Microsoft Financial Reporting Strategy
Group Case Study “Microsoft’s Financial Reporting Strategy”
Microsoft’s Financial Reporting Strategy ABSTRACT
2
This case study examines the factors explaining the difference between Microsoft’s market value of equity to book value of equity and overall financial reporting strategies employed at the firm. We analyzed financial information dating from 1985 to 1999 and 2011 annual report provided by Microsoft. We found factors explaining market value of equity are perceived risk and future cash flows. Additionally, we concluded the firm’s financial reporting practices were used to create a distorted impression of business performance to seek certain results. Factors Explaining the Difference between Market and Book Value of Equity: The difference between market value to book value of equity can be explained by the former being based on future expectations held by investors while the latter is formulated on historical data which has already impacted the firm. Finance theory explains a firm’s market value of equity is the result of investors perceiving three variables: managerial actions, economic environment, and political climate affecting a firm’s overall risk and future cash flows. While book value of equity is formulated by identifying residual interest left to stockholders after deducting liabilities which is largely attributed to the past (Ehrhardt ,2011).
Figure 1 - 1: Determinates of Stock Prices
Managerial Actions, The Economic Environment, and the Political Climate
"Perceived" Expected Future Cash Flows Figure 1 - 2: Determinates of Book Value of Equity
"Perceived" Risk
Assets - Liabilities = Stockholders Equity jklllllllkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkk
Microsoft’s Financial Reporting Strategy
3
Accounting research indicates “… factors that most affect the type of influence exercised by both book value & cash flow on the market price are a firm’s size and the speed of asset turnover. Thus, the larger the firm, the greater
Microsoft’s Financial Reporting Strategy ABSTRACT
2
This case study examines the factors explaining the difference between Microsoft’s market value of equity to book value of equity and overall financial reporting strategies employed at the firm. We analyzed financial information dating from 1985 to 1999 and 2011 annual report provided by Microsoft. We found factors explaining market value of equity are perceived risk and future cash flows. Additionally, we concluded the firm’s financial reporting practices were used to create a distorted impression of business performance to seek certain results. Factors Explaining the Difference between Market and Book Value of Equity: The difference between market value to book value of equity can be explained by the former being based on future expectations held by investors while the latter is formulated on historical data which has already impacted the firm. Finance theory explains a firm’s market value of equity is the result of investors perceiving three variables: managerial actions, economic environment, and political climate affecting a firm’s overall risk and future cash flows. While book value of equity is formulated by identifying residual interest left to stockholders after deducting liabilities which is largely attributed to the past (Ehrhardt ,2011).
Figure 1 - 1: Determinates of Stock Prices
Managerial Actions, The Economic Environment, and the Political Climate
"Perceived" Expected Future Cash Flows Figure 1 - 2: Determinates of Book Value of Equity
"Perceived" Risk
Assets - Liabilities = Stockholders Equity jklllllllkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkkk
Microsoft’s Financial Reporting Strategy
3
Accounting research indicates “… factors that most affect the type of influence exercised by both book value & cash flow on the market price are a firm’s size and the speed of asset turnover. Thus, the larger the firm, the greater