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    Microsoft's revenue unearned revenues account

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    Microsoft develops, manufactures, licenses, sells, and supports a wide range of software products, including operating systems for personal computers (PGs) and servers; server applications for client/server environments; business and consumer productivity applications; software development tools; and Internet and intranet software and technologies. The company has expanded its interactive content efforts, including NSN (the Microsoft Network online service), various Internet-based services, and entertainment and information software programs. Microsoft also sells PC books and input devices, and it researches and develops advanced technologies for the future software products. The following excerpt is from and article that appeared in the Wall Street Journal

    MICROSOFT'S EARNINGS GROWTH SLOWED IN
    THE LATEST QUARTER

    Microsoft Corp's growth juggernaut slowed in its fiscal fourth quarter, but the numbers masked a surprisingly potent performance by the software giant.
    The Redmond, Wash., company's earnings barley topped Wall Streets consensuses, breaking a pattern of dramatic upside surprises for the company. But the company's profit would have been considerably higher had it not salted away revenue in a special reserve account for use in future quarters. The account, dubbed "unearned revenues," continued to swell and underscore the returns Microsoft is reaping as a near - monopoly supplier of personal computer operating software and key application programs. The account represents revenues Microsoft has collected but hadn't yet reported. It was established because the company faces future cost to deliver up grades and customer support for products that already have been paid for. The policy helps smooth out sharp swings in the company's quarterly results.
    Microsoft reported net income of $1.06 billion , or 80 cents a share, for the quarter ended June 30, an increase of 89% from $559 million, or 43 cents a share, a year earlier. Analysts had expected per - share earnings of about 79 cents, according to First Call Corp. Quarterly revenue was 3.18 billion, up 41% from 2.26 billion a year earlier.

    Other Information:
    1. Appearing in the accompany tables are a comparative income statement for the forth quarters of fiscal 19996 and 1997 and for fiscal years 1996 and 1997. Also shown are comparative balance sheets for fiscal 1996 and 1997.
    2. The balance in unearned revenues account on March 31,1997 (the end of the third fiscal quarter of 1997) was $1,285 (in millions).
    3. The following description of Microsoft's revenue 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 $109 million and the balance of unearned revenues was primarily attributable to maintenance and other subscription contracts.

    Microsoft Corporation

    Income Statement
    Three Months Ended Years Ended
    ($ in Millions, except earnings per share) 30-Jun 30-Jun
    1996 1997 1996 1997
    Net Revenues $2,255 $3,175 $8,671 $11,358
    Cost of Revenues $241 $242 $1,188 $1,085
    Research and development $453 $516 $1,432 $1,925
    Sales and Marketing $661 $744 $2,657 $2,856
    General and administrative $90 $94 $316 $362
    Total operating expenses $1,445 $1,596 $5,593 $6,228
    Operating income $810 $1,597 $3,078 $5,130
    Interest income $92 $127 $320 $443
    Other expenses ($42) ($80) ($19) ($259)
    Income before income takes $860 $1,626 $3,379 $5,314
    Provisions for income taxes $301 $569 $1,184 $1,860
    Net Income $559 $1,057 $2,195 $3,454
    Preferred stock Dividends $0 $7 $0 $15
    Net income available for common share holders $559 $1,050 $2,195 $3,439
    Earnings per share $0.43 $0.80 $1.71 $2.63
    Average shares outstanding $1,290 $1,327 $1,281 $1,312

    Balance Sheets
    ($ in Millions) June 30, 1996 June 30, 1996

    Assets
    Current Assets
    Cash and short term investments $6,940 $8,966
    Accounts receivables $639 $980
    Other $260 $427
    Total Current Assets $7,839 $10,373
    Property, Plant and Equipment $1,326 $1,465
    Equity Investments $675 $2,346
    Other assets $253 $203
    Total Assets $10,093 $14,387

    Liabilities and Stockholders' Equity
    Current Liabilities
    Accounts Payable $808 $721
    Accrued compensation $202 $336
    Income taxes payable $484 $466
    Unearned revenues $560 $1,414
    Other assets $371 $669
    Total current liabilities $2,425 $3,610
    Minority Interest $125 ---
    Put Warrants $635 ---
    Stockholder Equity
    Convertible preferred stock --- $980
    Common stock and paid capital $2,924 $4,509
    Retained Earnings $3,984 $5,288
    Total stockholders equity $6,908 $10,777
    Total liabilities and stockholder equity $10,093 $14,387

    Answer the following questions based on the available information.

    1. Calculate Microsoft's net profit margin for the fourth quarter of 1996 and 1997and for the fiscal years 1996 and 1997. Comment on the results.
    2. Calculate Microsoft's working capital and current ratio. Comment on the results.
    3. Did Microsoft fall short of, meet, or exceed analysts expectations for fourth-quarter 1997 EPS?
    4. 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 the quarter?
    5. Continuing requirement 4 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?
    6. 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?
    7. Continuing requirement 6, 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?
    8. How much income before tax (on a per share basis) does Microsoft have "stored" in the "Unearned revenues" account at the end of 1997?
    9. How can the "Unearned revenues" account be used to manage EPS?
    10. How can analysts monitor the extent to which the "Unearned revenues" account is being used to manage EPS?
    11. Does the existence of the "Unearned revenues" account necessarily mean that Microsoft intends to manage its reported earnings? Explain.
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    (See attached file for full problem description)

    ---
    Microsoft develops, manufactures, licenses, sells, and supports a wide range of software products, including operating systems for personal computers (PGs) and servers; server applications for client/server environments; business and consumer productivity applications; software development tools; and Internet and intranet software and technologies. The company has expanded its interactive content efforts, including NSN (the Microsoft Network online service), various Internet-based services, and entertainment and information software programs. Microsoft also sells PC books and input devices, and it researches and develops advanced technologies for the future software products. The following excerpt is from and article that appeared in the Wall Street Journal

    MICROSOFT'S EARNINGS GROWTH SLOWED IN
    THE LATEST QUARTER

    Microsoft Corp's growth juggernaut slowed in its fiscal fourth quarter, but the numbers masked a surprisingly potent performance by the software giant.
    The Redmond, Wash., company's earnings barley topped Wall Streets consensuses, breaking a pattern of dramatic upside surprises for the company. But the company's profit would have been considerably higher had it not salted away revenue in a special reserve account for use in future quarters. The account, dubbed "unearned revenues," continued to swell and underscore the returns Microsoft is reaping as a near - monopoly supplier of personal computer operating software and key application programs. The account represents revenues Microsoft has collected but hadn't yet reported. It was established because the company faces future cost to deliver up grades and customer support for products that already have been paid for. The policy helps smooth ...

    Solution Summary

    This analyzes the Microsoft's revenue unearned revenues account and other financials

    $2.19