Financial Management of Theory and Practice - MyAssignmenthelp.com

Question: Discuss about the Financial Management of Theory and Practice. Answer: Analysis of the Income Statement In order to evaluate the common size income statement of Microsoft for last three years in order to report on change in net income due to change in expenses there is need to carry out the trend analysis. Trend analyses are of two types, horizontal trend analysis and vertical trend analysis. Below are vertical and horizontal trend analyses (Horngren, 2012): INCOME STATEMENT Particulars 2015-06 2016-06 2017-06 USD in millions except per share data Revenue $ 93,580.00 $ 85,320.00 $ 89,950.00 Cost of revenue $ 33,038.00 $ 32,780.00 $ 34,261.00 Gross profit $ 60,542.00 $ 52,540.00 $ 55,689.00 Operating expenses Research and development $ 12,046.00 $ 11,988.00 $ 13,037.00 Sales, General and administrative $ 20,324.00 $ 19,260.00 $ 20,020.00 Restructuring, merger and acquisition Other operating expenses $ 10,011.00 $ 1,110.00 $ 306.00 Total operating expenses $ 42,381.00 $ 32,358.00 $ 33,363.00 Operating income $ 18,161.00 $ 20,182.00 $ 22,326.00 Interest Expense $ 781.00 $ 1,243.00 $ 2,222.00 Other income (expense) $ 1,127.00 $ 812.00 $ 3,045.00 Income before taxes $ 18,507.00 $ 19,751.00 $ 23,149.00 Provision for income taxes $ 6,314.00 $ 2,953.00 $ 1,945.00 Net income $ 12,193.00 $ 16,798.00 $ 21,204.00 (Annual Report, 2016 and 2017) INCOME STATEMENT (Vertical Analysis) Particulars 2015-06 2016-06 2017-06 USD in millions except per share data Revenue 100.00% 100.00% 100.00% Cost of revenue 35.30% 38.42% 38.09% Gross profit 64.70% 61.58% 61.91% Operating expenses Research and development 12.87% 14.05% 14.49% Sales, General and administrative 21.72% 22.57% 22.26% Restructuring, merger and acquisition 0.00% 0.00% 0.00% Other operating expenses 10.70% 1.30% 0.34% Total operating expenses 45.29% 37.93% 37.09% Operating income 19.41% 23.65% 24.82% Interest Expense 0.83% 1.46% 2.47% Other income (expense) 1.20% 0.95% 3.39% Income before taxes 19.78% 23.15% 25.74% Provision for income taxes 6.75% 3.46% 2.16% Net income 13.03% 19.69% 23.57% INCOME STATEMENT Horizontal Analysis) Particulars 2015-06 2016-06 2017-06 USD in millions except per share data Revenue 100.00% 91.17% 96.12% Cost of revenue 100.00% 99.22% 103.70% Gross profit 100.00% 86.78% 91.98% Operating expenses Research and development 100.00% 99.52% 108.23% Sales, General and administrative 100.00% 94.76% 98.50% Restructuring, merger and acquisition Other operating expenses 100.00% 11.09% 3.06% Total operating expenses 100.00% 76.35% 78.72% Operating income 100.00% 111.13% 122.93% Interest Expense 100.00% 159.15% 284.51% Other income (expense) 100.00% 72.05% 270.19% Income before taxes 100.00% 106.72% 125.08% Provision for income taxes 100.00% 46.77% 30.80% Net income 100.00% 137.77% 173.90% (Annual Report, 2016 and 2017) Observations for the income Statement Analysis It has been noted that there has been constant increase in cost of good gold as it was 35.30 % of the net sales in year 2015 and increased to 38.42% to net sales in year 2016. So it can be said that increase in percentage of cost of goods sold as against the sales has decreased the net income of the company. Selling and general expenses together termed as operating expenses has decreased a lot in year 2016 as compared to year 2015. In year 2015 operating expenses was 45.29% that was reduced to 37.93 % in year 2016 and 37.09% in year 2017. So it can be said that the decrease in operating expenses has lead to some increase in net income of the company. Depreciation refers to notional expense as it does not lead to cash flow of resources but it impacts the net income of company. There has been increase in depreciation amount year by year that leads to decrease in net income of