Finance and Accounting of Microsoft Company - Case Study Example

Finance and Accounting Executive Summary This discussion highlights and analyses the financial positions of Microsoft Company Limited. The analyses are based on identifying a new product or service that the firm is planning to introduce in the year 2014. Apart from this, the discussion provides a comparison of the financial analysis of last three fiscal years, i.e. 2011 to 2013 along with the forecasted financial position with the new launch. Furthermore, the contribution of the new project by Microsoft has been justified based on the previous years’ financial analysis. In this context, the report reveals that Microsoft is highly efficient in some of the financial aspects whereas, some ratio reflects the weak financial position. Based on the analysis of different financial ratios, new product of Microsoft i.e. “Windows 10” is anticipated to lift the liquidity position of the company from the fiscal year 2011 to 2013 upward during fiscal year 2014. Whereas, with the application some aspects of raising funds for the operation of the new product will helps the business to improving its requirements of the capital but will affect the profitability and debt position. On the other hand, the discussion also identifies that Microsoft has been significantly affected in terms of the assets activity ratio in accordance to new launch. Conclusively, the report also provides overall findings on the best possible prospective of the “Widows 10” impact on the financial position of the company and measures to make the product more profitable for Microsoft. Financial Statements The aim of this assignment is to analyses the current and the predicted business model of Microsoft. Additionally, an assessment is conducted in order to have a better understanding about procedures based on which the company operates and make money from its businesses on a global context. In this context financial analysis, operational review and the other related aspects of Microsoft will be compared with the previous financial years to have the better understanding of the financial performance and the impact of new product or service that firm plans to introduce in 2014. Furthermore, this analysis also aims at evaluating the major influence of the underlined product to be introduced by the company during the year 2014 with last three fiscal years in order to excel its business performances with regards to the new product. In this respect, an in-depth internal and external analysis combined with the assessment of Microsoft current financial statement is made to ascertain the desired outcomes. The data largely forming the basis of this report has been extracted and gathered extensively from the last four years (2011-2013) annual reports of Microsoft. Microsoft during the financial year 2014 is planning to introduce “Windows 10” into its business (Guruocus, 2014). Based on the consideration various expenses and income incurred in launching “Windows 10” the financial statement has been predicted and shown below. Income Statements (Source: 2Microsoft, 2013). The profit and loss statement or the income statement documented above revealed the overall profitability of the company during the period of last three fiscal years i.e. 2011 to 2013. The above statement also included the forecasted profitability position with the introduction of the new product “Windows 10”. Microsoft periodically prepares its income statement, the income statement of the company includes the revenue, operating expenses, earning per share and tax figures that it has undergone during the period of time. Based on the growth trends and considering the “Windows 10” selling, the expected revenue for the year 2014 expected to increase by 0.058% over the previous fiscal year. Next aspect is the cost of goods sold, which replicates all costs that directly helps the company to generate its revenue. It was also estimated that the cost of goods sold will increase by 0.19% with the subsequent introduction of the new product. The operating expenses cost of research and development and sales and distribution will likely to increase to 0.075% and 0.11% due to additional costs of product promotion associated with the launch of “Windows 10” into the market. Moreover, Microsoft other operating income will significantly increase due to additional product line into the business. Moreover, with raising new shares into the market, it is expected that the earning per share of the Microsoft both basis and dilute will be highly increase. Balance Sheet (Source: 1Microsoft, 2013) Moreover, on the other hand balance sheet reflects the financial position of the Microsoft and brief overview of different transactions made during the year 2014 with effect from the launching of “Windows 10”. Cash and cash reserve is likely to reduce with requirement of additional cash in development of the same. Also the short term investment is predicted to increase as per the trend of the previous years. Whereas, the other current assets of company balance sheet can also be anticipated to increase or decrease with the trend as their positioning are not