Chapter 2 Blog- “Microsoft Sales Rise 25% to $16 Billion”

Link: http://money.cnn.com/2010/10/28/technology/microsoft_earnings/index.htm

Summary:

In this article, by observing Microsoft’s first-quarter sales, we can say Microsoft is prospering.  Thanks to the recent releases of Office 2010, Windows 7, and Xbox 360, Microsoft have reached sales around16.2 billion which is a 25% increase in profits since last year and had a net income that increased 51%.  Sales of around $1.5 billion came from the new release of Windows 7 last year but had to be excluded to recognize the revenue and follow the GAAP of revenue recognition criteria.  Revenue comparing to last year, rose 15% thanks to the new release of Microsoft Office 2010.  Sales of the new Xbox 360 and its PCs are growing and out competing other companies in sales of their new electronic devices.  Microsoft online services including msn and search engine Bing are making a lot of revenue, increasing services by 8% comparing to last year.  However, Apple has increasing sales and for the first time, Apple had sales that topped Microsoft’s sales.  As you can see, we can expect a bit of rivalry between the two companies, and they will start competing each other for sales.

Connection:

In terms of accounting, this article relates mostly to revenue and how the revenue recognition criteria is applied in situations like this.  When sales are made in an accounting period, Microsoft has to record all the sales collected in order for the revenue to be recognized in the same period.  This will also bring up another GAAP mentioned in chapter 2, which is the matching concept.  Whenever there is revenue gained, there must be expenses that are related to the revenue.  For example, advertising may be known as an expense because advertising helps Microsoft bring its products to the public and show the world what goods they have to meet the demands of the wants and needs of the people.  These expenses must be matched by being recorded in the same accounting period as the revenue gained.  When the company has to record these transactions, such as the revenue gained, the business has to record cash / accounts receivable as a debit and record sales as a credit in the journal.  If the company is recording the entries for its expenses such as advertising expense, the company will put advertising expense as a debit and the cash / accounts payable will be recorded as a credit in the accounting journal.  In the article, it states that Microsoft received $16.1 billion worth of sales and as a result of these high sales, Microsoft received $5.41 billion of net income.  With these two pieces of information, we can calculate the profit margin ratio by dividing net income by the revenue produced by the profit.  As a result of the calculation, the profit margin ratio for Microsoft’s earnings is 33.6%.  In other words, this means that Microsoft earned as profit, 33.6% of the amount of its revenues.  As a result of high profit in Microsoft, the net income of the income statement will rise significantly and this will cause the shareholders’ equity at the end of the accounting period to increase.

Reflection:

After reading this article, I realized what techniques are required to used to attract more consumers to buy one’s goods or services.  In the past few years, just by examining Microsoft’s financial statements, we can say that Microsoft has been very successful in business.  Microsoft has made brought many advanced technological changes to our world.  Its PC, Xbox 360, Microsoft Office, and Windows 7 have all reached top sellers in the past few years with little competition.  However recently Apple, a few days ago, just reached an all-time sales record of $20 billion, which is even greater than Microsoft’s sales.  I strongly believe that both businesses in the future will be rivals to strive for success in business by competing in their sales.  Now it all depends which company has better marketing skills by seeing who attracts more consumers.  I believe that successful advertising, the media, and public speaking are the main factors I would advise them to take in consideration, if they wish to continue their successful progress in the future.

Chapter 1-"New Accounting Rules Ruffle the Leasing Market"

Link: http://www.nytimes.com/2010/06/23/realestate/commercial/23fasb.html?_r=1&ref=financial_accounting_standards_board

Summary:

The Financial Accounting Standards Board, which sets American accounting guidelines, has been working with International Accounting Standards Board to combine its generally accepted accounting principles with international standards.  The Financial Accounting Standards Board and the International Accounting Standards Board have come up with a new accounting standard that is planned to be finished next year and will be in effect in 2013.  The new standard requires companies to book leases as assets and liabilities on the business balance sheets.  Now, companies have to put around $1.3 trillion in leases of assets and liabilities on their balance sheets.  In the year 2013, all companies will record much higher rent as part of their liabilities on their balance sheets.  They’re balance sheets are going to be a huge liability that makes it looks ugly.  This could have a serious impact on weakening companies because with such a huge liability on their balance sheets, other investors will become uninterested working with those companies.  Commercial banks will be struck in 2013, especially if they are still recovering from the recent recession.  Many companies are strategizing of how to counteract this standard.  Many companies are buying out their offices and property in order to avoid the problem of recording leases on their balance sheets.  Some companies may shrink the number of years on their lease because this will decrease the size of the liability so the balance sheets won’t give the companies a poor reputation.  Some industries decided to sign contingent rents instead of signing leases.  The costs of contingent rent depend on the percentage of the sales of the company.  This method also helps the company avoid the problem of recording leases on balance sheets.  Starting in 2013 companies will have to deal with the problem of having to record rent as a major liability but this debt will reduce over the terms of the lease.

Connection:

This article is connected to the concepts of which organizations are responsible for the development of accounting standards.  In chapter 1, it discusses that Canadian accounting standards are being converged into international accounting standards in January 2006.  In this article it reports that the Financial Accounting Standards Board, the organization who sets accounting standards for American corporations have decided to merge its accounting standards with the International Accounting Standards Board at the end of this year.  The two boards combined to come up with a new standard, which requires all companies in the United States to record leases on their business balance sheets.  Balance sheet brings up another connection with chapter 1.  Balance sheets are heavily effected in this article because companies are required to record their rent expense as a major liability instead of treated as an expense in the income statement and they will record their right to use the land as an asset.  This will affect the reputation of the business balance sheet because leases are huge liabilities that will be recorded on the balance sheet.  Other companies who may want to work with this company but they see that this company has a large amount of liabilities and this factor may affect their decision of working with that company or not.  Companies may want to borrow some money from the bank, for expanding their business.  Banks will look at the companies’ balance sheets and they will see a huge liability on the balance sheet.  Banks may decide not to lend any money to business after seeing their huge amount of liabilities on the balance sheets.  This new accounting standard will have a huge impact on future companies in Canada and the United States because the reputation of the company will depend on the efficiency of their balance sheet.

Reflection:

In my opinion, I think this is an unfair accounting standard for the companies because many companies will end up having to pay higher rent than usual, especially since the United States have not completely recovered from the recent worldwide economic downfall.  I think this new accounting standard may ruin the reputation of many businesses in the United States because since now companies are required to record leases on their balance sheets; the business balance sheet will have to carry more liabilities which do not give external users of financial statements a good reputation.  In my opinion, I think the best solution to counteract this accounting standard is to buy the offices, land, and property that you are using so companies can avoid the problem of having to record leases on the business balance sheet.  However, if some companies do not have enough cash to buy the land they are using, I suggest they should sign short term leases because long term leases are very costly.  I recommend that businesses should not rely on renewing leases because renewing can be more costly than long term leases because companies have to pay the original terms of lease plus the renewal of the lease.  I think this accounting standard should have been developed when the economy has been prospering for a long period of time in the United States because even though, the company has a very high amount of liabilities, the company will gain lots of profit increasing it’s cash value which means it will also increase the asset value of the business balance sheet and this will help even out the huge amount of liabilities, but overall I think the new accounting standard should not have been developed in the first place because I think it’s making the businesses look bad with its huge amount of liabilities.  In the future, businesses may have a tough time dealing with the leases on their liabilities.  Weakened businesses may end up having a higher liability value than their asset value since their asset value isn’t that high.  I think the accounting boards should negotiate this idea a bit more to be sure this affect will not cause disaster in the world of business.