Microsoft is a company that is famous for its various products such as the Windows series. The firm is well known and is frequently cited as an example of good management. However, how good is it? As of December 1st, 2007, one share of Microsoft was approximately $33. Every investor would be curious if that price is reasonable. Also, it is too dangerous to rely completely on intuition or rumor when you buy stocks. Therefore, we decided to analyze Microsoft in a more rational, reasonable, fact-based way, and refer to that information in determining whether to buy Microsoft's stock or not. The 10-K financial statement from Microsoft is an enormous document, and it would take too much time to read the entire material. We thus decided to read the report selectively and analyze the company in the following steps: First, we will calculate several useful financial ratios. Second, we will look into the firm's major accounting policies. Third, we will observe the trend, which shows how the company performed in the recent few years. Fourth, we will compare Microsoft with its competitors.
1. Calculation of Ratios
Here we present several accounting ratios that helped us analyze Microsoft.
Value(rounded off to three decimals)
Financial Leverage Ratio
Total Asset Turnover Ratio
Net Profit Margin
Return on Equity
Gross Profit Percentage
Fixed Asset Turnover
Accounts Payable Turnover
Earnings Per Share
Return on Assets
Quality of Income Ratio
Capital Acquisitions Ratio
Financial Leverage Percentage
*Microsoft's financial statement does not report any "interest expense", so we did not calculate "Times interest Earned" and Cash Coverage Ratio". **Ratios that appear more than once in the book are displayed only once in the table.
2. Discussion of Accounting Policies
Even if two people work as accountants for the same company, the result might differ depending on the methods they use. These methods, or accounting policies, can change how a company looks like to outside parties like investors. In the financial statement, Microsoft has included notes on its accounting policies.(pp.44-47) These notes helped us determine whether the management is employing a aggressive or conservative accounting policy. Being always aggressive would be reckless for a company. It might attract investors at first, but it might damage the firm in the long run. On the other hand, an excessively conservative management might impede a company's growth. In our opinion, Microsoft is maintaining a good balance between aggressive and conservative accounting policies.
A) Revenue recognition
For any company, creating revenue from delivering products or services is the most important and fundamental activity. Therefore, Revenue recognition is the most important accounting policy to discuss. There are two ways to record revenue: FOB shipping point and FOB destination. The difference between them is when the revenue is recordedㅡFOB shipping point records the revenue when the product is shipped, and FOB destination records the revenue when the product is delivered. Because FOB shipping point recognizes a revenue earlier than the FOB destination, it is a more aggressive policy. Faster recognition of revenue leads to increase of income in that fiscal year. In Microsoft's case, "revenue for retail packaged...