directly related to new product. Current assets are those values that are easily converted in the form of cash to their current obligations for example cash in hand. Fixed asset value in the balance sheet of Microsoft is the piece of property that it owes and utilizes to earn income, is also not directly related to the “Windows 10”. Liability is the obligation that Microsoft is liable to pay in the current or the future period. In order to meet the requirement of the product specification company need to raise the funds from the market so that the company has to bear extra-long term debts for the same. Whereas, the rest of the current liabilities are likely to influence in the similar trend as in the previous year and the shareholders equity will also increase with the raise the fund from additional shares. Calculation and Interpretation the Financial Ratio’s Profitability Ratio (Sources: Gurufocus, 2014; 1,2Microsoft, 2013) * Forecasted based on previous trends and assumed with the need of funding Net profit margin has significantly decreased from 2011 to 2012 i.e. 33.10% and 23.03% respectively. In the financial year 2013 with the assistance of lean business practices in controlling cost of sales and expenses net profit margin has increases to 28.08%. Furthermore, the calculation of profitability ratios also indicates that with the firm planning towards introducing new product i.e. “Windows 10” in 2014 in the short run may not be profitable due to the increase in operational cost. The return on assets ratio of Microsoft in the year 2014 has decreased compared to the year 2013. Moreover, the return on equity ratio also in the year 2014 has decreased compared to the year 2013 i.e. from 27.69% in 2013 to 24.01% in 2014. Thus, from the analysis reveals that Microsoft has witnessed fluctuating profitability ratio in the corresponding last four financial years. The evaluation of profitability ratio reflected that Microsoft having a positive financial position in terms of profitability and have a strong reputation in the market. The scenario of profitability is expected to be improve with the economy of scale as the company firstly in order to launch it product incurred high amount of cost related acquisition of further assets and funds from the market. Liquidity Ratio (Sources: 2Microsoft, 2013) * Forecasted based on previous trends and assumed with the need of funding Current ratio and quick ratio have been identified to be increase constantly for past three years i.e. from the period 2011 to 2012 and through the analysis it was predicted that the liquidity position will further strengthen with the launch of new product, “Windows 10”. However, the current ratio and quick ratio still identify to remain in very strong position as compare to the standard ratio i.e. 2.97 times and 2.91 times predicted in year 2014 respectively as compared to 2.60 times and 2.55 times respectively during the period 2011. Thus, liquidity ratio of Microsoft signifies that liquidity position in addition, to the new launch will not be affected as with increase in the liability asset position also considerably increases. This signifies that company is and will have higher prospects of meeting their short-term obligations. Moreover, it indicates that company will not face any difficulty in enduring their current obligations, Microsoft with its high liquidity position have better prospective growth in regards to “Windows 10”. Debt Ratio (Sources: Gurufocus, 2014; 1,2Microsoft, 2013) * Forecasted based on previous trends and assumed with the need of funding The financial position of Microsoft reveals that the capital structure of the company consists of mixture of both equity and debt financing in the financial year 2013. It also been estimated that with the planning for the launch of “Windows 10”, company has to undertake large capital requirement as well as physical cash to generate profitability from its new product, which will likely to change in the future debt position. The analysis of current and predicted debt ratios of Microsoft signifies that the debt to equity ratio of the company has been increased in financial year 2014 to 11.76 as compare to that of 8.85% in the year 2013. This increase in the debt to total asset arises due to the additional fund requirement for new product. Time’s interest earned or the interest coverage ratio of the Microsoft reveals that company has high solvency position. The ratio is expected to decrease in the year 2014 i.e. forecasted to 46.65 times as compare to the previous year 2013 in which it was 62.39 times. Besides, with the predicted 46.5 times ratio demonstrates the high prospects to repay company interest and debts. Furthermore, the ratio also reveals that income that Microsoft will earn with new launch and its previous products and services before interest and tax is sufficient to pay off company interest related expense. Asset Activity Ratios (Sources: 1,2Microsoft, 2013) * Forecasted based on previous trends and assumed with the need of funding The above aspects of asset activity ratios of Microsoft signifies its efficiency position during the year 2011 to 2013 and predicted effect