Question

Microsoft is the leading developer of software in the world. To continue to be successful Microsoft must generate new products, which requires significant amounts of cash. Shown below is the current asset and current liability information from Microsoft’s balance sheet (in millions). Following the Microsoft data is the current asset and current liability information for Oracle (in millions), another major software developer.


Part 1 (Cash and Cash Equivalents)
Instructions
(a) What is the definition of a cash equivalent? Give some examples of cash equivalents. How do cash equivalents differ from other types of short-term investments?
(b) Calculate (1) the current ratio and (2) working capital for each company for 2006 and discuss your results.
(c) Is it possible to have too many liquid assets?
Part 2 (Accounts Receivables)
Microsoft provided the following disclosure related to its accounts receivable.


Instructions
(a) Compute Microsoft’s accounts receivable turnover ratio for 2006 and discuss your results. Microsoft had sales revenue of $44,282 million in 2006 and an accounts receivable turnover ratio of 6.65 in 2005.
(b) Reconstruct the summary journal entries for 2006 based on the information in the disclosure.
(c) Briefly discuss how the accounting for bad debts affects the analysis in Part 2(a).


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  • CreatedMay 16, 2012
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