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).

Transcribed Image Text:

Microsoft Corporation Balance Sheets (partial) As of June 30 in millions) Current assets 2006 2005 Cash and equivalents Short-term investments Accounts receivable Other 6,714 27,447 9,316 5,533 $49,010 $22,442 $ 4,851 32,900 7,180 3,806 $48,737 $16,877 Total current assets Total current liabilities Oracle Balance Sheets (partial) As of May 31 (in millions) Current assets 2006 $6,659 946 3,022 1,347 11,974 $6,930 2005 $3,894 877 2,570 1,107 8,448 $8,063 Cash and equivalents Short-term investments Other current assets Total current assets Current liabilities Microsoft Corporation Notes to the Financial Statements Allowance for Doubtful Accounts. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Activity in the allowance for doubtful accounts is as follows (in millions) Balance at beginning of period $242 166 Charged to costs and expenses $44 48 40 Balance at end of period $166 Write-offs and other Year Ended June 30 2004 2005 2006 $(120) (43) (69) 142