The Performance of Microsoft Corporation and Oracle Corporation - Essay Example

?Running Head: ABBREVIATED OF YOUR CHOICE (all caps) and Section # of Accounting for Decision Making The performance of Microsoft Corporation and Oracle Corporation for the years 2011 and 2012 based on the respective financial statements has been analyzed in this report. Microsoft Corporation ends the accounting year on June 30th whereas Oracle ends it on the May 31st. However, this is not of due importance, the respective companies have been consistent with this over the years and this will not affect our analysis. Revenues The revenues of Microsoft rose from $69,943 million in 2011 to $73,723.0 million in 2012, which is a rise of approximately 5.40 percent (3780/69943 *100). On the other hand the revenues of Oracle rose from $35,622 million in 2011 to $37,121.0 million in 2012, which is a rise of 4.21 percent (1499/ 35622 *100). Therefore, Microsoft has been able to increase its revenue by a greater percentage. Cost of Goods Sold Looking at the cost of goods sold, we will be able to better able to comment on the performance as a sales figure alone does not mean anything if not compared with the costs incurred and the resulting profits. The cost of goods sold for Microsoft for the year 2011 were $15,577 million compared to the costs in 2012 which were $17,530 million. During the same years, the cost of goods sold for Oracle reduced from $8,398 million to $7858 million. Here we can clearly see that with rising sales, the costs rose for Microsoft while Oracle was able to reduce the cost figure despite the increasing revenues. This clearly indicates that Oracle was trying to curb its cost in order to obtain a better profit to sales ratio. Between the years 2011 the profit to sales ratio reduced for Microsoft, even though the absolute figures suggest an increasing trend. While the gross profit percentage for Oracle rose from 76.4 % (27224 / 35622 *100) to 78.8 % (29263 / 27224 * 100). Upon reviewing the financial statements of both the large players, Microsoft and Oracle, the overall net income clearly explains to us that Microsoft is obviously generating a greater revenue, however if seen in the last 2 years, it’s net income has declined by about 27%, in comparison to its rise a year earlier. Oracle, on the other hand has a net income of almost half as of with Microsoft, but has shown a growth of 17% which shows the company is progressing in the right direction. Account Receivables According to the balance sheets, the accounts receivable was $14,987 million in 2011 and $15780 million in 2012. The percentage of debtors compared to total revenues were 21.42 % (14987/69943 * 100) in 2011 and again 21.40 % (15780 /73723 *100) in 2012. On the other hand, Oracle, had accounts receivable of $6,628 million in 2011 and $6377 million in 2012. This as a percentage of total revenues was 18.6 % (6628/35622 *100) in 2011 and came down to 17.18 % (6377/37121 *100) in 2012. This indicates a tightening policy and Oracle started collecting cash quickly. Hence, Oracle has shown a positive trend making a good impact on its current assets, and in case of liquidation, it receives cash faster and might be offering cash discounts in order to speedup the collection. And as for Microsoft has been consistent with its debtors policy and has not made much effort in reducing the debtors collection period. Account Payables The accounts payable of Microsoft for 2011 were $4197 million and $4175 million in 2012. For Oracle, the creditors figure was $494 million in 2011 and $438 million in 2012. The accounts payable for Oracle was significantly lower. Also calculated as a percentage of the total costs the accounts payable for Oracle were significantly lower. This indicates that Oracle pays of its creditors earlier. This might be possible so that Oracle can avail cash discounts and not keep long credit term period. Inventory Looking at the past years balance sheet, it can be concluded that both of the firms were successful in reducing their inventory level over the past two years. Microsoft reduced their inventory level from $1,372 million in 2011 to $1,137 million in 2012. This shows a decrease in inventory level of 17% over the year. On the other hand, Oracle was able to reduce the inventory level by 48% which is almost the half from the previous year. The company’s inventory level declined from $303 million in 2011 to $158 million in 2012. The above comparison of inventory level shows that Oracle has been able to reduce its cost of holding inventory such as cost to insure, track and storage cost. An inventory shows the firm’s investment tied up in form of stock until the good is sold. It also indicates that Oracle would have a better quick ratio which is a better measure of liquidity than current ratio. This ratio excludes inventory from current ratio as it is difficult for firms to convert inventory into stock. Also, Oracle might have a better inventory management system as they might be using just-in-time method for their inventory, where company receives inventory only when needed or they might have a better a sales forecast in comparison to Microsoft. The management can use this information or comparison to improve its performance. It exactly will know that how much period it should allow its debtors and the amount of inventory it should purchase, so as to reduce costs. It may also collect accounts receivable faster and pay off its creditors earlier to avail cash discounts and reduce costs further. Also, it may find innovative ideas to increase revenues. And together by maximizing revenues and minimizing costs, the company can be more profitable. Conclusion Looking at the above financial statement analysis, it can be concluded that Oracle has been better performing in comparison to Microsoft. The numbers itself are not the best indicator for which firm is better but when looked at the percentage of increase and decrease in revenue, cost of good sold, accounts receivable, accounts payable and inventory level, it could be concluded that Oracle is a rising firm who has been improving over the past two financial years compared to Microsoft. References Book Fridson, M. (1995). Financial statement analysis. New York: Wiley. Harrison, W., and Horngren, C. (2001). Financial accounting. Upper Saddle River, NJ: Prentice Hall. Hilton, R. (1994). Managerial accounting. New York: McGraw-Hill. Warren, C., and Reeve, J., et al. (2005). Financial & managerial accounting. Mason, Ohio: Thomson/South-Western. Website Businessweek (2013). MICROSOFT CORP (MSFT:NASDAQ GS): Financial Statements - Businessweek. [online] Retrieved from: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=MSFT [Accessed: 4 May 2013]. Businessweek (2013). ORACLE CORP (ORCL:NASDAQ GS): Financial Statements - Businessweek. [online] Retrieved from: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=ORCL [Accessed: 4 May 2013]. Microsoft (2012). Microsoft 2012 Annual Report. [online] Retrieved from: http://www.microsoft.com/investor/reports/ar12/index.html [Accessed: 4 May 2013]. Oracle (2013). Oracle Annual Report 2011-2012. [online] Retrieved from: http://www.oracle.com/us/industries/financial-services/annual-report-2011-2012-1713441.pdf [Accessed: 4 May 2013]. Reuters (2013). Oracle Corp (ORCL.OQ) Quote| Reuters.com. [online] Retrieved from: http://www.reuters.com/finance/stocks/overview?symbol=ORCL.OQ [Accessed: 4 May 2013]. Reuters (2013). Microsoft Corp (MSFT.OQ) Quote| Reuters.com. [online] Retrieved from: http://www.reuters.com/finance/stocks/overview?symbol=MSFT.OQ [Accessed: 4 May 2013]. Read More