In order to evaluate the common size income statement of Microsoft for last three years in order to report on change in net income due to change in expenses there is need to carry out the trend analysis. Trend analyses are of two types, horizontal trend analysis and vertical trend analysis. Below are vertical and horizontal trend analyses (Horngren, 2012):
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INCOME STATEMENT |
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|
Particulars |
2015-06 |
2016-06 |
2017-06 |
|
USD in millions except per share data |
|||
|
Revenue |
$ 93,580.00 |
$ 85,320.00 |
$ 89,950.00 |
|
Cost of revenue |
$ 33,038.00 |
$ 32,780.00 |
$ 34,261.00 |
|
Gross profit |
$ 60,542.00 |
$ 52,540.00 |
$ 55,689.00 |
|
Operating expenses |
|
|
|
|
Research and development |
$ 12,046.00 |
$ 11,988.00 |
$ 13,037.00 |
|
Sales, General and administrative |
$ 20,324.00 |
$ 19,260.00 |
$ 20,020.00 |
|
Restructuring, merger and acquisition |
|
|
|
|
Other operating expenses |
$ 10,011.00 |
$ 1,110.00 |
$ 306.00 |
|
Total operating expenses |
$ 42,381.00 |
$ 32,358.00 |
$ 33,363.00 |
|
Operating income |
$ 18,161.00 |
$ 20,182.00 |
$ 22,326.00 |
|
Interest Expense |
$ 781.00 |
$ 1,243.00 |
$ 2,222.00 |
|
Other income (expense) |
$ 1,127.00 |
$ 812.00 |
$ 3,045.00 |
|
Income before taxes |
$ 18,507.00 |
$ 19,751.00 |
$ 23,149.00 |
|
Provision for income taxes |
$ 6,314.00 |
$ 2,953.00 |
$ 1,945.00 |
|
Net income |
$ 12,193.00 |
$ 16,798.00 |
$ 21,204.00 |
(Annual Report, 2016 and 2017)
|
INCOME STATEMENT (Vertical Analysis) |
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|
Particulars |
2015-06 |
2016-06 |
2017-06 |
|
USD in millions except per share data |
|||
|
Revenue |
100.00% |
100.00% |
100.00% |
|
Cost of revenue |
35.30% |
38.42% |
38.09% |
|
Gross profit |
64.70% |
61.58% |
61.91% |
|
Operating expenses |
|
|
|
|
Research and development |
12.87% |
14.05% |
14.49% |
|
Sales, General and administrative |
21.72% |
22.57% |
22.26% |
|
Restructuring, merger and acquisition |
0.00% |
0.00% |
0.00% |
|
Other operating expenses |
10.70% |
1.30% |
0.34% |
|
Total operating expenses |
45.29% |
37.93% |
37.09% |
|
Operating income |
19.41% |
23.65% |
24.82% |
|
Interest Expense |
0.83% |
1.46% |
2.47% |
|
Other income (expense) |
1.20% |
0.95% |
3.39% |
|
Income before taxes |
19.78% |
23.15% |
25.74% |
|
Provision for income taxes |
6.75% |
3.46% |
2.16% |
|
Net income |
13.03% |
19.69% |
23.57% |
|
INCOME STATEMENT Horizontal Analysis) |
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|
Particulars |
2015-06 |
2016-06 |
2017-06 |
|
USD in millions except per share data |
|||
|
Revenue |
100.00% |
91.17% |
96.12% |
|
Cost of revenue |
100.00% |
99.22% |
103.70% |
|
Gross profit |
100.00% |
86.78% |
91.98% |
|
Operating expenses |
|
|
|
|
Research and development |
100.00% |
99.52% |
108.23% |
|
Sales, General and administrative |
100.00% |
94.76% |
98.50% |
|
Restructuring, merger and acquisition |
|
|
|
|
Other operating expenses |
100.00% |
11.09% |
3.06% |
|
Total operating expenses |
100.00% |
76.35% |
78.72% |
|
Operating income |
100.00% |
111.13% |
122.93% |
|
Interest Expense |
100.00% |
159.15% |
284.51% |
|
Other income (expense) |
100.00% |
72.05% |
270.19% |
|
Income before taxes |
100.00% |
106.72% |
125.08% |
|
Provision for income taxes |
100.00% |
46.77% |
30.80% |
|
Net income |
100.00% |
137.77% |
173.90% |
(Annual Report, 2016 and 2017)
- It has been noted that there has been constant increase in cost of good gold as it was 35.30 % of the net sales in year 2015 and increased to 38.42% to net sales in year 2016. So it can be said that increase in percentage of cost of goods sold as against the sales has decreased the net income of the company.