the company. Taxes are the expenses that are paid to the government and it decreases the net income of the company. In year 2016 and 2017 there has been decrease in tax expenses as compared to year 2015 which leads to increase in net income of the Microsoft in both the years. There has been constant decrease in net income of the company (Brigham Ehrhardt, 2007) Analysis of the Balance Sheet Same horizontal and vertical trend analysis of the balance sheet has been carried down below and various observations are made. BALANCE SHEET Particulars 2015-06 2016-06 2017-06 USD in millions except per share data Assets Current assets Cash Cash and cash equivalents $ 5,595.00 $ 6,510.00 $ 7,663.00 Short-term investments $ 90,931.00 $ 106,730.00 $ 125,318.00 Total cash $ 96,526.00 $ 113,240.00 $ 132,981.00 Receivables $ 17,908.00 $ 18,277.00 $ 19,792.00 Inventories $ 2,902.00 $ 2,251.00 $ 2,181.00 Deferred income taxes $ 1,915.00 Other current assets $ 5,461.00 $ 5,892.00 $ 4,897.00 Total current assets $ 124,712.00 $ 139,660.00 $ 159,851.00 Non-current assets Property, plant and equipment Gross property, plant and equipment $ 32,337.00 $ 38,156.00 $ 47,913.00 Accumulated Depreciation -$ 17,606.00 -$ 19,800.00 -$ 24,179.00 Net property, plant and equipment $ 14,731.00 $ 18,356.00 $ 23,734.00 Equity and other investments $ 12,053.00 $ 10,431.00 $ 6,023.00 Goodwill $ 16,939.00 $ 17,872.00 $ 35,122.00 Intangible assets $ 4,835.00 $ 3,733.00 $ 10,106.00 Other long-term assets $ 2,953.00 $ 3,642.00 $ 6,250.00 Total non-current assets $ 51,511.00 $ 54,034.00 $ 81,235.00 Total assets $ 176,223.00 $ 193,694.00 $ 241,086.00 Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt $ 7,484.00 $ 12,904.00 $ 10,121.00 Accounts payable $ 6,591.00 $ 6,898.00 $ 7,390.00 Taxes payable $ 606.00 $ 580.00 $ 718.00 Accrued liabilities $ 5,096.00 $ 5,264.00 $ 5,819.00 Deferred revenues $ 23,223.00 $ 27,468.00 $ 34,102.00 Other current liabilities $ 6,858.00 $ 6,243.00 $ 6,377.00 Total current liabilities $ 49,858.00 $ 59,357.00 $ 64,527.00 Non-current liabilities Long-term debt $ 27,808.00 $ 40,783.00 $ 76,073.00 Deferred taxes liabilities $ 2,835.00 $ 1,476.00 $ 531.00 Deferred revenues $ 2,095.00 $ 6,441.00 $ 10,377.00 Other long-term liabilities $ 13,544.00 $ 13,640.00 $ 17,184.00 Total non-current liabilities $ 46,282.00 $ 62,340.00 $ 104,165.00 Total liabilities $ 96,140.00 $ 121,697.00 $ 168,692.00 Stockholders' equity Common stock $ 68,465.00 $ 68,178.00 $ 69,315.00 Retained earnings $ 9,096.00 $ 2,282.00 $ 2,648.00 Accumulated other comprehensive income $ 2,522.00 $ 1,537.00 $ 431.00 Total stockholders' equity $ 80,083.00 $ 71,997.00 $ 72,394.00 Total liabilities and stockholders' equity $ 176,223.00 $ 193,694.00 $ 241,086.00 BALANCE SHEET (Vertical Analysis) Particulars 2015-06 2016-06 2017-06 USD in millions except per share data Assets Current assets Cash Cash and cash equivalents 3.17% 3.36% 3.18% Short-term investments 51.60% 55.10% 51.98% Total cash 54.77% 58.46% 55.16% Receivables 10.16% 9.44% 8.21% Inventories 1.65% 1.16% 0.90% Deferred income taxes 1.09% 0.00% 0.00% Other current assets 3.10% 3.04% 2.03% Total current assets 70.77% 72.10% 66.30% Non-current assets Property, plant and equipment Gross property, plant and equipment 18.35% 19.70% 19.87% Accumulated Depreciation -9.99% -10.22% -10.03% Net property, plant and equipment 8.36% 9.48% 9.84% Equity and other investments 6.84% 5.39% 2.50% Goodwill 9.61% 9.23% 14.57% Intangible assets 2.74% 1.93% 4.19% Other long-term assets 1.68% 1.88% 2.59% Total non-current assets 29.23% 27.90% 33.70% Total assets 100.00% 100.00% 100.00% Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt 4.25% 6.66% 4.20% Accounts payable 3.74% 3.56% 3.07% Taxes payable 0.34% 0.30% 0.30% Accrued liabilities 2.89% 2.72% 2.41% Deferred revenues 13.18% 14.18% 