Analysis of Microsoft's Financial Performance and Strategic Decisions

This report provides a comprehensive analysis of Microsoft's financial performance. It examines the role of financial information in business risk assessment and decision-making, including factors driving decisions and the significance of financial factors. The report delves into how financial statements, particularly the balance sheet, income statement, and cash flow statement, aid in business decision-making, comparing accrual and cash flow accounting methods. It further analyzes sources of finance, capital expenditure decisions, and the impact of different ownership structures on financial performance. The study also evaluates corporate governance, legal and regulatory environments, stakeholder interests, and performance measures like ROCE and EPS. The report concludes by differentiating between business ethics, governance, and accounting ethics as controls on business accountability, providing a thorough understanding of Microsoft's financial strategies and their implications.

Running head: FINANCIAL PERFORMANCE OF MICROSOFT
Financial Performance of Microsoft
Name of the Student
Name of the University
Authors Note

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Executive summery
The study is based on the financial performance of a company which is one of tech giants
in the world. The aim of the study is to explain how Microsoft take decision based on different
parameters. The study, mainly explain about the different types of risk, financial statement,
different types of ownership, corporate governance, legal, regulatory bodies and the
characteristics of the above factors. The study, explain how the financial as well as the
management decision influences by the above factors. In the end of the study it concludes that
how Microsoft take all the decision by incorporating the above factors.

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Table of Contents
Introduction:....................................................................................................................................4
1. Role of financial information and analysis in business risk assessment and decision-making:. .4
1. 1 factors that guide and drive decision-making in business:...................................................5
1. 2 Significance of financial factors in business decision making.............................................5
1. 3...............................................................................................................................................6
The following are the important characteristics of business risk that impact on the business
decision-.......................................................................................................................................6
2. How financial statements and their structure aids in business decision making........................7
2. 1 Compare the accrual and cash flow approaches to accounting and financial reporting and
the implications of each for business decision making...............................................................8
2. 2 evaluate the structure and content of final accounts and their uses for business decision
making.......................................................................................................................................10
2. 3 Interpretation of financial information...............................................................................10
2. 4 Differentiate between financial decision relating to capital expenditure and revenue
expenditure................................................................................................................................11
3. Analyse the sources of finance and how businesses finance fixed assets and working capital
...................................................................................................................................................11
3.1 Evaluate the sources of long-term financing and working capital financing for businesses
...................................................................................................................................................12

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3.2 Examine critically the techniques needed to manage cash flow and the key business
decisions on which cash flow impacts.......................................................................................13
3.3 Evaluate methods for making capital expenditure or investment decisions and the criteria
that may be applied in the evaluation........................................................................................14
4. Evaluate how different ownership structures impact on financial performance.......................15
4.1 Critically analyse the corporate governance, legal and regulatory environments of different
business ownership structures....................................................................................................16
4.2 Compare and contrast stakeholder interests of owners and managers in decision making. 17
4.3 Evaluate the significance of ROCE, EPS and other overall performance measures for the
long-term sustainability of businesses.......................................................................................17
4.4 Differentiate between business ethics, governance and accounting ethics as controls on
business accountability..............................................................................................................18
5. Conclusion:................................................................................................................................18
6. References..................................................................................................................................19

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Introduction:
Financial decision is the critical part of a business organisation. The following study has
explained the importance of business decision in an organisation. The analysis has been
undertaken regarding the Microsoft company for study purpose. The study has explained about
the different risk and their characteristics and how its impact the business decision-making. It
discusses about the importance of financial statement and its impact on management. This
explain how the capital expenditure and revenue expenditure are two different aspects and the
source of finance. Inside the report different ownership structure and the how these influences
the financial position also given. It evaluates about corporate governance and how, it is different
from the legal and regulatory environment. During the study some important information has
used which is sourced from the financial year report of Microsoft.
1. Role of financial information and analysis in business risk assessment and decision-
making:
A business organisation is exposed to several business risks during the course of its
normal business operation and the decision relates to the company. The intension of the company
is to protect the business operation, shareholder fund, cash flow and liquidity position from the
unfavourable market fluctuation (Batkovskiy 2016). These aims of the company can be satisfied
through a good management decision. The management decision is more over base on the
financial information of the business.
In Microsoft the role of financial information is very important as it is relating to
decision-making process. Thus, the financial information Microsoft addresses about the
Company’s finance risks includes credit and debtors, liquidity, currency and interest, as well as

