Case 4: Microsoft / Investments Go to Microsoft's 10-K for the year ended June 30, 2020. This 10-K was filed on 2020-07-30. You are looking for Microsoft Corp. Answer the following questions: 1. Find the balance sheet (around page 57). At June 30, 2020, what percentage of Microsoft's total assets is made up of cash and investments? Be sure to include all equity investments. 2. Go to the Income Statement. You'll notice that there is no line item for investment income for the year ended June 30, 2020. The investment income number is buried in Other income, net which totals $77 million. So, go find the Other Income (Expense), Net" Note below the financial statements, this provides a breakdown of this number. Use this note to determine the income statement impact of Microsoft's investments for the year ended June 30, 2020. In other words, how much did Microsoft's investments increase their net income in 2020? Think carefully about what should be included or excluded here. For our purposes you should ignore any potential gains/losses from derivative contracts, as well as anything included in the other category. 3. Using Microsoft's amount invested (so don't include cash here) and amount earned on those investments in 2020, what was Microsoft's return on investment in 2020? Does this seem high or low to you? Explain your reasoning. 4. Now find the Investments Note. The top panel includes 7 columns that run from Cost Basis on the left to Equity Investments on the right. Which single column total here ties to the total amount of cash and investments you calculated above in question #1? 5. For total debt investments only, calculate the difference between the Recorded Basis and the Cost Basis at June 30, 2020. What does this difference represent conceptually? Calculate the difference at June 30, 2019 as well (this information is provided below the information for 2020). What does the change in this difference over time represent? PART II Item 8 BALANCE SHEETS 2020 2019 (In millions) June 30. Assets Current assets: Cash and cash equivalents Short-term investments $ $ 13,576 122,951 11,356 122,463 Total cash, cash equivalents, and short-term investments Accounts receivable, net of allowance for doubtful accounts of $788 and $411 Inventories Other current assets 136,527 32,011 1,895 11,482 133,819 29,524 2,063 10,146 Total current assets Property and equipment, net of accumulated depreciation of $43,197 and $35,330 Operating lease right-of-use assets Equity investments Goodwill Intangible assets, net Other long-term assets 181,915 44,151 8,753 2,965 43,351 7,038 13,138 175,552 36,477 7,379 2,649 42,026 7,750 14,723 Total assets $ 301,311 $ 286,556 $ Liabilities and stockholders' equity Current liabilities: Accounts payable Current portion of long-term debt Accrued compensation Short-term income taxes Short-term unearned revenue Other current liabilities 12,530 3,749 7,874 9,382 5,516 6,830 5,665 32.676 9,351 2,130 36,000 10,027 Total current liabilities Long-term debt Long-term income taxes Long-term unearned revenue Noforrad incomo tayor 72,310 59,578 29,432 3,180 69,420 66.662 29,612 4,530 229 Total current assets Property and equipment, net of accumulated depreciation of $43,197 and $35,330 Operating lease right-of-use assets Equity investments Goodwill Intangible assets, net Other long-term assets 181,915 44,151 8,753 2,965 43,351 7,038 13,138 175,552 36,477 7,379 2,649 42,026 7,750 14,723 Total assets $ 301,311 $ 286,556 $ $ Liabilities and stockholders' equity Current liabilities: Accounts payable Current portion of long-term debt Accrued compensation Short-term income taxes Short-term unearned revenue Other current liabilities 12,530 3,749 7,874 2,130 36,000 10,027 9,382 5,516 6,830 5,665 32,676 9,351 Total current liabilities Long-term debt Long-term income taxes Long-term unearned revenue Deferred income taxes Operating lease liabilities Other long-term liabilities 72,310 59,578 29,432 3,180 204 7,671 10,632 69,420 66,662 29,612 4,530 233 6,188 7,581 Total liabilities 183,007 184.226 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital shares authorized 24,000, outstanding 7,571 and 7,643 Retained earnings Accumulated other comprehensive income (loss) 80,552 34,566 3,186 78,520 24,150 (340) Total stockholders' equity 118,304 102,330 Total liabilities and stockholders' equity 301,311 $ 286,556 Refer to accompanying notes. 