Chemalite B cash Flow Solution
1. What are the factors that likely explain the difference between Microsoft’s market value of equity and its reported book value of equity?
Market value is the price at which an asset would trade in a competitive auction setting.
Book value is the value of an asset according to its balance sheet account balance.
The big difference is the inability to record certain intangible assets for example: brand value, human capital… these assets would provide earnings growth in the future and as far as determine Microsoft’s market value.
The company choose a conservative accounting policies.
2. What effect did Microsoft’s software capitalization policy have on its financial statements?
a) 60% R&D
Year
1995
1996
1997
1998
1999
R&D recognized
860
1,326
1,863
2,601
2,970
Adjustments
516
258
796
398
1,118
559
1,561
780
1,782
Capitalized Development Costs
516
1,054
1,516
2,120
2,562
b) Why do you think Microsoft chose to expense all software costs as incurred rather than capitalizing a portion of these costs?
The FASB provides guidelines for the treatment of software development costs that required capitalization once technological feasibility was established.
The company may have determined the useful life of the product to be short-lived as to make expensing costs as incurred equivalent to capitalization.
Conclude: Microsoft’s asset and stockholder’s equity would increase by net capitalized software costs and the income by the deceasing amount of software costs expensed.
3. What effect did Microsoft’s revenue recognition policy have on its financial statements?
a) If not adopted revenue recognition
Year
Unearned Revenue Ending Balance
Change
Reported Revenue
Adjusted revenue
% Increase
1995
0
-
-
-
-
1996
560
560
9,050
9,610
6.19%
1997
1,418
858
11,936
12,794
7.19%
1998
2,888
1,470
15,262
16,732
9.63%
1999
4,239
1,351
19,747
21,098
6.84%
Market value is the price at which an asset would trade in a competitive auction setting.
Book value is the value of an asset according to its balance sheet account balance.
The big difference is the inability to record certain intangible assets for example: brand value, human capital… these assets would provide earnings growth in the future and as far as determine Microsoft’s market value.
The company choose a conservative accounting policies.
2. What effect did Microsoft’s software capitalization policy have on its financial statements?
a) 60% R&D
Year
1995
1996
1997
1998
1999
R&D recognized
860
1,326
1,863
2,601
2,970
Adjustments
516
258
796
398
1,118
559
1,561
780
1,782
Capitalized Development Costs
516
1,054
1,516
2,120
2,562
b) Why do you think Microsoft chose to expense all software costs as incurred rather than capitalizing a portion of these costs?
The FASB provides guidelines for the treatment of software development costs that required capitalization once technological feasibility was established.
The company may have determined the useful life of the product to be short-lived as to make expensing costs as incurred equivalent to capitalization.
Conclude: Microsoft’s asset and stockholder’s equity would increase by net capitalized software costs and the income by the deceasing amount of software costs expensed.
3. What effect did Microsoft’s revenue recognition policy have on its financial statements?
a) If not adopted revenue recognition
Year
Unearned Revenue Ending Balance
Change
Reported Revenue
Adjusted revenue
% Increase
1995
0
-
-
-
-
1996
560
560
9,050
9,610
6.19%
1997
1,418
858
11,936
12,794
7.19%
1998
2,888
1,470
15,262
16,732
9.63%
1999
4,239
1,351
19,747
21,098
6.84%