When Microsoft Corporation released earnings for its third quarter of fiscal 2007, profits hit a record $4.9 billion, driven in large part by revenue that was 32 percent higher than the previous year. However, the $14.4 billion in sales included $1.67 billion in deferred revenue from the redemption of upgrade coupons for the company’s recently released operating system, Vista, that were never used. The coupons for Vista upgrades were given to customers prior to the release of the new program.
REQUIRED:
a. What is meant by “deferred revenue” and where does it fit in the financial statements?
b. Discuss the cash flow implications of the $1.67 billion in deferred revenue for Microsoft in the current and past fiscal quarters.
c. How do you think an analyst following the company would react to the above earnings announcement? How would the deferred revenues factor into the analysis?