- Selling and general expenses together termed as operating expenses has decreased a lot in year 2016 as compared to year 2015. In year 2015 operating expenses was 45.29% that was reduced to 37.93 % in year 2016 and 37.09% in year 2017. So it can be said that the decrease in operating expenses has lead to some increase in net income of the company.
- Depreciation refers to notional expense as it does not lead to cash flow of resources but it impacts the net income of company. There has been increase in depreciation amount year by year that leads to decrease in net income of the company.
- Taxes are the expenses that are paid to the government and it decreases the net income of the company. In year 2016 and 2017 there has been decrease in tax expenses as compared to year 2015 which leads to increase in net income of the Microsoft in both the years.
- There has been constant decrease in net income of the company (Brigham & Ehrhardt, 2007)
Analysis of the Balance Sheet
Same horizontal and vertical trend analysis of the balance sheet has been carried down below and various observations are made.
|
BALANCE SHEET |
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|
Particulars |
2015-06 |
2016-06 |
2017-06 |
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|
USD in millions except per share data |
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|
Assets |
|
|
|
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|
Current assets |
|
|
|
|||
|
Cash |
|
|
|
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|
Cash and cash equivalents |
$ 5,595.00 |
$ 6,510.00 |
$ 7,663.00 |
|||
|
Short-term investments |
$ 90,931.00 |
$ 106,730.00 |
$ 125,318.00 |
|||
|
Total cash |
$ 96,526.00 |
$ 113,240.00 |
$ 132,981.00 |
|||
|
Receivables |
$ 17,908.00 |
$ 18,277.00 |
$ 19,792.00 |
|||
|
Inventories |
$ 2,902.00 |
$ 2,251.00 |
$ 2,181.00 |
|||
|
Deferred income taxes |
$ 1,915.00 |
|
|
|||
|
Other current assets |
$ 5,461.00 |
$ 5,892.00 |
$ 4,897.00 |
|||
|
Total current assets |
$ 124,712.00 |
$ 139,660.00 |
$ 159,851.00 |
|||
|
Non-current assets |
|
|
|
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Property, plant and equipment |
|
|
|
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|
Gross property, plant and equipment |
$ 32,337.00 |
$ 38,156.00 |
$ 47,913.00 |
|||
|
Accumulated Depreciation |
-$ 17,606.00 |
-$ 19,800.00 |
-$ 24,179.00 |
|||
|
Net property, plant and equipment |
$ 14,731.00 |
$ 18,356.00 |
$ 23,734.00 |
|||
|
Equity and other investments |
$ 12,053.00 |
$ 10,431.00 |
$ 6,023.00 |
|||
|
Goodwill |
$ 16,939.00 |
$ 17,872.00 |
$ 35,122.00 |
|||
|
Intangible assets |
$ 4,835.00 |
$ 3,733.00 |
$ 10,106.00 |
|||
|
Other long-term assets |
$ 2,953.00 |
$ 3,642.00 |
$ 6,250.00 |
|||
|
Total non-current assets |
$ 51,511.00 |
$ 54,034.00 |
$ 81,235.00 |
|||
|
Total assets |
$ 176,223.00 |
$ 193,694.00 |
$ 241,086.00 |
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|
Liabilities and stockholders' equity |
|
|
|
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|
Liabilities |
|
|
|
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|
Current liabilities |
|
|
|
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|
Short-term debt |
$ 7,484.00 |
$ 12,904.00 |
$ 10,121.00 |
|||
|
Accounts payable |
$ 6,591.00 |
$ 6,898.00 |
$ 7,390.00 |
|||
|
Taxes payable |
$ 606.00 |
$ 580.00 |
$ 718.00 |
|||
|
Accrued liabilities |
$ 5,096.00 |
$ 5,264.00 |
$ 5,819.00 |
|||
|
Deferred revenues |
$ 23,223.00 |
$ 27,468.00 |
$ 34,102.00 |
|||
|
Other current liabilities |
$ 6,858.00 |
$ 6,243.00 |
$ 6,377.00 |
|||
|
Total current liabilities |
$ 49,858.00 |
$ 59,357.00 |
$ 64,527.00 |
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|
Non-current liabilities |
|
|
|
|||
|
Long-term debt |
