ACC 307 Locate and extract relevant information for a financial reporting issue

Research Case 21-4 Locate and extract relevant information for a financial reporting issue;integrative; Microsoft CorporationA meeting of your accounting department is scheduled for early tomorrow morning. One topic ofdiscussion is certain to be the appropriate adjustments to net income in your company’s statementof cash flows using the indirect method of reporting operating activities. Hallway discussions havesuggested some degree of uncertainty, particularly regarding unearned revenues, which aresubstantial for the company. Because your firm went public only seven months ago, this reportingissue is a new one for you and most other members of the department. In preparation for themeeting, you sought out the financial statements of Microsoft Corporation, knowing that it too hadsubstantial unearned revenues. The operating activities section of the comparative statements ofcash flows for Microsoft is presented below.Cash Flows Statements (in millions)Year Ended June 30,2009OperationsNet income$14,569Adjustments to reconcile net income to net cash from operations:Depreciation, amortization, and other noncash items2,562Stock-based compensation1,708Net recognized losses (gains) on investments and derivatives683Excess tax benefits from stock-based compensation(52)Deferred income taxes762Deferral of unearned revenue24,409Recognition of unearned revenue(25,426)Changes in operating assets and liabilities:Accounts receivable2,215Other current assets(422)Other long-term assets(273)Other current liabilities(3,371)Other long-term liabilities1,673Net cash from operations19,03720082007$17,681$14,0652,0561,479(572)(120)93524,532(21,944)1,4401,550(292)(77)42121,032(19,382)(1,569)153(98)(748)173)(1,764)232(435)(552)1,55821,61217,796Required:1. Locate the financial statements of Microsoft Corporation on the Internet. Search the disclosurenotes for information about how Microsoft accounts for its unearned revenues. How is theundelivered portion of Microsoft’s sales of Windows XP Professional recorded initially?2. Why does the statement of cash flows include “unearned revenue” as an addition to net incomein the operations section? Why is “recognition of unearned revenue” included as a deduction fromnet income? Why do you think Microsoft reported these two items separately rather than justadjusting net income for the change in the unearned revenue account balance?3. Why is stock-based compensation added to net income?