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capital management risk so it is enhancing the management to adopt an appropriate strategy
based on these information.
1. 1 factors that guide and drive decision-making in business:
There are number of factors, which influence and drive the decision-making in Microsoft.
The major factors include ROI, image and brand of Microsoft which enhance the sales of the
company, effective resource planning and opportunity cost are the factors guide the decision-
making process in Microsoft. Apart from this there some environmental factors, which drive the
decision-making in a business are competitors, advancement of technology, change in taste and
preferences, economic environment and many more (Gitman, Juchau, and Flanagan 2015).
1. 2 Significance of financial factors in business decision making
Financial factor is the scorecard of a business and has a major role in the business
decision making. The following are the significance of the financial factor
Profit and loss are the financial factor, which admits about the cash generating ability of a
company and this has no complexity in understanding. Profit and loss tells about expanses the
company have bearded from various financial models like revenue, expanses, cost of goods and
more (Furlanetto, Ravazzolo and Sarferaz 2017). This information helps Microsoft to take the
decision for reducing the expanses.
Cash is another critical financial information tools that have a significant role in business
decision making. This inform the company about how much cash will need to meet the financial
obligation of a company and when it is going to require and the source from where it will raise
(Otley and Emmanuel 2013).

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Asset and liability of a company uses the information from all financial models like
income statement and cash flow statement. This also perceived as the “statement of financial
position”.
Apart from the above, there also an important financial factor is financial ratios. Financial
ratios like liquidity, profitability, debtors’ turnover ratio. These key ratios act as an indicator for
Microsoft as each have a standard benchmark ratio. This, provide information about the
Microsoft’s financial condition along with the operational efficiency of the company.
1. 3 characteristics of business risks that impact on financial and business decision
The following are the important characteristics of business risk that impact on the
business decision-
 Uncertainty arises in the business environment when the company is not sure
about the future.
 Risk is an essential part of a business, which can be mitigated but difficult to
avoid completely.
 The risk is dependent upon the size and nature off the business like variety and
standardise product
 Risk has directly related to profit as higher the risk, higher the return.
For Microsoft uncertainty arises from changes in software development comes in many
forms, which may hinder the sales of the company. Developing a complex code and avoiding the
prone to mistake is always a part of risk associated with Microsoft. Microsoft is the world’s
fourth largest company heaving a market value of 750.6 billion US dollar so there always a risk
to manage the financial data and taking decision is crucial one. To increase profit Microsoft has

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been taking the risk in development of new software and the implementation of it a successive
way, which gives it higher return.
2. How financial statements and their structure aids in business decision making
There are mainly three financial report used for the business decision includes Balance
sheet, income statement and cash flow statement. The financial report must be correct to make
good decision.
Balance sheet comprises of asset, liability and equity of a company for a financial year. It
gives a clear picture of strength of the company and the working capital cycle that is how easily a
company able to handle changes in revenue (Collier 2015). It also informs about how receivable
cycle work; how net profit being used.
The balance sheet of Microsoft (2018) shows that the company has invested 133,768m
dollar in short-term investment, which has the maturity period is within 3 months to 1 year. This
indicates that company has strong liquidity position to meet the uncertainty. The retained
earnings of the company show a decline as compare to last financial year because of the loss of
2187$ in comprehensive income as compare to a gain of 627$ in last year (Microsoft.com, 2019).
Therefore, the management will work on this to identify the cause of loss.
Income statement of a company explore about the profit and losses incurred by a
company during a particular financial year. The purpose of this statement is to inform about the
sales and the expenses incurred by the company.
The profit/loss account of a company addresses that the company has generate a gross
profit of $72,005 as compared to $62,310 but in the mean while the net income of the company
lower than the last year. The reason of decreasing in the net income is due to the new taxation