with the “Windows 10” lunch in the year 2014. The forecasted analysis reveals that assets turnover ratio has fallen from 0.64 in 2011 to 0.47 in 2014, which was mainly due to increase of US$ 66,913 million in total assets from the financial year 2011 to 2014 and US$ 33,186 million additionally over previous year. Moreover, the activity ratio of inventory turnover has also expected to fall, as the analysis discloses that Microsoft will witness 9.04 times in respect of inventory turnover ratio in 2014. The ratio is ascertained to be significantly high during the year 2012. A lower in respect of inventory turnover ratio indicated that company may face the problem of over-stocking of “Windows 10”, as the previous version of the software has high influence over the customers. Nevertheless, the efficiency ratio of Microsoft as predicted is lower than the previous years’ figures. Bar Graphs with Trend Lines The bar graph with the trend line of the NP margin ratio reflected that the net profit margin decreases during the financial year 2012 when compared to coresponding year 2011. Moreover, an increase in the net profit in the year 2013 is observed and it is pridicted that with the launch of new product i.e. “Windows 10” profit margin ratio will further increase. With the bar graph with the trend line of the return on asset ratio, it was quite significant that the ratio is fluctuating in the past three financial year i.e. 2011 to 2013. Moreover, due to employment of aditional assets, ratio is likely to fall in the year 2014. The above figure illustrating the return to equity ratio trend the return on asset ratio reveals similar fluctuating trend which is anticipated to decrease as per the forecasted trend. The trend of the current ratio is towards the upward direction, which reflected that company has very sound liquity postion and with the strong reputation in the market it has high financial postion to meet it current obligations. Additionally, due to strong current ratio the trend of the quick ratio of the last three years is moving towards upward direction. Besides, the new product of Microsoft is likely to have high impact on the quick ratio of the company as the trend of the year 2014 is highly expected to grow further. Based on the debt to total asset trend of previous years, it is expected to move upwards in 2014 as the requirement of debts will increase with introduction of new product into market. The trend of the interest earned ratio is towards the downward direction but it is still treated to be higher, which signifies that income that the company earns with new launch and its previously held products and services before interest and tax is enough to pay off interest expense. The inventory turnover trend of the Microsoft reveal that in the financial year 2012 the company has high inventory turnover ratio as compare to 2011 and 2013but it is expected to fall in the year 2014. With respect to the total asset trend, it is determined that in the years 2011 to 2013 the trend of the ratio has seen declining trend and it was also reflected through the analysis that it will fall in the 2014. This was mainly due to the due to additional investment in the total assets from the financial year 2011 to 2013 in 2014to meet the development requirements of the new product of Microsoft. Conclusion From the above discussion and analysis, it can be ascertained that the liquidity position of the company is significantly forecasted to be strengthened with the launch of new product as compared to previous fiscal years. The financial performances of Microsoft in the last three financial years, i.e. 2011 to 2013 are identified to be satisfactory in terms of profit margin. As the company also has effective control over operating income through strategic investment strategies, but with the launch of “Windows 10” the profitability position is expected to be slightly influenced by the additional cost in the product. Furthermore, apart from being expected low level of profitability ratio, the company is having the higher prospects for growth with new products in the long run, which is pointedly justified as per the asset activity ratio of the company. As the company has significantly noticed that its new product is successful in the long run and higher prospects of growth in future, it can undertake new fund raising activities, which can prove to be profitable due to score in the debt ratios appraisal. Thus, it can be concluded that with respect to the above analysis in order to ensure stable performance in terms of its new product in the market, the company needs to place considerable focus on reducing its some operational costs and creating creativity and innovative features in “Windows 10” development for better financial performance. References Guruocus. (2014). Microsoft Corp. Retrieved from http://www.gurufocus.com/stock/MSFT 1Microsoft. (2013). Balance sheets. Retrieved from http://www.microsoft.com/investor/reports/ar13/financial-review/balance-sheets/index.html 2Microsoft. (2013).Income statements. Retrieved from http://www.microsoft.com/investor/reports/ar13/financial-review/income-statements/index.html Read More