Required
A.    Identify and list the errors in the income statement. 
B.    Prepare a corrected income statement.
P4-4     INTERPRETING AN  INCOME STATEMENT
Obj. 2     Microsoft Corporation's 2004 annual report included the following income statement information.
Microsoft Corporation Income Statements
	
(In millions, except earnings per share)

	
	
Year Ended June 30
	2002
	2003
	2004
	
Revenue
	$28,365
	$32,187
	$36,835
	
Operating expenses:

	
	
Cost of revenue
	5,699
	6,059
	6,716
	
Research and development
	6,299
	6,595
	7,779
	
Sales and marketing
	6,252
	7,562
	8,309
	
General and administrative
	1,843
	2,426
	4,997
	
Total operating expenses
	20,093
	22,642
	27,801
	
Operating income
	8,272
	9,545
	9,034
	
Losses on equity investees and other
	(92)
	(68)
	(25)
	
Investment income/(loss)
	(305)
	1,577
	3,187
	
Income before income taxes
	7,875
	11,054
	12,196
	
Provision for income taxes
	2,520
	3,523
	4,028
	
Net income
	$ 5,355
	$ 7,531
	$ 8,168
	
Earnings per share:

	
	
Basic
	$    0.50
	$    0.70
	$    0.76
	
Diluted
	$    0.48
	$    0.69
	$    0.75
	
Weighted average shares outstanding:

	
	
Basic
	10,811
	10,723
	10,803
	
Diluted
	11,106
	10,882
	10,894
	
Required Ratios often are used to assess changes in financial statement information over time. Use Microsoft's income statements to answer the following questions. Express your answers as percentages.
A.    What was the ratio of net income to revenue each year?
B.    What was the ratio of cost of revenue (cost of goods sold) to revenue each year?
C.   What was the ratio of operating expenses to revenue each year?
D.   What was the percentage change in net income between 2002 and 2003, and between
2003 and 2004? (Hint: Divide the increase in net income from 2002 and 2003 by the net
income for 2002.) 
E.    Did Microsoft's operating results improve between 2002 and 2003? Between 2003 and
2004? Explain your answers.