Microsoft Finance

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. *Microsoft’s Financial Reporting Strategy 1. What are the factors that likely explain the difference between Microsoft’s market value of equity and its reported book value of equity? The most obvious reason for the difference between the market value of equity and the book value of equity is the inability to record certain intangible assets such as brand value, customer loyalty, and perhaps most importantly, human capital. These intangible assets are likely to provide tremendous earnings growth in the future which determines the company’s market value. Notice also that the company’s choice of conservative accounting policies has the effect of depressing the company’s book value of equity. 2. What effect did Microsoft’s software…show more content…
Even as reported the first quarter of 1997 represented the lowest quarterly revenue growth in the company’s history. While the timing of the company’s decision to defer revenues appears particularly opportune, the introduction of Windows 95 to the market provides a legitimate reason for the decision. As described in the case, the company expected to integrate its Internet technologies into both Windows 95 and Office 97 “at no additional cost to customers.” Arguably, then, sales of these products were improved by these implicit promises and a portion of these revenues should be deferred into the future. However, to the extent the development costs of providing these enhancements have already been incurred and expensed under the company’s current treatment of software development costs, the company’s deferral of revenues exaggerates the mismatching of expenses with revenues. Still, the company’s policy on revenue recognition is more consistent with accrual accounting than is the company’s policy on software development expenses. 4. Describe Microsoft’s overall financial reporting strategy in 1997-99. Why did the company adopt this strategy and why was the SEC concerned about it? 1. Hiding profits—Microsoft’s phenomenal success may have provided them with an incentive to hide their success from regulators and competitors. Given the company’s history with regulatory
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