The article discusses Microsoft’s unexpectedly low earnings for the fiscal first quarter in September 2012 and attributed the slump to the declining personal computer market. They had a 22% decline in net income from the year-earlier period, which was lower than analysts expected. Microsoft still gets most of its sales from PCs and directly devices related to PCs, although they are slowly transitioning to other technologies such as smart phones and tablets.
The article also discusses Microsoft’s new operating system Windows 8 and its release date of October 26th and the article states that Microsoft has deferred revenues of $1.36 billion dollars due to the software upgrades and the pre-order sales of this new system. Accounting for this unearned revenue, Microsoft still would have been flat on its expected revenues, but by less than 1% from the prior year.
Specifically owed to the Windows 8 release, deferred revenues make up 8.5% of it’s would-be total revenue. Micrsoft therefore has 1.36 billion in cash and accounts receivables as assets on its balance sheet and 1.36 billion as unearned revenues as a liability. Generally Accepted Accounting Principles tell us that we cannot recognize revenue until 1) the earnings process is complete, 2) one can quantify/measure the revenue, 3) the risk and rewards of the product/service have been transferred to the buyer, and 4) payment is assured. Microsoft understands that although cash has been received, the product has not yet been delivered and therefore, cannot attribute the cash to revenue.
This article shows how the clear discrepancy between cash and accrual accounting methods can affect companies. Once Windows 8 is (was) released, they can credit the $1.36 billion in revenue on their income statement (RE), and debit the unearned revenue on their balance sheet. Microsoft’s 2012 Annual Report actually shows that Windows & Windows Live Division’s unearned revenue had increased to $2.44 billion at the fiscal yearend.
Source: http://www.nytimes.com/2012/10/19/technology/microsoft-profit-falls-as-pc-sales-shrink.html?_r=1&
Source: New York Times Date: October 18, 2012