57 Diluted (A/C) 5.76 $ 5.06 2.13 Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented. NOTE 3 OTHER INCOME (EXPENSE), NET The components of other income (expense), net were as follows: $ S $ (In millions) Year Ended June 30, Interest and dividends income Interest expense Net recognized gains on investments Net gains (losses) on derivatives Net losses on foreign currency remeasurements Other, net 2020 2,680 (2,591) 32 187 (191) (40) 2019 2,762 (2,686 648 144 (82 (57 2018 2.214 (2,733) 2,399 (187) (218) (59) Total 77 $ 729 $ 1,416 Net Recognized Gains (Losses) on Investments Net recognized gains (losses) on debt investments were as follows: 2020 2019 (In millions) Year Ended June 30, Realized gains from sales of available-for-sale securities Realized losses from sales of available-for-sale securities Other-than-temporary impairments of investments $ S S 50 (37) (17) 12 (93) (16 2018 27 (987) (6) Total $ $ (97 S (966 Net recognized gains (losses) on equity investments were as follows: (In millions) Year Ended June 30, Net realized gains on investments sold Net unrealized gains on investments still held Impairments of investments 2020 $ $ $ 83 69 (116) 2019 276 479 (10) 2018 3,406 0 (41) Total $ 36 $ 745 $ 3,365 68 PART II Item 8 NOTE 4 INVESTMENTS Investment Components The components of investments were as follows: Unrealized Gains Unrealized Losses Recorded Basis Fair Value Level Cash and Cash Equivalents Short-term Investments Equity Investments Cost Basis $ $ 1 $ 0 $ $ $ 0 0 6,495 (In millions) June 30, 2020 Changes in Fair Value Recorded in Other Comprehensive Income Commercial paper Certificates of deposit U.S. government securities U.S. agency securities Foreign government bonds Mortgage- and asset-backed securities Corporate notes and bonds Corporate notes and bonds Municipal securities Municipal securities (1 0 4,687 2,898 92,067 2.439 6,982 4,865 8,500 58 1,618 1,646 3,168 449 1 Level 2 Level 2 Level 1 Level 2 Level 2 Level 2 Level 2 Level 3 Level 2 Level 3 2 6 1 0 15/01 101010101010190191011 4,688 2,898 98,561 2.441 6,985 4,900 8,810 58 366 91 (3) (6) (17) 0 3,070 1,252 95,393 1,992 6,984 4,900 8,810 58 366 41 327 0 | 0101010101010101010 0 313 57 (4) 0 91 91 Total debt investments 122,900 $ 6,929 $ (31) 129,798 $ 6,882 $ 122,916 0 Changes in Fair Value Recorded in Net Income Equity investments Equity investments $ $ $ Level 1 Other 1,198 2,551 784 0 414 2,551 loillolo Total equity investments $ 3,749 784 $ $ 2,965 $ $ $ 0 $ Cash Derivatives, net (a) 5,910 35 5,910 0 35 0 Total $ 139.492 13,576 $ 122,951 2,965 69 PART II Item 8 PART II Item 8 Unrealized Gains Unrealized Losses Cash and Cash Equivalents Fair Value Level Recorded Basis Cost Basis Short-term Investments Equity Investments $ $ 0 S S S 0 Nin 0 0 (In millions) June 30, 2019 Changes in Fair Value Recorded in Other Comprehensive Income Commercial paper Certificates of deposit U.S. government securities U.S. agency securities Foreign government bonds Mortgage- and asset-backed securities Corporate notes and bonds Corporate notes and bonds Municipal securities Municipal securities 0 $ 0 (104) 0 1,773 $ 1,430 769 698 1.854 0 0 2.211 2.018 104,925 988 6.350 3,554 7,437 15 242 4 Level 2 Level 2 Level 1 Level 2 Level 2 Level 2 Level 2 Level 3 Level 2 Level 3 0 10101010101010101 2.211 2,018 106,675 988 6,346 3,561 7,541 15 290 2,506 0 438 588 105,906 290 3,840 3.561 7,541 15 290 (8 (3) 7 0 10 0 111 0 0 0 48 0 0 7 0 0 0 0 Total debt investments $ 127,747 $ 2.027 $ (122) $ 129,652 $ 7,176 $ 122,476 $ 0 Chang in Fair Value Recorded in Net Income S $ 409 $ 0 $ Equity investments Equity investments Level 1 Other 973 2,085 564 2,085 0 0 Total equity investments $ 3,058 $ 409 $ 0 $ 2.649 $ $ S $ Cash Derivatives, net (a) 3,771 (13) 3,771 0 0 (13) 0 0 Total $ 136,468 $ 11,356 $ 122,463 $ 2,649 (a) Refer to Note 5 - Derivatives for further information on the fair value of our derivative instruments. Equity investments presented as "Other" in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2020 and 2019, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $1.4 billion and $1.2 billion, respectively. Unrealized Losses on Debt Investments 1 Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows: Case 4: Microsoft / Investments Go to Microsoft's 10-K for the year ended June 30, 2020. This 10-K was filed on 2020-07-30. You are looking for Microsoft Corp. Answer the following questions: 1. Find the balance sheet (around page 57). At June 30, 2020, what percentage of Microsoft's total assets is made up of cash and investments? Be sure to include all equity investments. 