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 €œstored€ 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.

MICROSOFT'S EARNINGS GROWTH SLOWED IN THE LATEST QUARTER programs. The account represents revenues Microsoft has collected but hadn't yet reported. It was established because the company faces future costs to deliver upgrades and customer sup- Microsoft Corp's growth juggernaut slowed in its fiscal fourth port for products that already have been paid for The policy helps quarter, but the numbers masked a surprisingly potent perfor soth out sharp swings in the company's quarterly results, mance by the software giant. Microsoft reported net income of $1.06 billion, or 80 cents The Redmond, Wash company's earnings barely topped Wall a share, for the quarter ended June 30, an increase of 89% Street's consensus, breaking a pattern of dramatic upside surprises from $559 million, or 43 cents a share, a year earlier Analysts for the company. But the company's profit would have been had expected per-share earnings of about 79 cents, according considerably higher had it not salted away revenue in a special to First Call Corp. Quarterly revenue was $3.18 billion, up reserve account for use in future quarters. That account, dubbed 41% from $2.26 billion a year earlier. unearned revenues," continued to swell and underscore the returns Microsoft is reaping as a near-monopoly supplier ol tet Journal July 18, 1997. Copyright 1997 Dow Jones & Com- personal computer operating-software and key application pay, Inc. All rights reserved worldwide. Reprinted with permission. Source: Microsoft's Earnings Growth Slowed in the Latest Quarter" e Microsoft Corporation Income Statements Three Months Ended June 30, Years Ended June 30, 2 Research and development Sales and marketing Total operating expenses 1 2 Income before income taxes Provision for income taxes Preferred stock dividends Net income available for 0 s outstandin Balance Sheet (selected accounts) ($ in millions) Liabilities and Stockholders' Equity June 30, 1996 June 30, 1997 Current liabilities Accounts payable Accrued compensation Income taxes payable Unearned revenues Other S 808 202 484 560 371 $2,425 $ 721 336 466 1,418 669 $3,610 Total current liabilities