Microsoft Financial Reporting Strategy Essay

When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

Marketing. Because of the large number of suppliers selling similar products, apparel-retail firms must stimulate demand with attractive store layouts, colorful product offerings, and various sales promotions.

Revenue recognition is one of the top causes for financial statement restatements. In addition, revenue recognition is an area commonly questioned by the Securities and Exchange Commission (SEC) staff in their review of public filings and resultant comment letter process. Furthermore, revenue recognition is often prey to financial fraud.

3. What effect did Microsoft’s revenue recognition policy have on its financial statements? Ignore any potential tax effects.

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

1. This question addresses the effect of Microsoft’s software capitalization policy on its financial statements. Ignore any potential tax effects.

Microsoft is in an industry that makes it more difficult to apply DuPont analysis averages to determine its financial health. Microsoft obviously operates

According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.

Pro forma earnings are earnings which often exclude non-recurring items and are defined by each individual firm rather than under the general accepted accounting principle (GAAP). Pro forma earnings reporting is commonplace in the U.S. (Doyle et al. 2013; Bentley et al. 2016). Items such as nonrecurring gains and losses, depreciation and amortization expenses, write-downs, restructuring and merger costs, stock compensation expenses, and interest expenses are often excluded in pro forma earnings figures. Since many of these exclusions are likely to be transitory in nature, pro forma earnings can be viewed as a better measure of permanent earnings and have received increasing focus recently. Research studies found that pro forma earnings are more value relevant, informative, and better associated with stock prices than GAAP earnings (Bradshaw and Sloan, 2002; Bhattacharya et al.,2003; Brown and Sivakumar, 2003; Entwistle et al., 2010). However, exclusion of the non-recurring items is completely discretionary (Doyle et al., 2013) and managers may use the flexibility to opportunistically influence the market’s perception of the firm’s recurring earnings (Dechow and Schrand, 2004). Managers may have strong incentives to manipulate the reported pro forma earnings to influence investors’ perceptions about the

Timing of revenue recognition is a crucial part in revenue recognition. According to US GAAP, revenue should be recognized when it is realized/realizable and earned (FASB, 1984, Para. 83).

Attached is an Income Statement from 2005 to 2007 (Microsoft Corporation Annual Report, 2008). As you can see, revenues and net income have continued to increase over the years. Earnings per share have increased as well. This shows that Microsoft is in a good financial standing. This means they are able to pay their shareholders and increase what they

This paper provides the horizontal and vertical analysis of the income statement and the balance sheet. Equally, financial ratios have been computed to show the leverage, liquidity, efficiency, profitability and the equity of the Hewlett Packard enterprises. Recommendations and conclusion have been made on the results depicted by the analysis. Lastly, an evaluation was made on the different ways that stakeholders utilize the financial statements.

This report is issued in order to inform the public about Microsoft Corporation. We analyzed the profitability and liquidity of this company. In addition, we were able to provide recommendations for investments or credits in Microsoft for the best interest of the public.

YEAR 0 2009 1 2010 2 2011 3 2012 4 2013 5 2014 6 2015 7 2016 8 2017 9 2018 10 Initial Investment Gross Revenue 2 COGS 3 Add'l revenue Less: COGS Loan down payment 4 Loan repayment Depreciation Additional workers Land square required Moving cost 5 Operating Expenses Total Expenses Net Income Before Tax Income Tax Net Income After Tax After Tax Cash Flow ATCF Cummulative ATCF NPV through Year N

1. What factors might have led analysts to question Oracle Systems’ method of revenue recognition in mid-1990? Are these legitimate concerns?