2. Go to the Income Statement. You'll notice that there is no line item for investment income for the year ended June 30, 2020. The investment income number is buried in Other income, net which totals $77 million. So, go find the Other Income (Expense), Net" Note below the financial statements, this provides a breakdown of this number. Use this note to determine the income statement impact of Microsoft's investments for the year ended June 30, 2020. In other words, how much did Microsoft's investments increase their net income in 2020? Think carefully about what should be included or excluded here. For our purposes you should ignore any potential gains/losses from derivative contracts, as well as anything included in the other category. 3. Using Microsoft's amount invested (so don't include cash here) and amount earned on those investments in 2020, what was Microsoft's return on investment in 2020? Does this seem high or low to you? Explain your reasoning. 4. Now find the Investments Note. The top panel includes 7 columns that run from Cost Basis on the left to Equity Investments on the right. Which single column total here ties to the total amount of cash and investments you calculated above in question #1? 5. For total debt investments only, calculate the difference between the Recorded Basis and the Cost Basis at June 30, 2020. What does this difference represent conceptually? Calculate the difference at June 30, 2019 as well (this information is provided below the information for 2020). What does the change in this difference over time represent? PART II Item 8 BALANCE SHEETS 2020 2019 (In millions) June 30. Assets Current assets: Cash and cash equivalents Short-term investments $ $ 13,576 122,951 11,356 122,463 Total cash, cash equivalents, and short-term investments Accounts receivable, net of allowance for doubtful accounts of $788 and $411 Inventories Other current assets 136,527 32,011 1,895 11,482 133,819 29,524 2,063 10,146 Total current assets Property and equipment, net of accumulated depreciation of $43,197 and $35,330 Operating lease right-of-use assets Equity investments Goodwill Intangible assets, net Other long-term assets 181,915 44,151 8,753 2,965 43,351 7,038 13,138 175,552 36,477 7,379 2,649 42,026 7,750 14,723 Total assets $ 301,311 $ 286,556 $ Liabilities and stockholders' equity Current liabilities: Accounts payable Current portion of long-term debt Accrued compensation Short-term income taxes Short-term unearned revenue Other current liabilities 12,530 3,749 7,874 9,382 5,516 6,830 5,665 32.676 9,351 2,130 36,000 10,027 Total current liabilities Long-term debt Long-term income taxes Long-term unearned revenue Noforrad incomo tayor 72,310 59,578 29,432 3,180 69,420 66.662 29,612 4,530 229 Total current assets Property and equipment, net of accumulated depreciation of $43,197 and $35,330 Operating lease right-of-use assets Equity investments Goodwill Intangible assets, net Other long-term assets 181,915 44,151 8,753 2,965 43,351 7,038 13,138 175,552 36,477 7,379 2,649 42,026 7,750 14,723 Total assets $ 301,311 $ 286,556 $ $ Liabilities and stockholders' equity Current liabilities: Accounts payable Current portion of long-term debt Accrued compensation Short-term income taxes Short-term unearned revenue Other current liabilities 12,530 3,749 7,874 2,130 36,000 10,027 9,382 5,516 6,830 5,665 32,676 9,351 Total current liabilities Long-term debt Long-term income taxes Long-term unearned revenue Deferred income taxes Operating lease liabilities Other long-term liabilities 72,310 59,578 29,432 3,180 204 7,671 10,632 69,420 66,662 29,612 4,530 233 6,188 7,581 Total liabilities 183,007 184.226 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital shares authorized 24,000, outstanding 7,571 and 7,643 Retained earnings Accumulated other comprehensive income (loss) 80,552 34,566 3,186 78,520 24,150 (340) Total stockholders' equity 118,304 102,330 Total liabilities and stockholders' equity 301,311 $ 286,556 Refer to accompanying notes. 