Case: Microsoft Corporation
Microsoft is the leading developer of software in the world. To continue to be successful Microsoft must generate new products, which requires significant amounts of cash. Shown below is the current asset and current liability information from Microsoft’s June 30, 2009, balance sheet (in millions). Following the Microsoft data is the current asset and current liability information for Oracle (in millions), another major software developer.
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Microsoft Corporation As of June 30 |
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Current assets |
2009 |
2008 |
|
Cash and equivalents |
$6,076 |
$10,339 |
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Short term investments |
25,371 |
13,323 |
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Accounts receivable |
11,192 |
13,589 |
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Other |
6,641 |
5,991 |
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Total current assets |
$49,280 |
$43,242 |
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Total current liabilities |
$27,034 |
$29,886 |
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Oracle |
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Current assets |
2009 |
2008 |
|
Cash and equivalents |
$8,995 |
$8,262 |
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Short term investments |
3,629 |
2,781 |
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Receivables |
4,430 |
5,127 |
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Other current assets |
1,527 |
1,933 |
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Total current assets |
$18,581 |
$18,103 |
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Current liabilities |
$9,149 |
$10,029 |
Part 1 (Cash and Cash Equivalents)
Instructions
(a) What is the definition of a cash equivalent? Give some examples of cash equivalents. How do cash equivalents differ from other types of short term investments?
(b) Calculate (1) the current ratio and (2) working capital for each company for 2009 and discuss your results.
(c) Is it possible to have too many liquid assets?
Part 2 (Accounts Receivables)
Microsoft provided the following disclosure related to its accounts receivable.
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Allowance for Doubtful Accounts. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Activity in the allowance for doubtful accounts is as follows: |
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(in millions) |
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Year Ended June 30 |
Balance at |
Charged to costs and expenses |
Write offs |
Balance at end of period |
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2007 |
$142 |
$64 |
($89) |
$117 |
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2008 |
117 |
88 |
52 |
153 |
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2009 |
153 |
360 |
62 |
451 |
Instructions
(a) Compute Microsoft’s accounts receivable turnover ratio for 2009 and discuss your results. Microsoft had sales revenue of $58,437 million in 2009.
(b) Reconstruct the summary journal entries for 2009 based on the information in the disclosure.
(c) Briefly discuss how the accounting for bad debts affects the analysis in Part 2 (a).