Microsoft Corporation Accounting and Financial Analysis

Overview of Microsoft Corporation

Microsoft Corporation is an American technology company headquartered in Redmond, Washington. Founded by Paul Allen and Bill Gates in 1975, the company's core operations encompass the discovery, development, manufacturing, and licensing of goods and services related to computing (Bellis, 2017). According to Statista (2017), the company employs approximately 124,000 people worldwide. Over the decades since its inception, Microsoft has grown progressively into a large global corporation. Its extensive business portfolio encompasses electronics, personal computers, computer software, and, more recently, cloud computing. Notable products and services include Microsoft Office, Xbox, Internet Explorer, and the Microsoft Operating System.

The organizational structure of Microsoft Corporation supports its business growth and development. The firm's structure reflects the needs of the computer hardware and software industry in response to the dynamics of market supply and demand. A responsive organizational structure ensures the company's long-term success. Specifically, Microsoft employs a product-type divisional organizational structure, which involves company divisions founded on particular hardware and software products as well as organizational functions. Three features characterize this structure: product-type branches, multinational corporate groups, and geographic segments (Lombardo, 2017).

Stakeholders of a corporation are the parties whose interests must be considered when generating and carrying out policies and programs. The key stakeholders of Microsoft Corporation, along with their primary objectives in relation to the organization, are as follows:

Employees: The company offers a wide range of resources to help employees achieve a work-life balance, including work leave, part-time hours, telecommuting, and referral services.

Suppliers: These include the various contractors and brokers working in partnership with the organization. Their objective is to ensure that dealing with Microsoft benefits and profits all parties involved.

Shareholders: The primary goal is to maximize shareholder returns. As the key owners of the company, shareholders significantly influence organizational direction.

Government: Microsoft works in partnership with government entities to cultivate a setting where prospects and development can succeed through invention, research, technology, acquisition of international talent, and infrastructure.

Consumers: Guaranteeing a high level of satisfaction among consumers and associates is a fundamental element of Microsoft's mission, achieved through its Customer Partner Experience program.

Civil society: Microsoft is dedicated to assisting non-governmental organizations (NGOs) in leveraging technology to facilitate social and economic progress. The firm's approach is centered on providing such organizations access to stable and more secure technology while enhancing the delivery of information technology solutions (Smithson, 2017).

Key resources encompass assets that are specific to the organization. Microsoft Corporation possesses tangible resources, intangible resources, and human resources. In terms of tangible resources, the organization holds property and equipment, including computer equipment, hardware, and software (Anastasia, 2015), as well as land and buildings, totaling more than $18 billion. The company also holds significant cash reserves, which provide substantial financial flexibility, with cash reserves exceeding $6 billion. Additional tangible resources include established distribution channels—encompassing retailers and vendors—for its various products. These tangible assets indicate that Microsoft Corporation has substantial borrowing ability, strong investment capacity, and solid financial reserves (Microsoft, 2016).

Intangible resources consist of technology, organizational culture, and reputation. Microsoft's key technological resources include intellectual property and its capacity for research and development. Its distinctive corporate culture—deemed team-oriented and driven, with personnel valued for their contributions—is another important intangible resource. Taken together, Microsoft is strongly positioned with respect to intangible resources owing to its vast technological competencies, brand recognition, and culture (Microsoft, 2016).

Finally, human resources represent a critical asset. Microsoft has the ability to attract and retain some of the most outstanding talent in the information technology industry. The company's skilled and dedicated workforce is a major competitive resource (Microsoft, 2016).

Corporate governance at Microsoft is designed to establish and maintain management accountability by appropriately assigning roles and responsibilities. It is also intended to reinforce and protect an organizational culture of business integrity and responsible business practices, encourage the effective use of resources, and promote accountability for the management of those resources. The corporate governance structures are consistent with best-practice expectations: the composition of the board includes independent directors who are not responsible for day-to-day management. Business processes also include the use of independent advisors and the conducting of performance evaluations. The company maintains continuous communication with stakeholders to keep them informed of Microsoft's operations and financial position (Smithson, 2017).

Accounting plays a key role in the organization as a fundamental means of assisting managers, suppliers, consumers, and other stakeholders in making decisions. Accounting provides information to organizational managers for external reporting, routine internal reporting, and ad hoc internal reporting, making it possible to supply information to both internal and external users and to support key decision-making (Needles et al., 2013).

The accounting software used by the company is Microsoft Dynamics 365, a product developed by Microsoft itself. This software helps bridge the silos between Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP), driven by data and intelligence, and helps the company seize new business opportunities (Microsoft, 2017).