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policy the company has keep a provision of $19,903 as compared to $4,412 in the last financial
year (Microsoft.com, 2019). This, information will useful for the company to work in reducing
the income tax.
Cash flow shows the inflow and out flow of money during a finite period from operating,
financing and investing activity. This statement shows that whether the company have sufficient
cash for maintain a healthy business (Afonina 2015). this statement makes able the business to
take the appropriate in reduce cost, increase sales, raise profitability, purchase new capital asset,
best source of finance that is lender or creditor who helps in maintain the financial health of the
company.
The financial report of Microsoft shows that in 2018 has outflow $33,590 as compared to
$8,408 inflow in last year, since there is significant decrease in issuance in debt. The company
has invested $6,061 in current year compared to $46,781, $23950 in the preceding years this will
enhance the decision towards increase in the capital investment. The company has shown a
consistent positive inflow of $43884, $39507, $33325 in 2018, 2017, 2016 respectively
(Microsoft.com, 2019).
2. 1 Compare the accrual and cash flow approaches to accounting and financial reporting
and the implications of each for business decision making
Accrual based accounting records all the revenue and expanses in the accounting
statement when they are earned. When the income is earned but the there is no cash received
then the revenue is recorded in asset account receivable. Similarly, the expanses also recorded on
liability account. The following are the advantages for business decision making:

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 The company can appropriately analyse the profitability margin by matching the
revenue and expanses.
 Accrual accounting helps in preparing a standard budget and helps in forecasting
future fluctuation.
 This will useful for management when they are looking for a additional financial
opportunities.
In general accrual accounting, system provides a better picture of the financial result.
This, transparency of the accounting system enhances for a valuable decision.
Cash flow method approach in accounting also known as direct method of accounting
where the actual cash flow information is used. All the expanses and income are only
recognising through cash and it will record only when cash is receiving or paid and holistic in
nature.
Microsoft adopts the accrual-based accounting. Since, cash flow approach due to the
difficulty and time taking procedure. There are no requirements of collect store transitional
information per customer or supplier (Zayed and Liu 2014). There also another drawback in cash
flow approach that the FASB requires an organisation using this method to disclose the
reconciliation of net income to the net cash provided and used by operating activities that had
been reported if indirect method has used.

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2. 2 evaluate the structure and content of final accounts and their uses for business decision
making
A final account is comprising of trading account, profit & loss account and balance sheet.
A trading account records all the financial transition relates to purchase and sells of goods with
purchasing cost and selling price respectively. It gives an overview of buying and selling of
goods. The profit and loss account show the net profit or loss during an accounting period. This
informs about the all the expanses, losses and income gain during an income year (Iatridis, G.,
2010). The balance sheet contents are assets and liability. This explains about how financial
soundness of the company.
The structure and content under final account of Microsoft gives the idea about
profitability and the financial position of the company to its management, owner and the
interested parties. The information collected from the particulars of final account helps the
management in business decision taking.
2. 3 Interpretation of financial information
The following are the interpretation based on the financial information collected from the
financial year report of Microsoft company-
 Increase in an amount of $13.7 billion charge towards the tax cuts and Job act
tends to decrease in the net income and diluted EPS by $13.7 and $1.75.
 The adaptation of new accounting standard in the income year 2018 shows a
impact on revenue recognition and leases.
 The financial report shows a consolidated result of Linkdin Company which has
acquired by the company in 2016.

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 The main cause for the decrease in the operating income is due to the asset
implementation charging of $360 million to the phone business and $480 million
restructuring charges associate with phone business only. This also has an impact
on net income and dilutes of EPS $1.1 billion.
 There is also a $306 million severance expense primarily relate to the marketing
plan of the Microsoft has decreased the net income (Mondal et al 2016).
 There is a new debt issuance cost has included in the financial statement because
of adopting the new accounting standard.
 The NDS has been included in the consolidated result of the Microsoft.
2. 4 Differentiate between financial decision relating to capital expenditure and revenue
expenditure
The investment in the capital asset is to improve the existing business that resulting into
the increases in its life. In revenue expenditure, the expenses incurred concerning day-to-day
activities of the business (Hussain, Salia and Karim 2018). Capital expenditure is long-term in
nature while revenue expenditure is short term in nature that influences the management decision
making. The management decision seeks to improve the earning capacity through increase in the
capital expenditure while maintenance earning capacity is based on revenue expenditure.
3. Analyse the sources of finance and how businesses finance fixed assets and working
capital
The source of finance to a business includes equity capital, debt capital, financial
leverage, banks and other financial institution. For, fixed asset the source of finance is from