$ 27,808.00 |
$ 40,783.00 |
$ 76,073.00 |
|||
|
Deferred taxes liabilities |
$ 2,835.00 |
$ 1,476.00 |
$ 531.00 |
|||
|
Deferred revenues |
$ 2,095.00 |
$ 6,441.00 |
$ 10,377.00 |
|||
|
Other long-term liabilities |
$ 13,544.00 |
$ 13,640.00 |
$ 17,184.00 |
|||
|
Total non-current liabilities |
$ 46,282.00 |
$ 62,340.00 |
$ 104,165.00 |
|||
|
Total liabilities |
$ 96,140.00 |
$ 121,697.00 |
$ 168,692.00 |
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|
Stockholders' equity |
|
|
|
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|
Common stock |
$ 68,465.00 |
$ 68,178.00 |
$ 69,315.00 |
|||
|
Retained earnings |
$ 9,096.00 |
$ 2,282.00 |
$ 2,648.00 |
|||
|
Accumulated other comprehensive income |
$ 2,522.00 |
$ 1,537.00 |
$ 431.00 |
|||
|
Total stockholders' equity |
$ 80,083.00 |
$ 71,997.00 |
$ 72,394.00 |
|||
|
Total liabilities and stockholders' equity |
$ 176,223.00 |
$ 193,694.00 |
$ 241,086.00 |
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|
BALANCE SHEET (Vertical Analysis) |
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|
Particulars |
2015-06 |
2016-06 |
2017-06 |
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|
USD in millions except per share data |
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|
Assets |
|
|
|
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|
Current assets |
|
|
|
|||
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Cash |
|
|
|
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|
Cash and cash equivalents |
3.17% |
3.36% |
3.18% |
|||
|
Short-term investments |
51.60% |
55.10% |
51.98% |
|||
|
Total cash |
54.77% |
58.46% |
55.16% |
|||
|
Receivables |
10.16% |
9.44% |
8.21% |
|||
|
Inventories |
1.65% |
1.16% |
0.90% |
|||
|
Deferred income taxes |
1.09% |
0.00% |
0.00% |
|||
|
Other current assets |
3.10% |
3.04% |
2.03% |
|||
|
Total current assets |
70.77% |
72.10% |
66.30% |
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|
Non-current assets |
|
|
|
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|
Property, plant and equipment |
|
|
|
|||
|
Gross property, plant and equipment |
18.35% |
19.70% |
19.87% |
|||
|
Accumulated Depreciation |
-9.99% |
-10.22% |
-10.03% |
|||
|
Net property, plant and equipment |
8.36% |
9.48% |
9.84% |
|||
|
Equity and other investments |
6.84% |
5.39% |
2.50% |
|||
|
Goodwill |
9.61% |
9.23% |
14.57% |
|||
|
Intangible assets |
2.74% |
1.93% |
4.19% |
|||
|
Other long-term assets |
1.68% |
1.88% |
2.59% |
|||
|
Total non-current assets |
29.23% |
27.90% |
33.70% |
|||
|
Total assets |
100.00% |
100.00% |
100.00% |
|||
|
Liabilities and stockholders' equity |
|
|
|
|||
|
Liabilities |
|
|
|
|||
|
Current liabilities |
|
|
|
|||
|
Short-term debt |
4.25% |
6.66% |
4.20% |
|||
|
Accounts payable |
3.74% |
3.56% |
3.07% |
|||
|
Taxes payable |
0.34% |
0.30% |
0.30% |
|||
|
Accrued liabilities |
2.89% |
2.72% |
2.41% |
|||
|
Deferred revenues |
13.18% |
14.18% |
14.15% |
|||
|
Other current liabilities |
3.89% |
3.22% |
2.65% |
|||
|
Total current liabilities |
28.29% |
30.64% |
26.77% |
|||
|
Non-current liabilities |
|
|
|
|||
|
Long-term debt |
15.78% |
21.06% |
31.55% |
|||
|
Deferred taxes liabilities |
1.61% |
0.76% |
0.22% |
|||
|
Deferred revenues |
1.19% |
3.33% |
4.30% |
|||
|
Other long-term liabilities |
7.69% |
7.04% |
7.13% |
|||
|
Total non-current liabilities |
26.26% |
32.18% |
43.21% |
|||
|
Total liabilities |
54.56% |
62.83% |
69.97% |
|||
|
Stockholders' equity |
|
|
|
|||
|
Common stock |
38.85% |
35.20% |
28.75% |
|||
|
Retained earnings |
5.16% |
1.18% |
1.10% |
|||
|
Accumulated other comprehensive income |
1.43% |
0.79% |
0.18% |
|||
|
Total stockholders' equity |
45.44% |
37.17% |
30.03% |
|||
|
Total liabilities and stockholders' equity |
100.00% |
100.00% |
