Msft Accounting Essay

659 Words3 Pages
1. This question addresses the effect of Microsoft’s software capitalization policy on its financial statements. Ignore any potential tax effects.
Estimate the effect of capitalizing software costs on Microsoft’s fiscal 1997, 1998, and 1999 income statements and balance sheets. Assume that 1) 60% of Microsoft’s research and development expenses were incurred after technological feasibility was established, 2) the average product life was two years, 3) the company had always capitalized these costs; and 4) the company begins amortization capitalized software costs at the beginning of the following fiscal year.
Briefly speculate as to why Microsoft chose to expense all software costs as incurred rather than capitalizing a portion of these
…show more content…
Microsoft announced to integrate the internet technologies on Windows 95 and Office 97 giving an impetus to the sales of these products and a portion of these revenues should be deferred into the future.

3. What would be the combined effect of these two policies on Microsoft’s fiscal 1997, 1998, and 1999 financial statements? Answer: The revenue coming from the promise to integrate internet technologies on Windows 95 and office would be recognized in the future by the revenue recognition policy. However, the development costs to provide these enhancements are already incurred in the and expensed in the company’s treatment for the software development costs. The combined effect of these two policies is the mismatch of expense with revenue.

4. The case indicates that the company’s “market value” of equity at June 30, 1999 was $460 billion. Compare this to the company’s “book value” of equity. What factors likely explain the difference between these two values?

Answer: The difference between the company’s market value and book value is a factor of the intangible assets like brand value, human capital, customer satisfaction and loyalty. These intangible assets become the factor of production providing future growth. Microsoft’s accounting policies had a negative impact on the book value of the company.

5. Would you characterize Microsoft’s overall financial reporting strategy as aggressive or
Get Access