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Microsoft: software capitalization and revenue recognition

1: What was the overall impact of both the software capitalization policy and the revenue recognition policy on Microsoft's fiscal 1997, 1998, and 1999 financial statements?

2: In your opinion, during the same timeframe, did Microsoft provide its analysts' with information that was intentionally overly pessimistic? Are there any benefits to the company to being outwardly pessimistic about its future prospects?

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1: What was the overall impact of both the software capitalization policy and the revenue recognition policy on Microsoft's fiscal 1997, 1998, and 1999 financial statements?

The software capitalization policy of Microsoft during 1997, 1998, and 1999 was to expense 100% of the costs. The results of this policy was that so called research and development costs, which was mainly software development costs totaling $1,8 billion, $2.6 billion, and $3.0 billion was expensed. In other words the research and development costs reduced the income before taxes by these amounts. If we read the GAAP carefully, these costs should have been capitalized. By expensing these, the retained profits for year were reduced. On the other hand, had these costs been capitalized, they would have appeared on the assets side of the balance sheet and amortized over a period of time. The retained profits would have increased in the balance sheet and the net income would have increased in the Income Statement.

The revenue recognition policy of Microsoft also has a serious problem during 1997, 1998 and ...

Solution Summary

Microsoft: software capitalization and revenue recognition policy is discussed very comprehensively in this explanation..

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