur regardless of whether the milestones are reached or not. As a result, Microsoft has relatively consistent annual expenses during its software development process compared to companies that capitalize on costs after technological feasibility is established. After the development process is finished, Microsoft’s software will start to generate revenue but will not appear on the company’s balance sheet because no costs were capitalized.

To illustrate the impact of Microsoft’s cost capitalization policy, consider a specific software that takes three years to develop, its technological feasibility is established at the end of year two, and the developed software will be on the market for two years. The following tables are created with arbitrary values to compare two cases where
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