Research Case 21 - 4 Locate and extract relevant information for a financial rep

Question

Research Case 21 - 4 Locate and extract relevant information for a financial reporting issue; integrative; Microsoft Corporation A meeting of your accounting department is scheduled for early tomorrow morning. One topic of discussion is certain to be the appropriate adjustments to net income in your company's statement of cash flows using the indirect method of reporting operating a ctivities. Hallway discussions have suggested some degree of uncertainty, particularly regarding unearned revenues, which are substantial for the company. Because your firm went public only seven months ago, this reporting issue is a new one for you and mo st other members of the department. In preparation for the meeting, you sought out the financial statements of Microsoft Corporation , knowing that it too had substantial unearned revenues. The o perating activities section of the comparative statements of cash flows for Microsoft is presented below. Cash Flows Statements (in millions) Year Ended June 30, 2009 2008 2007 Operations Net income $14,569 $17,681 $14,065 Adjustments to reconcile net in come to net cash from operations: Depreciation, amortization, and other noncash items 2,562 2,056 1,440 Stock - based compensation 1,708 1,479 1,550 Net recognized losses (gains) on investments and derivatives 683 (572) (292) Excess tax benefits from stock - based compensation (52) (120) (77) Deferred income taxes 762 935 421 Deferral of unearned revenue 24,409 24,532 21,032 Recognition of unearned revenue (25,426) (21,944) ( 19,382) Changes in operating assets and liabilities: Accounts receivab le 2,215 (1,569) (1,764) Other current assets (422) 153 232 Other long - term assets (273) (98) (435) Other current liabilities (3,371) (748) (552) Other long - term liabilities 1,673 173) 1,558 Net cash from operations 19,037 21,612 17,796 Required: 1. Locate the financial statements of Microsoft Corporation on the Internet. Search the disclosure notes for information about how Microsoft accounts for its unearned revenues. How is the undelivered portion of Microsoft's sales of Windows XP Professional recorded initially? 2. Why does the statement of cash flows include %u201Cunearned revenue%u201D as an addition to net income in the operations section? Why is %u201Crecognition of unearned revenue%u201D included as a deduction from net income? Why do you thi nk Microsoft reported these two items separately rather than just adjusting net income for the change in the unearned revenue account balance? 3. Why is stock - based compensation added to net income? Research Case 21 - 4 Locate and extract relevant information for a financial reporting issue; integrative; Microsoft Corporation A meeting of your accounting department is scheduled for early tomorrow morning. One topic of discussion is certain to be the appropriate adjustments to net income in your company's statement of cash flows using the indirect method of reporting operating a ctivities. Hallway discussions have suggested some degree of uncertainty, particularly regarding unearned revenues, which are substantial for the company. Because your firm went public only seven months ago, this reporting issue is a new one for you and mo st other members of the department. In preparation for the meeting, you sought out the financial statements of Microsoft Corporation , knowing that it too had substantial unearned revenues. The o perating activities section of the comparative statements of cash flows for Microsoft is presented below. Cash Flows Statements (in millions) Year Ended June 30, 2009 2008 2007 Operations Net income $14,569 $17,681 $14,065 Adjustments to reconcile net in come to net cash from operations: Depreciation, amortization, and other noncash items 2,562 2,056 1,440 Stock - based compensation 1,708 1,479 1,550 Net recognized losses (gains) on investments and derivatives 683 (572) (292) Excess tax benefits from stock - based compensation (52) (120) (77) Deferred income taxes 762 935 421 Deferral of unearned revenue 24,409 24,532 21,032 Recognition of unearned revenue (25,426) (21,944) ( 19,382) Changes in operating assets and liabilities: Accounts receivab le 2,215 (1,569) (1,764) Other current assets (422) 153 232 Other long - term assets (273) (98) (435) Other current liabilities (3,371) (748) (552) Other long - term liabilities 1,673 173) 1,558 Net cash from operations 19,037 21,612 17,796 Required: 1. Locate the financial statements of Microsoft Corporation on the Internet. Search the disclosure notes for information about how Microsoft accounts for its unearned revenues. How is the undelivered portion of Microsoft's sales of Windows XP Professional recorded initially? 2. Why does the statement of cash flows include %u201Cunearned revenue%u201D as an addition to net income in the operations section? Why is %u201Crecognition of unearned revenue%u201D included as a deduction from net income? Why do you thi nk Microsoft reported these two items separately rather than just adjusting net income for the change in the unearned revenue account balance? 3. Why is stock - based compensation added to net income? Research Case 21 - 4 Locate and extract relevant information for a financial reporting issue; integrative; Microsoft Corporation A meeting of your accounting department is scheduled for early tomorrow morning. One topic of discussion is certain to be the appropriate adjustments to net income in your company's statement of cash flows using the indirect method of reporting operating a ctivities. Hallway discussions have suggested some degree of uncertainty, particularly regarding unearned revenues, which are substantial for the company. Because your firm went public only seven months ago, this reporting issue is a new one for you and mo st other members of the department. In preparation for the meeting, you sought out the financial statements of Microsoft Corporation , knowing that it too had substantial unearned revenues. The o perating activities section of the comparative statements of cash flows for Microsoft is presented below. Cash Flows Statements (in millions) Year Ended June 30, 2009 2008 2007 Operations Net income $14,569 $17,681 $14,065 Adjustments to reconcile net in come to net cash from operations: Depreciation, amortization, and other noncash items 2,562 2,056 1,440 Stock - based compensation 1,708 1,479 1,550 Net recognized losses (gains) on investments and derivatives 683 (572) (292) Excess tax benefits from stock - based compensation (52) (120) (77) Deferred income taxes 762 935 421 Deferral of unearned revenue 24,409 24,532 21,032 Recognition of unearned revenue (25,426) (21,944) ( 19,382) Changes in operating assets and liabilities: Accounts receivab le 2,215 (1,569) (1,764) Other current assets (422) 153 232 Other long - term assets (273) (98) (435) Other current liabilities (3,371) (748) (552) Other long - term liabilities 1,673 173) 1,558 Net cash from operations 19,037 21,612 17,796 Required: 1. Locate the financial statements of Microsoft Corporation on the Internet. Search the disclosure notes for information about how Microsoft accounts for its unearned revenues. How is the undelivered portion of Microsoft's sales of Windows XP Professional recorded initially? 2. Why does the statement of cash flows include %u201Cunearned revenue%u201D as an addition to net income in the operations section? Why is %u201Crecognition of unearned revenue%u201D included as a deduction from net income? Why do you thi nk Microsoft reported these two items separately rather than just adjusting net income for the change in the unearned revenue account balance? 3. Why is stock - based compensation added to net income?

Explanation / Answer

Microsoft

(A)Here is the breakdown of how Microsoft accounts for unearned revenues:

Volume Licensing Programs

These are customer billings for multi-year licensing arrangements which are accounted for as subscriptions with revenue recognized ratably over the billing coverage period.

Undelivered Elements

These are the rights to receive unspecified upgrade of Microsoft Internet Explorer when available and are accounted for using the straight-line basis over the related product

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