Write a paper in which you answer the following questions:

1. Describe Microsoft's overall reporting strategy. Why had the company adopted this strategy and why was the SEC concerned about it?

2. Assume that 60% of Microsoft's research and development expenses were incurred after technological feasibility was established, that the average product life was two years, and that the company begins amortizing software cost at the beginning of the following year. Estimate the effect of capitalizing software costs on Microsoft's fiscal 1997, 1998, and 1999 income statements and balance sheets.

a. Speculate as to why Microsoft chose to expense all software costs as incurred rather than capitalizing a potion of these costs.

b. In your opinion, did Microsoft provide its analysts with information that was intentionally overly pessimistic? Are there any benefits to the company being outwardly pessimistic about its future prospects?