Question

Microsoft develops, manufactures, licenses, sells, and supports a wide range of software products for personal computers (PCs) and servers; business and consumer productivity applications; software development tools; and content such as MSN (the Microsoft Network online service).
The following excerpt is from an article that appeared in The Wall Street Journal.


Other Information:
1. Appearing in the accompanying tables are the comparative income statements for the fourth quarters of fiscal 1996 and 1997 and for the fiscal years 1996 and 1997. Also shown are portions of the balance sheets for fiscal 1996 and 1997.
2. The balance in the unearned revenues account on March 31, 1997 (the end of the third fiscal quarter of 1997) was $1,285 million.
3. The following description of Microsoft’s unearned revenues account is taken from the company’s SEC filings:
The portion of the Company’s revenues that are earned later than billed is reflected in the unearned revenues account. Of the March 31, 1997, balance of $1,285 million, approximately $765 million represented the unearned portion of Windows desktop operating systems revenues and $150 million represented the unearned portion of Office 97 revenues. Unearned revenues associated with upgrade rights for Microsoft Office 97 were $190 million, and the balance of unearned revenues was primarily attributable to maintenance and other subscription contracts.




Required:
1. Calculate Microsoft’s net profit margin for the fourth quarter of 1996 and 1997 and for the fiscal years 1996 and 1997. Comment on the results.
2. Did Microsoft fall short of, meet, or exceed analysts’ expectations for fourth-quarter 1997 EPS?
3. If no reductions were made from the Unearned revenues account during the fourth quarter of fiscal 1997, how much did Microsoft add to the account during that quarter?
4. Continuing requirement 3, how much higher or lower would Microsoft’s fourth-quarter income before tax have been (on a per share basis) if this accrual adjustment had not been made?
5. Assume that Microsoft reduced its Unearned revenues account by $188.0 million during the first three quarters of fiscal 1997. How much did Microsoft add to the account during the fiscal year?
6. Continuing requirement 5, how much higher or lower would Microsoft’s annual income before tax have been (on a per share basis) if this accrual adjustment had not been made?
7. How much income before tax (on a per share basis) does Microsoft have “stored” in the Unearned revenues account at the end of 1997?
8. How can the Unearned revenues account be used to manage EPS?
9. How can analysts monitor the extent to which the Unearned revenues account is being used to manage EPS?
10. Does the existence of the Unearned revenues account necessarily mean that Microsoft intends to manage its reported earnings?Explain.


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  • CreatedSeptember 10, 2014
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