100.00% |
|||
(Annual Report, 2016 and 2017)
|
BALANCE SHEET (Horizontal Analysis) |
|||
|
Particulars |
2015-06 |
2016-06 |
2017-06 |
|
USD in millions except per share data |
|||
|
Assets |
|
|
|
|
Current assets |
|
|
|
|
Cash |
|
|
|
|
Cash and cash equivalents |
100.00% |
116.35% |
136.96% |
|
Short-term investments |
100.00% |
117.37% |
137.82% |
|
Total cash |
100.00% |
117.32% |
137.77% |
|
Receivables |
100.00% |
102.06% |
110.52% |
|
Inventories |
100.00% |
77.57% |
75.16% |
|
Deferred income taxes |
100.00% |
0.00% |
0.00% |
|
Other current assets |
100.00% |
107.89% |
89.67% |
|
Total current assets |
100.00% |
111.99% |
128.18% |
|
Non-current assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Gross property, plant and equipment |
100.00% |
117.99% |
148.17% |
|
Accumulated Depreciation |
100.00% |
112.46% |
137.33% |
|
Net property, plant and equipment |
100.00% |
124.61% |
161.12% |
|
Equity and other investments |
100.00% |
86.54% |
49.97% |
|
Goodwill |
100.00% |
105.51% |
207.34% |
|
Intangible assets |
100.00% |
77.21% |
209.02% |
|
Other long-term assets |
100.00% |
123.33% |
211.65% |
|
Total non-current assets |
100.00% |
104.90% |
157.70% |
|
Total assets |
100.00% |
109.91% |
136.81% |
|
Liabilities and stockholders' equity |
|
|
|
|
Liabilities |
|
|
|
|
Current liabilities |
|
|
|
|
Short-term debt |
100.00% |
172.42% |
135.24% |
|
Accounts payable |
100.00% |
104.66% |
112.12% |
|
Taxes payable |
100.00% |
95.71% |
118.48% |
|
Accrued liabilities |
100.00% |
103.30% |
114.19% |
|
Deferred revenues |
100.00% |
118.28% |
146.85% |
|
Other current liabilities |
100.00% |
91.03% |
92.99% |
|
Total current liabilities |
100.00% |
119.05% |
129.42% |
|
Non-current liabilities |
|
|
|
|
Long-term debt |
100.00% |
146.66% |
273.57% |
|
Deferred taxes liabilities |
100.00% |
52.06% |
18.73% |
|
Deferred revenues |
100.00% |
307.45% |
495.32% |
|
Other long-term liabilities |
100.00% |
100.71% |
126.88% |
|
Total non-current liabilities |
100.00% |
134.70% |
225.07% |
|
Total liabilities |
100.00% |
126.58% |
175.46% |
|
Stockholders' equity |
|
|
|
|
Common stock |
100.00% |
99.58% |
101.24% |
|
Retained earnings |
100.00% |
25.09% |
29.11% |
|
Accumulated other comprehensive income |
100.00% |
60.94% |
17.09% |
|
Total stockholders' equity |
100.00% |
89.90% |
90.40% |
|
Total liabilities and stockholders' equity |
100.00% |
109.91% |
136.81% |
(Annual Report, 2016 and 2017)
Observation made on the balance sheet changes:
- The cash and cash equivalents ranges 3% to 4% of the total assets in all the last three years
- The inventory ranges 0.90% to 2.00% of the total assets in all the last three years
- The account receivable ranges 8.00 % to 11.00 % of the total assets in all the last three years
- The long term debt ranges 25.00 % to 45.00 % of the total Liabilities and Shareholder Equity in all the last three years. It can be better seen in vertical analysis of balance sheet
- The equity ranges 28.00 % to 40.00 % of the total Liabilities and Shareholder Equity in all the last three years
- The retained earnings range 1.00 % to 5.00 % of the total Liabilities and Shareholder Equity in all the last three years (Besley & Brigham, 2014)
Annual Report. 2016. Microsoft Corporation. Retrieved 5 December 2017, from https://www.microsoft.com/en-us/Investor/annual-reports.aspx
Annual Report. 2017. Microsoft Corporation. Retrieved 5 December 2017, from https://www.microsoft.com/en-us/Investor/annual-reports.aspx
Besley, S. & Brigham, E. 2014. Principles of Finance. Cengage Learning.
Brigham, E. & Ehrhardt, M. 2007. Financial Management: Theory & Practice. Cengage Learning.
Horngren, C. 2012. Financial Accounting. Pearson Higher Education AU.
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