Essay: Accounting Function in Microsoft Corporation Analysis

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[. . .] To begin with, it would be important to determine the extent to which Microsoft Corporation is making use of long-term debt. This we could determine by comparing its debt ratio with that of one of its key competitors, i.e. Oracle, IBM, or Apple.

The debt ratio, according to Albrecht, Stice, and Stice (2007, pp. 476), is “a measure of leverage, computed by dividing total liabilities by total assets.”

Company

Debt Ratio in ‘000’

Microsoft Corporation

168,692/241,086 = 0.70

IBM

99,224/117,470 = 0.84

The debt ratio in this case indicates that both companies have more assets than debt. The debt ratio figure of Microsoft indicates that the company has 70% of its assets financed by creditors, which is fairly high even for a tech company like Microsoft. This is indicative of significant leverage, and hence greater risk. However, it should be noted that Microsoft has a lower debt ratio than IBM. This effectively means that it could find easier to borrow than IBM.

To determine the soundness of the company’s working capital management, we could take into consideration its current ratio. This would provide us with an estimation of how set the company is when it comes to the settlement of its financial obligations in the short-term. The current ratio is derived by dividing an entity’s current assets with its current liabilities (Drury, 2008).

Company

Current ratio in ‘000’

Microsoft Corporation

159,851/64,527 = 2.48

IBM

43,888/36,275 = 1.21

In both scenarios, the current ratios are greater than one. This effectively means that both companies would be able to settle their short-term obligations if they fell due at that moment. However, the greater current ratio in the case of Microsoft means it is in better placed to settle its short-term obligations than IBM.

To obtain a sneak preview of the company’s profitability, we could take into consideration its return on assets ratio, relative to that of its competitor. This ratio, according to Porter and Norton (2016), could be computed by dividing an entity’s net income with its total assets.

Company

Return on Assets Ratio in ‘000’

Microsoft Corporation

21,204/241,086 = 0.09

IBM

11,872/117,470 = 0.10

In this case, it is clear that IBM’s assets are being used more effectively in the generation of profits, than those of Microsoft. This is more so the case given the latter’s lower return on equity ratio. Microsoft needs to find a way of making better use of its assets in income generation. A chronically low ROA is indicative of an incompetent or inefficient managerial team (Tirole, 2010).

Yet another important ratio we could take into consideration is the debt to equity ratio. This particular ratio, as Bierman (2010, pp. 272) points out “gives an indication of an enterprise’s ability to sustain losses without jeopardizing the interests of creditors.” It is computed by dividing the company’s total debt with its total equity.

Company

Debt to Equity Ratio in ‘000’

Microsoft Corporation

168,692/72,394 = 2.33

IBM

99,224/18,246 = 5.44

It is clear from the above that IBM has been more aggressive in the utilization of debt to finance its growth. As a consequence of the greater interest expense, the company is therefore at risk of more volatile earnings than Microsoft.

References

Albrecht, W.A, Stice, E.K & Stice, J.D 2007, Financial Accounting, 10th edn, Thomson Higher Education, Mason, OH.

Bierman, H 2010, An Introduction to Accounting and Managerial Finance: A Merger of Equals, World Scientific, New Jersey.

Drury, C 2008, Management and Cost Accounting, 7th edn, Cengage Learning, Mason, OH.

Microsoft Corporation 2017, Governance Framework, viewed 1 October 2017, https://www.microsoft.com/en-us/Investor/corporate-governance/framework.aspx

Microsoft Corporation 2017, Annual Report 2016, viewed 1 October 2017, https://www.microsoft.com/investor/reports/ar16/index.html

Porter, G.A & Norton, C.L 2016, Financial Accounting: The Impact on Decision Makers, 10th edn, Cengage Learning, Boston, MA.

Tirole, J 2010, The Theory… [END OF PREVIEW]

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