Analysis of Microsoft's Accounting Policy
| Case Study: Analysis of Microsoft’s Accounting Policies
Introduction
Microsoft’s business
As the most widely recognized company in the world, Microsoft dominated the home computer operating system market with MS-DOS and Microsoft Windows, a graphical extension for MS-DOS in 1980s.The company was founded by Bill Gates and Paul Allen and went public on March 13th, 1986 with the price of $25.75 per share. Since going public, the company’s performance kept being outstanding. Microsoft not only had a high level growth of revenue and operating income, but also achieved this growth in really short period. The net income of Microsoft always grew more than 15% compared to the same quarter in prior years. Thus, the stock price of the company increased significantly, which was almost 100%, since going public.
SEC’s investigation
However, Microsoft Corporation was under investigation by Securities and Exchange Commission (SEC) for financial reporting problems on June 30th, 1999. The company’s former head of internal auditing, Charles Pancerzewski, charged that Microsoft manipulated its reserve accounts to smooth its earning regularly. By doing so, the company is able to stash accruals during good times and reach them during bad times. In this way, the company can always meet or exceed analysts’ expectations. SEC is the first one to investigate Microsoft’s financial reporting practices. However, the company insisted on saying that they didn’t engage in any improper reporting to manipulate their earnings. And this investigation didn’t affect the company’s stock price much. What caught SEC’s attention was Microsoft’s incredibly stable growth rate of earnings every year and how fast they achieved this growth in such a volatile industry.
Microsoft’s accounting strategy
According to Generally Accepted Accounting Principles (GAAP), there are two essential areas for software developers: how to record software development costs and when to recognize revenue.
Introduction
Microsoft’s business
As the most widely recognized company in the world, Microsoft dominated the home computer operating system market with MS-DOS and Microsoft Windows, a graphical extension for MS-DOS in 1980s.The company was founded by Bill Gates and Paul Allen and went public on March 13th, 1986 with the price of $25.75 per share. Since going public, the company’s performance kept being outstanding. Microsoft not only had a high level growth of revenue and operating income, but also achieved this growth in really short period. The net income of Microsoft always grew more than 15% compared to the same quarter in prior years. Thus, the stock price of the company increased significantly, which was almost 100%, since going public.
SEC’s investigation
However, Microsoft Corporation was under investigation by Securities and Exchange Commission (SEC) for financial reporting problems on June 30th, 1999. The company’s former head of internal auditing, Charles Pancerzewski, charged that Microsoft manipulated its reserve accounts to smooth its earning regularly. By doing so, the company is able to stash accruals during good times and reach them during bad times. In this way, the company can always meet or exceed analysts’ expectations. SEC is the first one to investigate Microsoft’s financial reporting practices. However, the company insisted on saying that they didn’t engage in any improper reporting to manipulate their earnings. And this investigation didn’t affect the company’s stock price much. What caught SEC’s attention was Microsoft’s incredibly stable growth rate of earnings every year and how fast they achieved this growth in such a volatile industry.
Microsoft’s accounting strategy
According to Generally Accepted Accounting Principles (GAAP), there are two essential areas for software developers: how to record software development costs and when to recognize revenue.