Microsoft Accounting Analysis PDF

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Microsoft Accounting Analysis...

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Microsoft Corporation Accounting Analysis FINC 421 7980 Financial Analysis Professor Don Taylor

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Microsoft Corporation Introduction and Company Background Information In 1975 childhood friends Bill Gates and Paul Allen found Microsoft, a company that makes computer software. The company was originally based in Albuquerque, New Mexico. However, in 1979 Microsoft relocated to Washington State and became a multinational technology corporation. The first name of the company was called Micro-Soft which stood for microprocessors and software—in order to produce software for the Altair 8800, an early personal computer. Eventually Allen quit his job as a programmer in Boston and Gates left Harvard University to focus building the business. By the end of 1978, Microsoft’s sales topped more than $1 million and in 1979 the business moved its headquarters to Bellevue, Washington, a suburb of Seattle, where Gates and Allen grew up. The company went on to license its MSDOS operating system to IBM for its first personal computer, which debuted in 1981. Afterward, other computer companies started licensing MS-DOS, which had no graphical interface and required users to type in commands in order to open a program (Microsoft 2019). In 1985, Microsoft released a new operating system, Windows, with a graphical user interface that included drop-down menus, scroll bars and other features. The following year, the company moved its headquarters to Redmond, Washington, and went public at $21 a share, raising $61 million. By the late 1980s, Microsoft had become the world’s biggest personalcomputer software company, based on sales (Microsoft 2019). The company's 1986 initial public offering (IPO), and subsequent rise in its share price, created three billionaires and an estimated 12,000 millionaires among Microsoft employees. Since the 1990s, it has increasingly diversified from the operating system market and has made a number of corporate acquisitions, their largest being the acquisition of LinkedIn for $26.2 billion in December 2016, followed by their acquisition of Skype Technologies for $8.5 billion in May 2011 (Keizer, 2014). In this project, an analysis of the firm’s accounting practices and the quality of the firm’s earnings will be investigated and reported for the assessment of the overall health of the company.

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Income Statement Analysis The income statement presents information on the financial results of a company’s business activities over a period of time. The income statement communicates how much revenue the company generated during a period and what cost it incurred in connection with generating that revenue (Dybek 2018). Total revenue far exceeded predictions for Microsoft in fiscal year 2019. Microsoft’s annual net sales for 2019 was $125,843 billion, significantly more than 2018's revenue of 110,360 billion. Microsoft annual cost of goods sold for 2019 was $42.910 billion, a 11.94% increase from 2018. Microsoft annual gross profit for 2019 was $82.933 billion. The value of Accumulated other comprehensive net income (or net loss) in the Balance Sheet is -340 million which is a loss for annual year 2019. However, the corporate tax rate for Microsoft increased from 15% in 2017 to 55% in 2018 but has reduced to 10.2% in 2019 which resulted in a $2.6 billion net income tax benefit (SEC 10K, 2019). Microsoft revenue growth is due in part to early investment in innovation and acquisitions. Three areas in particular that attributed to revenue growth were productivity and business processes division, intelligent cloud and personal computing. Productivity and business process division which includes Office 365 and LinkedIn, revenue increased 13 percent over last year to $9.7 billion. In addition, revenue from Linked grew 37 percent to $1.46 billion but also caused the company to take an operating loss of $182 million, which is a decrease from the$353 million in 2018. Intelligent Cloud revenue increased 23 percent to $9.6 billion with a boost of 89 percent from Azure’s annual revenue growth. The department of commercial cloud revenue, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $38.1 billion, $26.6 billion and $16.2 billion in fiscal years 2019, 2018, and 2017. Surprisingly, the Personal Computing division jumped 17 percent from the previous year to an astounding $10.8 billion. The division is comprised of the Windows PC business, Surface products and gaming teams (Levy 2018).