57 Diluted (A/C) 5.76 $ 5.06 2.13 Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented. NOTE 3 OTHER INCOME (EXPENSE), NET The components of other income (expense), net were as follows: $ S $ (In millions) Year Ended June 30, Interest and dividends income Interest expense Net recognized gains on investments Net gains (losses) on derivatives Net losses on foreign currency remeasurements Other, net 2020 2,680 (2,591) 32 187 (191) (40) 2019 2,762 (2,686 648 144 (82 (57 2018 2.214 (2,733) 2,399 (187) (218) (59) Total 77 $ 729 $ 1,416 Net Recognized Gains (Losses) on Investments Net recognized gains (losses) on debt investments were as follows: 2020 2019 (In millions) Year Ended June 30, Realized gains from sales of available-for-sale securities Realized losses from sales of available-for-sale securities Other-than-temporary impairments of investments $ S S 50 (37) (17) 12 (93) (16 2018 27 (987) (6) Total $ $ (97 S (966 Net recognized gains (losses) on equity investments were as follows: (In millions) Year Ended June 30, Net realized gains on investments sold Net unrealized gains on investments still held Impairments of investments 2020 $ $ $ 83 69 (116) 2019 276 479 (10) 2018 3,406 0 (41) Total $ 36 $ 745 $ 3,365 68 PART II Item 8 NOTE 4 INVESTMENTS Investment Components The components of investments were as follows: Unrealized Gains Unrealized Losses Recorded Basis Fair Value Level Cash and Cash Equivalents Short-term Investments Equity Investments Cost Basis $ $ 1 $ 0 $ $ $ 0 0 6,495 (In millions) June 30, 2020 Changes in Fair Value Recorded in Other Comprehensive Income Commercial paper Certificates of deposit U.S. government securities U.S. agency securities Foreign government bonds Mortgage- and asset-backed securities Corporate notes and bonds Corporate notes and bonds Municipal securities Municipal securities (1 0 4,687 2,898 92,067 2.439 6,982 4,865 8,500 58 1,618 1,646 3,168 449 1 Level 2 Level 2 Level 1 Level 2 Level 2 Level 2 Level 2 Level 3 Level 2 Level 3 2 6 1 0 15/01 101010101010190191011 4,688 2,898 98,561 2.441 6,985 4,900 8,810 58 366 91 (3) (6) (17) 0 3,070 1,252 95,393 1,992 6,984 4,900 8,810 58 366 41 327 0 | 0101010101010101010 0 313 57 (4) 0 91 91 Total debt investments 122,900 $ 6,929 $ (31) 129,798 $ 6,882 $ 122,916 0 Changes in Fair Value Recorded in Net Income Equity investments Equity investments $ $ $ Level 1 Other 1,198 2,551 784 0 414 2,551 loillolo Total equity investments $ 3,749 784 $ $ 2,965 $ $ $ 0 $ Cash Derivatives, net (a) 5,910 35 5,910 0 35 0 Total $ 139.492 13,576 $ 122,951 2,965 69 PART II Item 8 PART II Item 8 Unrealized Gains Unrealized Losses Cash and Cash Equivalents Fair Value Level Recorded Basis Cost Basis Short-term Investments Equity Investments $ $ 0 S S S 0 Nin 0 0 (In millions) June 30, 2019 Changes in Fair Value Recorded in Other Comprehensive Income Commercial paper Certificates of deposit U.S. government securities U.S. agency securities Foreign government bonds Mortgage- and asset-backed securities Corporate notes and bonds Corporate notes and bonds Municipal securities Municipal securities 0 $ 0 (104) 0 1,773 $ 1,430 769 698 1.854 0 0 2.211 2.018 104,925 988 6.350 3,554 7,437 15 242 4 Level 2 Level 2 Level 1 Level 2 Level 2 Level 2 Level 2 Level 3 Level 2 Level 3 0 10101010101010101 2.211 2,018 106,675 988 6,346 3,561 7,541 15 290 2,506 0 438 588 105,906 290 3,840 3.561 7,541 15 290 (8 (3) 7 0 10 0 111 0 0 0 48 0 0 7 0 0 0 0 Total debt investments $ 127,747 $ 2.027 $ (122) $ 129,652 $ 7,176 $ 122,476 $ 0 Chang in Fair Value Recorded in Net Income S $ 409 $ 0 $ Equity investments Equity investments Level 1 Other 973 2,085 564 2,085 0 0 Total equity investments $ 3,058 $ 409 $ 0 $ 2.649 $ $ S $ Cash Derivatives, net (a) 3,771 (13) 3,771 0 0 (13) 0 0 Total $ 136,468 $ 11,356 $ 122,463 $ 2,649 (a) Refer to Note 5 - Derivatives for further information on the fair value of our derivative instruments. Equity investments presented as "Other" in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2020 and 2019, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $1.4 billion and $1.2 billion, respectively. Unrealized Losses on Debt Investments 1 Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows
