Questions:
1.) Locate the financial statements of Microsoft Corporation on the internet. Search the disclosure notes for information about how Microsoft accounts for its unearned revenues. How is the undelivered portion of Microsoft’s sales of Windows XP Professional recorded initially?
2.) Why does the statement of cash flows include "unearned revenue" as an addition to net income in the operations section? Why is "recognition of unearned revenue" included as a deduction from the net income? Why do you think Microsoft reported these two items separately rather than just adjusting net income for the change in the unearned revenue account balance?
3.)Why is stock-based compensation added to net income?
Answers:
1) Microsoft has an item as current liability named as unearned revenue, which is in increasing trend over the past years. Unearned revenue is treated as liability that results from the sales of the products from Microsoft like Office and Windows. While purchasing, the customers pay for the current version as well as the future upgrades. This is the reason why Microsoft treats the unearned revenue as liability.
A part of the income obtained from Windows XP is transacted as unearned revenue as the undelivered constituent involving the telephone assistance for post-delivery in few cases and the entitlement of receiving enhancements or upgrades that are not specified, on the internet explorer from Microsoft based on as and when available (Wang & Gan, 2016).
2) The cash flow statement of Microsoft recorded an item as unearned revenue, as the addition to net revenue in the under the operation segment as that amount of cash is collected as revenue, however the amount is not included under the revenue statement. On the other hand, unearned revenue recognition is accounted as deduction from the net revenue as the amount was accounted as unearned revenue previously at the time of collection and is being recognised now and therefore, accounted as revenue. These two items has been reported separately by Microsoft as even though the adjustment for net changes will give the same result, the amount of dollar is considerably high, therefore, reporting the items separately will give more precise information (Microsoft – Official Home Page, 2017).
3) The stock-based compensation is accounted as the suitable portion of fair value of this compensation that is , SARs, stock options and restricted stock, on the grant date. No cash flow is there that is associated with this compensation, therefore, the expenses is again added to the net revenue to eliminate the non-cash items while determining the cash generated from operations.
Reference:
Microsoft – Official Home Page. (2017). Microsoft.com. Retrieved 11 April 2017, from https://www.microsoft.com/en-in/
Wang, L., & Gan, L. (2016). Theory Research of Value Investing Based on Market Position. Applied Economics and Finance, 3(2), 146-156.
