Microsoft is the leading developer of software in the world. To continue to be successful Microsoft must generate new products, and generating new products requires significant amounts of cash. Shown on the following page is the current assets section of Microsoft’s June 30, 1998, balance sheet (in millions) and excerpts from a footnote describing the first item listed in the balance sheet, “Cash, cash equivalent, and short-term investments.” Following the Microsoft data is the current assets section for Oracle (in millions), another major software developer.

Instructions

(a) What is the definition of a cash equivalent? Give some examples of cash equivalents.
How do cash equivalents differ from other types of short-term investments?

(b) Comment on Microsoft’s presentation of cash in its balance sheet.

(c) What problems might this presentation of cash pose for a user of Microsoft's financial statements?

(d) Calculate (1) the current ratio and (2) working capital for each company for 1998 and discuss your results.

(e) Is it possible to have too many liquid assets?
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