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Balance Sheet Analysis The main purpose of the balance sheet is to determine if a company has financial strength and economic efficiency through assets, liabilities, and equity. Microsoft 2019 balance sheet indicates the company continues strengthen financially going into 2020. Total current assets in the company are valued at $175,552 million. Majority of the assets come from short term investments at $122,463 million. Microsoft’s total assets are up at $286,566 million compared to $258,858 million in 2018. The acquisition of LinkedIn and Microsoft’s $7.5 billion acquisition of GitHub being added into the balance sheet obviously gives the company a jolt in total assets (SEC 10k, 2019). Total liabilities for the company at the end of fiscal year 2019 were $184,226 million. Although high liabilities may seem to cause some concern, the increase in assets this year give a strong indication that Microsoft will have the financial means to pay off debt. Long term debt makes up 59% of total liabilities with $66,662 million. Microsoft was able to reduce long term debt by almost $5.6 million from the previous year at $72,242. Cash Flows Analysis The cash flow statement provides information about a company’s cash receipts and cash payments or simply how a company generates cash and how that cash is being used. The cash flow statement consists of three parts: cash flows provided by (used in) operating activities, cash flows provided by (used in) investing activities, and cash flows provided by (used in) financing activities (Dybek 2018). Microsoft Corp.’s net cash from operations increased from 2016 to 2019. In FY 2019, Microsoft is providing cash flow from operations at $52,185 million which is an increase of $8,301 million from the previous year. The company’s net cash used in investing declined from 2016 to 2017 but then increased from 2017 to 2019 at (15,773) exceeding 2016 level. Microsoft Corp.’s net cash from (used in) financing increased from 2016 to 2017 but then declined significantly from 2017 to 2019. Net cash for financing went from $8,408 in 2017 to ($33,590) million in 2018 to (36,887) in 2019. Net cash used in investing went from ($46,781) million in 2017 to ($6,061) million in 2018 and ($15,773) in 2019. The significant financial activities by the company were net cash flow which went from $4,283 in 2018 to ($590) in 2019 (SEC 10k, 2019).

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Conclusion At the end of fiscal year 2019, Microsoft generated $125.843 billion of revenue which represented a 14.03% increase year-over-year. Operating income grew 22.54% from the previous fiscal year to $42.959 billion. In addition, Microsoft spent $8.6 billion on share repurchases. In the first quarter of its fiscal 2019, the company bought back another $2.6 billion of its stock. Since the company started paying regular dividends in 2004, management has raised the payout every single year, by a total of 475%. The company’s latest dividend hike was announced in September. It was a 9.5% increase to its quarterly dividend rate to $0.46 per share (SEC 10k, 2019). Since the creation of Microsoft, windows have been a staple in homes, workplace and academic institutions all over the world for decades. Bill gates is widely known as the face of Microsoft even in a reduced role within the company. Although Apple and google has managed to supersede Microsoft in many areas, the company continues to be at the forefront of innovation. Microsoft still remains an essential part of an investor’s portfolio.

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References Dybek, M. (2018, August 04). Microsoft Corp. (MSFT) | Statement of Cash Flows. Retrieved from https://www.stock-analysis-on.net/NASDAQ/Company/Microsoft-Corp/FinancialStatement/Statement-of-Cash-Flows Keizer, G. (2014, July 14). Microsoft gets real, admits its device share is just 14%. Retrieved from https://www.computerworld.com/article/2490008/microsoft-windows/microsoftgets-real--admits-its-device-share-is-just-14-.html Levy, N. (2018, July 20). Microsoft closes record year with $110B in revenue, cruising past Wall Street expectations again. Retrieved from https://www.geekwire.com/2018/microsoftposts-110b-revenue-year-cruising-past-wall-street-expectations/ Microsoft Annual Report 2019. (n.d.). Retrieved from https://www.microsoft.com/enus/annualreports/ar2019/annualreport#primaryR2 Microsoft Corporation (MSFT): Cloud and Gaming Are the Reasons to Buy the Stock. (2018, July 6). Retrieved from https://www.valuespectrum.com/news/134279-microsoftcorporation-msft-cloud-and-gaming-are-the-reasons-to-buy-the-stock Pan, J. (2018, December 12). MSFT Stock Forecast 2019: More Upside for Microsoft Corporation? Retrieved from https://www.profitconfidential.com/stock/microsoftstock/msft-stock-forecast-further-upside-2019/ SEC 10 K UNITED STATES SECURITIES AND EXCHANGE COMMISSION. (2019, June 30). Retrieved from: https://www.sec.gov/Archives/edgar/data/789019/000156459018019062/msft10k_20180630.htm#ITEM_8_FINANCIAL_STATEMENTS_AND_SUPPLEM...