E17.10. The SEC and Microsoft (Easy)

a. In 1999, Microsoft Corporation announced that the Securities and Exchange Commission (SEC) was investigating some of its accounting practices. Exhibit 17.1 presents the current liability section of Microsoft's comparative balance sheet at the end of the first quarter of its 2000 fiscal year. Can you see a reason for the SEC's concern?

b. Exhibit 17.1 also gives the cash from operations section of Microsoft's cash flow statement for the same quarter. Microsoft reported revenues of $5.384 billion in the quarter to September 30, 1999, and $4.193 billion for the corresponding quarter for 1998. Does it appear that the SEC's concerns were justified in the 1999 period? Real World Connection See Exercises E1.6, E4.14, E6.13, E7.7, E8.10, E10.11, and E19.4 MICROSOFT CORPORATION Partial Balance Sheets Sept. 30, 1999 June 30, 1999 Current liabilities Accounts payable Accrued compensation Income taxes payable Unearned revenue Other Total current liabilities $ 997 313 1,136 $ 874 396 1,607 4,129 4,239 1.757 1,602 $8,332 58,718 Partial Cash Flow Statements in millions Operations Net income Depreciation Gains in sales Unearned revenue Recognition of unearned revenue from prior periods Other current liabilities Accounts receivable Other current assets Net cash from operations Three Months Ended September 30 1999 1998 $2,191 $1,683 440 179 (156) (160) 1,253 1,010 (1,363) (765) (345) 360 64 341 (94) (64) $1.990 $2,584