Case 21-4 Locate and extract relevant information for a financial reporting issue;

Asked by bizgrad
Dated: 4th Dec'17 07:48 AM
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 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 activities. 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 most 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 operating 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


Net income $14,569 $17,681 $14,065

Adjustments to reconcile net income 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 receivable 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


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 “unearned revenue” as an addition to net income

in the operations section? Why is “recognition of unearned revenue” included as a deduction from

net income? Why do you think 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?

Case 21-4 Locate and extract relevant information for a financial reporting issue;
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