Analysis of Financial Statements
Financial statements are frequently a key source of information for financial decisions and taking a look at Microsoft’s financial statements can help us decide certain things about the company. There are three different types of statements that will be discussed in this section. These include: the balance sheet, the income statement, and the statement of cash flows. They are discussed here in either the sense of quarterly or yearly statements and will be noted as so. All information has been derived from Yahoo Finance. (http://finance.yahoo.com)
The first statement that will be analyzed for Microsoft is the balance sheet. The balance sheet is essentially a snapshot of what the firm owns (assets), what the firm owes (liabilities), and the difference between the two (equity) at a single moment in time. When we analyze a balance sheet, we must keep in mind that the values on this statement are the book values and are not necessarily what the company is worth at this exact moment in time, or the market values. Something we can see right away is an estimate of how much net working capital Microsoft has by analyzing the quarterly data of the period ending December 31, 2011. Net working capital shows how cash that will become available fairs with the cash that must be paid over the next twelve months by taking current assets and subtracting current liabilities. For Microsoft, this is $72,513,000,000-$25,373,000,000=$47,140,000,000 and is looked upon positively for a healthy firm. The use of debt in a firm’s capital structure is called financial leverage and the more debt a firm has (as a percentage of assets), the greater the financial leverage. If we take a look at the yearly balance sheets for 2009, 2010, and 2011 for Microsoft, we can see that each year debt becomes a bigger percentage of total assets. In 2009, debt is 4.8% of assets. In 2010, it is 5.7%. In 2011, it is 11%. This could be viewed at in either a positive or negative light because high financial leverage can increase potential rewards to shareholders, while low financial leverage can possibly decrease the potential for financial distress and business failure.
The second statement that will be analyzed is the income statement. The income statement measures performance of a company over some period of time. It shows both revenues and the subtracted expenses with the result being net income. When we take a look at the annual income statements from 2009, 2010, and 2011, we can see that net income has increased each year and this is clearly a positive trend. Also, we can look at specific categories like research development and observe that it increased from 2010 to 2011, which shows that Microsoft may be trying to expand their products and innovations.
The third, and final, statement that will be analyzed is the statement of cash flows. Overall, what the cash flow statement provides is crucial to financial statement analysis and financial decisions. It illustrates the difference between the number of dollars that came in and the number that went out. The statement of cash flows provides us with a fundamental principal, which is known as the cash flow identity. It says that the cash flow from the firm’s assets is equal to the value of its liabilities plus the value of its equity. The first section of the statement of cash flows deals with the cash flows from operating activities, or the firm’s day-to-day activities of producing and selling. In Microsoft’s case, this total result has increased from 2009-2011, from $19,037,000,000 to $26,994,000,000, and this is positive because it displays the fact that they are able to cover their everyday cash outflows with their everyday cash inflows more efficiently. The next section of the statement of cash flows is the investing activities section. As we can see, total cash flow from investing has decreased from $15,770,000,000 to $14,616,000,000, from 2009 to...
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