Financial Accounting Analysis

Microsoft's business outlook appears healthy and growing. In fiscal year 2016, the company achieved strong financial results and built a robust foundation for continued future success. Despite making investments in innovation and undertaking global business expansion, Microsoft sustained its commitment to shareholder returns and achieved a 12 percent increase in total cash returns. The firm generated $85.3 billion in revenue and $20.2 billion in operating income for fiscal year 2016. These results reflect strong new product innovations as well as increased consumer usage and engagement across its businesses (Microsoft, 2016).

Financial leverage involves the use of debt to increase the volume of production and thereby increase revenues and earnings. It is calculated as the ratio of total debt to total assets. The financial leverage for the past two reported years is as follows:

2016 = 121,697 / 193,694 = 0.6283 = 62.83%
2015 = 94,389 / 174,472 = 0.5410 = 54.10%

These figures indicate that Microsoft Corporation is highly geared: more than 60 percent of its operations are financed using debt, while the remaining portion is financed by equity (Brigham and Houston, 2016).

Working capital management addresses the challenges involved in managing a firm's current assets, current liabilities, and the interrelationship between them. The objective is to ensure that a company can continue its operations and has adequate capacity to meet both short-term debt obligations and forthcoming operational expenditures (Brigham and Houston, 2016). The working capital ratio—computed as current assets divided by current liabilities—for Microsoft is as follows:

2016 = 139,660 / 59,357 = 2.35
2015 = 122,797 / 49,647 = 2.47

This indicates that the company is well managed and fully capable of meeting its short-term obligations while maintaining sufficient cash flow (Brigham and Houston, 2016).

Another element of working capital management is inventory management. For an organization to operate with maximum efficiency and maintain a healthy level of working capital, it must carefully balance holding adequate inventory to satisfy customer demand while avoiding excess inventory that prolongs cash conversion. This is assessed using the inventory turnover ratio, calculated as cost of goods sold divided by average inventory:

2016 = 32,780 / ((2,251 + 2,902) / 2) = 12.71

A relatively high inventory turnover ratio implies that Microsoft's efficiency in ordering could potentially be further enhanced (Brigham and Houston, 2016).

Microsoft Corporation faces intense competition, particularly in the software sector, from Apple and Google. All three companies rely on distinctive product offerings to generate the majority of their revenues, and each has attempted to enter competitors' markets with alternative services and varying degrees of success. With respect to market capitalization, Apple held a market cap of approximately $640 billion and was considered the largest company in the world, followed by Google at approximately $450 billion, with Microsoft at approximately $376 billion. Apple surpasses its rivals in hardware sales and high-end devices, largely because of its early-2000s positioning against Microsoft's dominance, which led many consumers to grow up using Mac products, resulting in a particularly loyal customer base (Ross, 2015).

The users of financial statements encompass various stakeholders who rely on financial information to assess an organization's capacity to fulfill its responsibilities and to make decisions about the organization. These groups include internal users—such as management and employees—and external users. External users may have either profit-oriented or non-profit interests in the accounting information, and comprise consumers, suppliers, investors, government agencies, and creditors (Cunningham et al., 2011).

Qualitative factors encompass non-numerical considerations that may influence the outcome of a decision. Unlike quantitative factors, which deal with measurable data, qualitative factors rely on information that is not easily quantified. Relevant qualitative considerations for Microsoft include political, social, and technological factors (Al-Tarawneh, 2012), such as the rapidly advancing intelligent cloud, personal computing trends, product and service development, and intellectual property matters.

Profitability Trends and Key Financial Ratios

The profitability trends of the organization can be examined using profitability ratios, which assess the ability of business operations to generate earnings relative to costs and other relevant expenditures over a given time period.

i. Net Profit Margin
2016 = 16,798 / 85,320 = 0.1969 = 19.69%
2015 = 12,193 / 93,580 = 0.1303 = 13.03%

ii. Return on Assets
2016 = 16,798 / 139,660 = 0.1203 = 12.03%
2015 = 12,193 / 122,797 = 0.09929 = 9.93%

iii. Return on Equity
2016 = 16,798 / 71,997 = 0.2333 = 23.33%
2015 = 12,193 / 80,083 = 0.1523 = 15.23%

These profitability trends indicate that Microsoft Corporation has been able to generate increasing earnings relative to its costs. With respect to net profit margin, for every $1.00 of revenue, returns increased from 13 cents to 19 cents. For every dollar invested in company assets, Microsoft increased returns from 9.93 cents to 12.03 cents. Similarly, for every dollar invested in equity, the company saw returns increase from 15.23 cents to 23.33 cents.

i. Acid Test Ratio = (Total Current Assets – Inventory – Prepaid Expenses) / Current Liabilities
= (139,660 – 2,251) / 59,357 = 2.31

ii. Accounts Receivable Turnover = Sales / Accounts Receivable
= 85,320 / 18,277 = 4.67

iii. Book Value per Share of Common Stock = (Stockholders' Equity – Preferred Stock) / Average Shares Outstanding (Weygandt et al., 2015)
= 71,997 / 24,000 = 2.99