14.15% Other current liabilities 3.89% 3.22% 2.65% Total current liabilities 28.29% 30.64% 26.77% Non-current liabilities Long-term debt 15.78% 21.06% 31.55% Deferred taxes liabilities 1.61% 0.76% 0.22% Deferred revenues 1.19% 3.33% 4.30% Other long-term liabilities 7.69% 7.04% 7.13% Total non-current liabilities 26.26% 32.18% 43.21% Total liabilities 54.56% 62.83% 69.97% Stockholders' equity Common stock 38.85% 35.20% 28.75% Retained earnings 5.16% 1.18% 1.10% Accumulated other comprehensive income 1.43% 0.79% 0.18% Total stockholders' equity 45.44% 37.17% 30.03% Total liabilities and stockholders' equity 100.00% 100.00% 100.00% (Annual Report, 2016 and 2017) BALANCE SHEET (Horizontal Analysis) Particulars 2015-06 2016-06 2017-06 USD in millions except per share data Assets Current assets Cash Cash and cash equivalents 100.00% 116.35% 136.96% Short-term investments 100.00% 117.37% 137.82% Total cash 100.00% 117.32% 137.77% Receivables 100.00% 102.06% 110.52% Inventories 100.00% 77.57% 75.16% Deferred income taxes 100.00% 0.00% 0.00% Other current assets 100.00% 107.89% 89.67% Total current assets 100.00% 111.99% 128.18% Non-current assets Property, plant and equipment Gross property, plant and equipment 100.00% 117.99% 148.17% Accumulated Depreciation 100.00% 112.46% 137.33% Net property, plant and equipment 100.00% 124.61% 161.12% Equity and other investments 100.00% 86.54% 49.97% Goodwill 100.00% 105.51% 207.34% Intangible assets 100.00% 77.21% 209.02% Other long-term assets 100.00% 123.33% 211.65% Total non-current assets 100.00% 104.90% 157.70% Total assets 100.00% 109.91% 136.81% Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt 100.00% 172.42% 135.24% Accounts payable 100.00% 104.66% 112.12% Taxes payable 100.00% 95.71% 118.48% Accrued liabilities 100.00% 103.30% 114.19% Deferred revenues 100.00% 118.28% 146.85% Other current liabilities 100.00% 91.03% 92.99% Total current liabilities 100.00% 119.05% 129.42% Non-current liabilities Long-term debt 100.00% 146.66% 273.57% Deferred taxes liabilities 100.00% 52.06% 18.73% Deferred revenues 100.00% 307.45% 495.32% Other long-term liabilities 100.00% 100.71% 126.88% Total non-current liabilities 100.00% 134.70% 225.07% Total liabilities 100.00% 126.58% 175.46% Stockholders' equity Common stock 100.00% 99.58% 101.24% Retained earnings 100.00% 25.09% 29.11% Accumulated other comprehensive income 100.00% 60.94% 17.09% Total stockholders' equity 100.00% 89.90% 90.40% Total liabilities and stockholders' equity 100.00% 109.91% 136.81% (Annual Report, 2016 and 2017) Observation made on the balance sheet changes: The cash and cash equivalents ranges 3% to 4% of the total assets in all the last three years The inventory ranges 0.90% to 2.00% of the total assets in all the last three years The account receivable ranges 8.00 % to 11.00 % of the total assets in all the last three years The long term debt ranges 25.00 % to 45.00 % of the total Liabilities and Shareholder Equity in all the last three years. It can be better seen in vertical analysis of balance sheet The equity ranges 28.00 % to 40.00 % of the total Liabilities and Shareholder Equity in all the last three years The retained earnings range 1.00 % to 5.00 % of the total Liabilities and Shareholder Equity in all the last three years (Besley Brigham, 2014) References Annual Report. 2016. Microsoft Corporation. Retrieved 5 December 2017, from https://www.microsoft.com/en-us/Investor/annual-reports.aspx Annual Report. 2017. Microsoft Corporation. Retrieved 5 December 2017, from https://www.microsoft.com/en-us/Investor/annual-reports.aspx Besley, S. Brigham, E. 2014. Principles of Finance. Cengage Learning. Brigham, E. Ehrhardt, M. 2007. Financial Management: Theory Practice. Cengage Learning. Horngren, C. 2012. Financial Accounting. Pearson Higher Education AU.