Microsofts Financial Reporting Strategy:

1. Assume that Microsoft incurred 60% of its research and development expenses after it had established technological feasibility. The average product life was two years, and the company begins amortizing software costs at the beginning of the following year. Estimate how capitalizing software costs affect Microsofts fiscal 1997, 1998, and 1999 income statements and balance sheets. Ignore any tax effects.
2. Estimate the amount of revenue that Microsoft would have reported in each quarter from 1996 through 1999 if the company had not adopted its new revenue recognition policy in 1996. Ignore any potential tax effects.
3. How did these two policies impact Microsofts fiscal 1997, 1998, and 1999 financial statements in dollars? .
4. What factors likely explain the difference between Microsoft's market value of equity and its reported book value of equity?
5. Why do you think Microsoft chose to expense all software costs as incurred, rather than capitalizing a portion of these costs?
6. Why do you think Microsoft decided to defer a portion of its revenues in fiscal 1996?

Exhibit 2 Microsoft Corp., 1986-1998 Annual Income Statements (\$'s in millions)